Author: Qiu Kaijun
Ideal Automobile is like a young man with strong feet, deep pockets, and big dreams. While exercising and improving himself, it is also accelerating its growth.
On November 29th, Ideal Automobile released its third-quarter report, demonstrating outstanding financial performance. If we look at traditional financial indicators, Ideal Automobile is not yet a profitable company, with a loss of RMB 21.5 million in the third quarter.
However, Ideal Automobile invested RMB 888.5 million in research and development during the same period, and the profit of the company can be achieved by tending to the details.
Why not profit if it can profit?
The reason is not that Ideal Automobile’s operating costs are high, but because it needs to maintain a sustained investment in research and development. Ideal’s founder, chairman, and CEO, Li Xiang, said that they plan to continuously invest more than 10% of research and development costs in more important areas of technical research and development outside of products in the long term.”
High efficiency has always been a characteristic of Ideal Automobile. If it slightly shifts its focus, Ideal Automobile could become the earliest new automotive force to be profitable and far exceed Tesla’s time-to-profitability.
However, Ideal Automobile’s strategy is undoubtedly:
To win the present, it needs to achieve sufficient sales and gross profit;
To win the future, it not only requires product development but also investment in technology research at the enterprise level, which is essential.
Popular Effect Continues
“Congratulations on Ideal’s outstanding performance”…
“This is truly an exceptional quarter of performance”…
“Congratulations on the fantastic results”…
At the beginning of the third-quarter financial results conference call, many investment bankers and analysts began questioning the management in this manner.
This is not just polite remarks. Ideal Automobile created the best delivery performance, highest income, highest gross profit, and the construction of the most retail centers in the quarter. It accumulated the highest cash and various equivalents in the history of the company, which amounted to 48.83 billion yuan.
All of this is due to Ideal Automobile’s first and only vehicle, the Ideal ONE. In the third quarter, Ideal Automobile delivered 25,100 vehicles, and in October, it delivered another 7,649 vehicles. In November, Ideal Automobile broke through the 10,000-vehicle delivery threshold and reached a record high of 13,485 vehicles.
Ideal ONE thus became the first single-model new automotive force to exceed 10,000 unit sales per month. This is not its first record, as it is also the first single-model production new automobile force product to exceed 100,000 units, which took the shortest time.# Ideal ONE – The Definition of a Popular Car
Ideal ONE’s popularity stems from Li Xiang’s simple and accurate product definition. Starting from his own perspective as a successful man from a multi-child family, Li Xiang created a “car and home” for himself and similar people.
Based on this scenario demand, Li Xiang combined intelligent cockpit, intelligent driving, range-extending drive system, and luxury car quality into Ideal ONE. In this car, it’s not a pure electric vehicle, but it offers a pure electric driving experience. It doesn’t aggressively pursue autonomous driving, but it has a practical L2 level driving assistance system. There are no flashy gimmicks, but every seat is designed thoughtfully for each family member. The price is 338,000 yuan, but it has the configuration of a million-dollar luxury car.
Compared with the global popular electric car Tesla Model 3, the two models have both similarities and differences.
The similarities are that both cars provide intelligent driving, intelligent cockpit, and electric driving experience, creating a superior experience and value for the same price range of cars. Moreover, both companies are directly operated and focus on products without liking marketing advertising.
The differences are that Ideal ONE’s intelligent cockpit is more in line with the functional requirements of family cars. Its voice interaction and localized content are also very rich. Tesla’s autonomous driving function is more aggressive and is charged separately by level. However, Ideal Auto believes that intelligent driving should be a standard feature for families.
Another major difference is that after Tesla Model 3 made a splash, it continued to push down prices by launching a standard range version and introducing lithium iron phosphate batteries, etc. Currently, it has reached the range of around 250,000 yuan. After the debut of the first car, Ideal ONE, in 2021, it was upgraded, and the price increased by 10,000 yuan. By charging this extra 10,000 yuan, Ideal ONE offers advanced AD assisted driving, intelligent cockpit, upgraded comfort, and a 280-kilometer increase in NEDC comprehensive cruising range… which many car owners consider cost-effective.
Ideal ONE wins over more consumers by creating more value. This makes Ideal ONE inherently popular.
Balance between Present and Future
Driven by Ideal ONE’s outstanding performance, Ideal Auto’s financial statements are in a relatively healthy state.
How to evaluate whether the financial condition of a listed company is healthy?
First of all, it should be determined the development stage of the industry and the position of the company.
For the intelligent electric vehicle race, the storm has been blowing for several years, and it has now entered the stage of product invasion and large-scale penetration into ordinary consumers.
The intelligent electric vehicle industry is still growing at a high speed, and even in the steepest slope of growth rate. For companies, this is a time for rapid advancement – to occupy large areas of land while also reserving strength for long-term battles.
