Li Auto's Margin Squeeze: A Strategic Pivot or a Warning?
Q2 margins halved on refresh and cost inflation, but in-house chips and batteries promise long-term differentiation—at a price.
LI · Earnings Call · 2026-08-26
The Second Quarter Reality Check
Li Auto's second-quarter results were a stark reminder that the electric vehicle race is as much about cost discipline as product brilliance. Total revenues fell 15.1% year-over-year to RMB 25.7 billion, with vehicle sales down 16.7%. More strikingly, vehicle margin collapsed to 9.4% from 19.4% a year ago, and the company swung to an operating loss of RMB 2.3 billion. CFO Tie Li attributed the decline to “reduced vehicle deliveries and a lower average selling price due to a different product mix.” — Tie Li, Chief Financial Officer · 2026-08-26 The quarter also absorbed the full wave of a product refresh that touched every model in the lineup. The pain is not just a mix story. Raw material inflation—particularly memory chips and battery materials—hit gross margins hard. CEO Xiang Li acknowledged the pressure: “This year, we've seen cyclical fluctuations in upstream raw materials and core components, which has created temporary cost pressures for both the industry and our company.” — Xiang Li, Founder, Chairman and CEO · 2026-08-26 Yet the company's response is telling: it has chosen to absorb these costs rather than pass them to consumers. “We have made a decision not to pass the price increase over to our customers.” — Xiang Li, Founder, Chairman and CEO · 2026-08-26In-House Tech as the Antidote
The counterweight to margin erosion is Li Auto's deepening investment in vertical integration. The MACH M100 chip, now shipping in volume, is central to this strategy. CEO Li described it as a core moat: “By developing core technologies in-house, we're continuously deepening our competitive moat.” — Xiang Li, Founder, Chairman and CEO · 2026-08-26 The MACH VLA model, which runs on the chip, is also being rolled out to NVIDIA platforms later this year. The company expects these technologies to eventually lift margins back to a healthy range, though CFO Li cautioned that the full-year recovery depends on fourth-quarter volumes. The most significant new commitment is to in-house battery development. Li Auto now designs cells, packs, and thermal management systems, and plans to equip all new models with proprietary batteries within months. CEO Li framed this as existential: “We firmly believe that batteries and chips are going to be the most critical technological barriers in the embodied AI industry.” — Xiang Li, Founder, Chairman and CEO · 2026-08-26 This is a shift from earlier quarters where the company relied more heavily on CATL.Overseas Expansion and the Path to Growth
While margins recover, Li Auto is also pushing overseas. The company will launch the Li L9 in Kazakhstan and Uzbekistan, open Middle East sales in September, and bring the Li i6 to Europe in Q4. CEO Li emphasized a careful, premium approach: “Overseas expansion has been our long-term strategy, and we have made some steady progress... We aim to position Li Auto as a premium brand in overseas markets as well.” — Xiang Li, Founder, Chairman and CEO · 2026-08-26 This echoes prior calls—in May 2026, the company had already outlined a phased international rollout. The bigger question is whether the margin squeeze is transient or structural. In the March call, CFO Li had guided for a Q2 gross margin of around 10%—and the actual 11% slightly beat that. But the long-term target remains elusive. CEO Li reiterated his aspiration:In the long term, my view is that a healthy margin for the company will be somewhere between 15% to 20% gross margin, with the main driver here being the raw material costs.