The past year has been challenging for Li Auto, which heavily promoted AI and a shift to pure-electric vehicles. On the evening of March 12, the company released its financial results for the fourth quarter and full year of 2025. For a long time, Li Auto was the only domestic new automaker capable of consistently maintaining a gross margin above 20% and achieving substantial sustained profits. However, it has now found itself walking a tightrope around the break-even point.
"The past year has been a crucial period of strategic adjustment for Li Auto," admitted Li Xiang, Chairman and CEO, during the earnings call. In this cycle described as involving "growing pains and restructuring," the company must contend not only with an intensely competitive external price war and setbacks in its pure-electric transition but also undertake deep internal organizational reflection.
**Surviving the Downturn** Last year's downturn proved difficult for Li Auto. Financial data from the fourth quarter shows the company faced pressure on both revenue and profit. Operating profit for the quarter turned to an actual loss of 400 million yuan. In contrast, after adjusting for the impact of the Mega recall, the previous quarter's operating profit was nearly break-even (-0.7 billion yuan). This marks the first time since 2023 that Li Auto's operating profit has been in such a precarious state.
While the final reported net profit figure remained positive, this was not due to profitability from its core vehicle sales business. Instead, it relied heavily on interest income generated from the company's substantial cash reserves, which added approximately 430 million yuan.
Notably, management had long adhered to a baseline principle: a gross margin around 20% is fundamental for healthy development. However, in the fourth quarter, the actual vehicle gross margin was only 16.8%. This represents a 3-percentage-point decline compared to the adjusted vehicle gross margin of 19.8% in the third quarter, excluding the Mega recall impact.
This decline was primarily due to lower overall selling prices. The per-vehicle economic model provides a clearer picture. In Q4, the real gross profit per vehicle sold was only 42,000 yuan, a further decrease of 13,000 yuan from the previous quarter's 55,000 yuan. Although per-vehicle costs dropped by 15,000 yuan quarter-over-quarter, the benefits of economies of scale were insufficient to offset the impact of falling selling prices.
Broadening the perspective, competitors have launched larger, cheaper extended-range SUVs targeting Li Auto's L-series, intensifying competition. Internally, the "6-series" models in the 200,000-yuan entry-level segment became the primary sales drivers. However, in Q4, the average monthly sales of the i6 were constrained to just 9,500 units due to battery supply chain limitations, negatively impacting the overall gross margin.
Overall, Li Auto currently faces a situation where its overall market share is under pressure, relying heavily on its entry-level models. Annual data shows that the L6 and i6 models accounted for over half of total sales, which has somewhat eroded the brand's previously premium positioning.
This pressure is likely to persist for some time. Looking ahead to the first quarter, revenue guidance is set at only 20.4-21.6 billion yuan, representing a year-over-year decline of 16%-21%. This implies the average selling price per vehicle will significantly decrease from 250,000 yuan to approximately 222,000 yuan. With fixed cost allocation rising due to the sequential decline in Q1 sales, coupled with recent increases in raw material prices, vehicle gross margin is expected to continue probing the bottom in the first quarter.
**Organizational Reshuffle** Facing these pressures, while external market competition and macroeconomic headwinds are factors, Li Auto's management is choosing to look inward. In this crisis, the first issue addressed was frontline morale.
"Our biggest problem in the past was managing a direct sales system using dealership management methods," Li Xiang acknowledged during the earnings call. The original intent of the direct sales model was to maintain control over pricing, service standards, and user experience. However, during a period of rapid, extensive expansion, this model became distorted.
Previously, some store locations were poorly chosen, dispersing valuable sales resources in second-tier shopping malls with declining foot traffic. Consequently, when market conditions deteriorated sharply, the customer acquisition capability of individual stores significantly weakened, dragging down the overall lead conversion rate.
Under the traditional dealership model, dealers bear their own profits and losses, giving them strong motivation to compete for every order. In Li Auto's previous direct sales system, store managers were more like senior employees. They lacked real decision-making power and had little control over store location, personnel appointments, or profit sharing.
When conditions were favorable, relying on the product's strong appeal, sales staff could sell vehicles without needing extensive skills. But in a downturn, with all brands engaged in close combat and slashing prices to attract customers, this direct sales system, lacking deep incentive alignment, quickly revealed issues of low efficiency and inadequate competitiveness. Ma Donghui stated during the earnings call that problems like blind store expansion and excessive external displays ultimately stemmed from flawed management mechanisms.
Confronting these organizational issues, the first major remedy Li Auto prescribed for 2026 is a restructuring of the sales system. Starting in March, the company is implementing a "Store Partner" program. The aim is to transform direct sales store managers into genuine "operators" of their stores.
Ma Donghui detailed the core of this mechanism: the store will become the fundamental operating unit. The company is delegating "operational decision-making rights" and "profit-sharing rights" to store managers. This means managers will have autonomy over customer acquisition, store operations, and team management. Future new store site selection will no longer be decided solely by headquarters behind closed doors; instead, store managers will participate fully in the evaluation process, with responsibility and accountability directly tied to the individual.
Li Xiang aims to create a "catfish effect" with the potential for high earnings: "In the current environment where car sales systems generally aren't profitable, we hope to cultivate a large number of store managers with annual incomes exceeding one million yuan, allowing outstanding managers to earn two to three times the industry average."
By creating deep incentive alignment, Li Auto seeks to fundamentally boost the combat effectiveness of its frontline teams, motivating managers to treat their stores as their own business ventures.