Therefore, when looking at the listed companies involved in this race, several financial indicators should be considered: revenue and growth rate, gross profit margin, research and development (R&D) investment, and cash reserves.
Revenue and gross profit demonstrate current achievements. If companies fail to gain an advantage during the initial stage, they would miss the best opportunity.
R&D investment and cash reserves represent future strength. With the popularization of intelligent electric vehicles still in its early stages, the width and breadth of the competition will expand geometrically. In the end, only the players who stick through to the end have a chance of winning. Pursuing profits while sacrificing R&D investment during this stage will likely lead to winning in the short term but losing in the long term.
Looking at revenue first, Ideal Auto generated CNY 7.78 billion revenue for Q3, more than double the previous year, with a sequential increase of 54.3%. Compared to the overall growth rate of the intelligent electric vehicle market, Ideal Auto outperformed the industry.
In terms of gross profit, the company generated CNY 1.81 billion in Q3, a year-on-year increase of 264.8% and a sequential increase of 90.2%. The growth rate of gross profit margin is larger than that of revenue, indicating that Ideal Auto is improving its efficiency, and the economies of scale are also helping it.
To increase gross profit, the company either generates more income or reduces costs. The commercial model of Ideal Auto is extremely simple – to sell cars to make money. The more cars they sell, the more they earn. This simple business model allows the company and the team to focus on improving products and sales, leading to increased efficiency.
Regarding cost-saving, companies should control their costs. For Ideal Auto’s sales, general, and administrative expenses, these were CNY 1.02 billion for Q3, 55% of NIO’s and 66% of XPeng Motors’ during the same period.
As of November, Ideal Auto has sold 76,400 vehicles, and has 174 sales centers. Its average sales per store are 439 cars – much higher than its peers. This year, NIO, XPeng, and Ideal Auto sold about the same number of cars. As of Q3, XPeng Motors had 271 sales centers, and NIO had 317.
For R&D expenses, Ideal Auto spent CNY 888.5 million in Q3, a YoY increase of 165.6%, and a sequential increase of 36.0%. Li Xiang, the founder of Ideal Auto, previously stated that the company aims to invest CNY 3 billion in R&D expenses in 2021. The main areas of R&D investment include intelligent driving, pure electric platforms, and high-power fast charging – all of which will undoubtedly determine the most critical abilities of future intelligent electric vehicles.
Although Ideal Automobile has not yet turned a profit, it has been able to create positive cash flow. As of the third quarter, the total amount of cash and cash equivalents, restricted cash, term deposits, and short-term investments for Ideal Automobile is RMB 48.83 billion, a significant increase from the RMB 36.53 billion in the second quarter. Moreover, this figure for Ideal Automobile is higher than that of NIO and XPeng, which are RMB 47 billion and RMB 45.36 billion, respectively.
These four indicators indicate that Ideal Automobile is undoubtedly the most outstanding in its current achievements. However, the future depends on the transformation of research and development investment. From the current point of view, Ideal Automobile has at least made heavy bets in the right direction.
Mission and Responsibility Arise
“This is a very important mission and responsibility for our generation’s hardware tech enterprise,” said Li Xiang during the third-quarter earnings call.
The so-called “mission and responsibility” is to “ensure that we can continue to invest more than 10% of our research and development expenses into technical research and development outside of products.”
How did the previous generation of hardware companies do it? Take Xiaomi for example. Smartphones and IoT devices have only low gross profit margins of around 5-6% and 10%, respectively.
Li Xiang believes that “if a company only has a single-digit gross profit margin, its entire investment can only be in product-level R&D, and it cannot invest more in-depth research and development expenses at the technical level.”
Ensuring R&D investment is certainly not the final mission and responsibility. As a “hardware enterprise” of this generation – a smart electric vehicle research and production enterprise, what expectations does Ideal Automobile have?
Li Xiang’s internal letter made this clear:
Ideal Automobile’s vision for 2030: to create mobile homes and become the world’s leading smart EV company.
They have outlined a vision to achieve this goal. For example, a midway point is to achieve over 20% market share of China’s smart electric vehicles by 2025 and become a recognized leading enterprise.
To achieve this goal, Ideal Automobile must hone their comprehensive technical capabilities, business capabilities, and strategic resource support capabilities. “Only when comprehensive strength is achieved first can we have a real chance to win the World Cup of smart electric vehicles.”
Ideal Automobile’s goals are undoubtedly ambitious, but they have gone through meticulous calculations and have extremely high expectations for their team.
“Inamori Kazuo,” the “god of management,” said, “People who can depict their own successful scenes have a very high chance of success. If the scene is clearly visible when you close your eyes and imagine success, you will definitely be able to achieve it and succeed.”
Ideal Automobile’s desired future is not profitability, but rather to become the world’s leading smart electric vehicle company.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.