Regarding channel strategy, Li Auto has hit the brakes. Addressing rumors of "closing 100 stores," Ma Donghui clarified that this involves normal operational optimization of a small number of inefficient stores unable to support sales targets. The core focus for Li Auto's channel development in 2026 shifts from "emphasizing quantity" to "emphasizing quality." New store additions will decisively avoid shopping areas with depleted traffic, prioritizing top-tier malls and premium auto hubs, with focused expansion in higher-tier cities. Empowered by financial and digital tools, Li Auto aims for this new sales system to deliver visibly improved operational results by the third quarter of this year.
**Securing the Core Business** Channels are the pipelines for delivering ammunition, but ultimately, victory on the battlefield still depends on the product. Internally, Li Auto has formulated a "3+2 Strategy."
The three core strategies are: First, effectively manage the sales system. Second, ensure the successful generational update of the L-series, led by the new Li L9. Third, achieve stable volume growth for pure-electric models, including the i6, i8, MEGA, and the i9 slated for launch in the second half of the year.
The two supporting strategies are: The investments made in intelligentization over recent years—including chips, models, and various research capabilities—will manifest in significantly different product experiences this year.另一方面，海外业务也将取得进展和开拓。
During the earnings call, Li Xiang expressed that 2026 is the year for deliveries from the third-generation platform, and the company has internal confidence in this year's product and technological competitiveness.
However, competition across the entire market is intensifying. The number of new models in the domestic new energy vehicle market above 200,000 yuan this year is reportedly equivalent to the sum of the past three years, while overall market growth remains limited. Li Bin, Chairman of NIO, has pointed out that the entire domestic passenger vehicle market is expected to contract over the next two years.
Stabilizing the core business is the top priority. The L-series is Li Auto's profit engine and cannot be compromised. In the second quarter, Li Auto will successively launch three significantly upgraded L-series models, firing the first shot in its counteroffensive. The new-generation Li L9 bears significant responsibility. For this launch, Li Auto is adopting a strategy of "increased features at lower prices." The new L9's price range will shift down to the 320,000-380,000 yuan bracket previously occupied by the L8 series.
In terms of features, the new L9 incorporates the 800V platform and 5C ultra-fast charging from the pure-electric series, along with the Extended Range 3.0 system. By streamlining SKUs and offering high-end features as standard, Li Auto aims to upgrade the L9's competitiveness from mere "product definition" to "technological barrier," using extreme cost-performance and experiential advantages to defend this crucial profit stronghold against the intensified competition expected in the extended-range segment in 2026.
In the pure-electric domain, Li Auto is digesting past missteps. In the first quarter, by introducing a second battery supplier, the production bottleneck for the popular i6 model began to ease, with a full resolution expected in Q2. Meanwhile, word-of-mouth has driven a recovery, with orders for the i8 doubling in March.
In the second half of 2026, Li Auto will also launch a new pure-electric flagship SUV, the i9. Through the i6, i8, and the upcoming i9, Li Auto is cautiously rebuilding its pure-electric product matrix, attempting to establish a solid foothold in the pure-electric business.
"In such a fiercely competitive environment, we must successfully execute the '3+2 Strategy' to truly support our goal of achieving over 20% sales growth compared to last year," Li Xiang stated.
**Betting on Robotics** Amid the headwinds, Li Auto is placing bets for a comeback in the next decade. For the full year, R&D expenditure reached a high of 11.3 billion yuan. R&D expenses for the fourth quarter alone hit 3.02 billion yuan, exceeding market expectations. A significant portion, up to 50% (over 6 billion yuan), was allocated to AI-related fields.
Management reached a consensus during a strategic review: an excessive focus on R&D efficiency in the past, cutting R&D whenever revenue fell, led to slower technological iteration and model launches. Therefore, even with sales under pressure, subsequent R&D expenses will not be reduced and may even increase further.
On the flagship L9 Livis model, set for release in the second quarter, Li Auto will debut its self-developed dual "M100" chips based on a 5nm process. The effective computing power of this dual-chip setup per vehicle is 5 to 6 times that of the Thor-U chip. This will enable Li Auto to achieve integrated hardware-software capabilities combining "self-developed algorithms + self-developed computing power."
Li Xiang painted a grand technological vision during the call: 2026 is a pivotal year for Li Auto's evolution into an "embodied intelligence" enterprise. At the execution level, the L9 Livis will feature a full wire-controlled chassis, including wire-controlled steering, all-electronic mechanical braking, four-wheel steering, and an 800V active suspension. The vehicle will no longer rely on traditional MCU-to-MCU command transmission; models can directly output actions to the control system.
Recent information suggests Li Auto's R&D efforts are extending into "spatial robots," with its first embodied intelligence two-wheel robot expected to debut in the first half of the year. Li Xiang firmly believes that future cars will not merely be traditional transportation tools but will become embodied intelligent entities with vitality and proactivity.
Addressing recent departures of several senior executives to start their own ventures, Li Xiang commented, "Since the beginning of the year, there have indeed been some new developments within the company. Those who followed Li Auto from the start and recently left to start businesses have also gained recognition from the investment market," offering his congratulations. He added, "This also provides very good opportunities for some young technical and business managers within the company."
Li Xiang revealed that in core areas like foundational models, embodied intelligence, and product lines, many individuals born in the 1990s and post-1995s are already competently leading their domains. University graduates from the class of 2000 and later, nurtured over the past three years, have become core members tackling technical R&D and challenging technical solutions. He sees this as a sign of the company's confidence for the next decade.
Looking back, from a myth of 11 consecutive quarters of profitability to now falling below the healthy gross margin line and core business teetering on the edge of loss, Li Auto is undergoing a painful transformation. But this is certainly not the final chapter. As of the end of last year, Li Auto still held a substantial cash reserve of nearly 100 billion yuan. This war chest is the ballast allowing Li Auto to stabilize R&D investment and proceed with organizational restructuring amidst the current headwinds.
The battle for 2026 has begun. With no retreat possible, Li Auto must dance on the edge of the cliff.
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