Article by | Leng Zelin

Edited by | Wang Pan

In the second quarter, after experiencing a popular two-year period of bicycles, Ideale finally launched its second vehicle model — L9. According to CEO Li Xiang’s predictions, the vehicle should be delivered in August and achieve delivery of more than 10,000 in September.

On the other hand, recent media reports have revealed spy photos of Ideale’s L8, which almost retains the same family style as L9, and also incorporates a lidar sensor above the roof. The vehicle is positioned as a medium-to-large-sized SUV and is slightly smaller than L9. It is highly likely to replace the existing Ideale ONE.

According to Li Xiang’s previously stated product strategy, L9, L8, and possibly L7 can be understood as iPhone Pro, iPhone, and iPhone mini, respectively. It is highly likely that the pure electric products will continue to follow this strategy. The latter two power modes will gradually cover the entire new energy vehicle market ranging from 200,000 to 500,000 RMB.

Previously, Ideale relied on a single vehicle, Ideale ONE, to support sales. Not only did it keep up with the parallel learning of multiple products from NIO and XiaoPeng, but it also consistently ranks at the forefront of new energy vehicle sales and leads the hype of extended-range electric vehicles.

According to the product schedule released by Ideale, three more models will be launched successively next year, making it a blockbuster year for Ideale’s products. Since L9, Ideale has ceased to “go it alone,” and perhaps the way the outside world perceives Ideale may also need to change.

Earlier this year, Li Xiang published an article on social media, believing that although the “three fools of carmaking” had different strategies, they all completed the validation period from 0 to 1 in 2021 and achieved roughly 3% of the market share in their respective niche markets. When it comes to stages 1-10, the most critical business move is to “scale up” the advantages, accumulated experiences, and verified business models to mass production.

Therefore, as the final financial report before “mass replication,” perhaps this year’s report will better reflect the feasibility and potential of Ideale’s business model amidst the upstream raw material price surge and intensifying market competition.

“Birth Pains” before Ideale achieves mass production

Overall, affected by the Shanghai outbreak in April, Ideale’s financial data saw a comprehensive decline in the second quarter from the previous quarter.

In the second quarter, sales revenue for Ideale vehicles was 8.48 billion RMB, an increase of 73% YoY but a decrease of 8.9% QoQ. Total revenue was 8.73 billion RMB, an increase of 73.3% YoY but a 8.7% decrease QoQ. The gross profit amounted to 1.88 billion RMB, an increase of 97.1% YoY but a decrease of 13.2% QoQ.It is worth noting that the net loss of Ideal Auto in the current quarter has reached a new high since its listing, totaling CNY 641 million, an increase of 172.2% year on year, while the net loss in the first quarter was only CNY 10.9 million. Throughout last year, Ideal Auto’s net loss was only CNY 321.5 million (its net profit in Q4 2021 was CNY 296 million).

In addition, the operating loss of Ideal Auto in the second quarter also hit a record high, reaching CNY 978.5 million, up 82.6% year on year and 136.9% quarter on quarter.

The reasons for the significant increase in losses are, on the one hand, that Ideal Auto’s loss base is relatively small compared to other new forces, and the reduction in delivery volume leads to a decrease in sales and gross profit; on the other hand, the increase in operating expenses due to the growth of the number of models and offline sales network.

In the second quarter, Ideal Auto’s R&D expenses were CNY 1.53 billion, up 134.4% year on year and 11.5% quarter on quarter; sales, general and administrative expenses were CNY 1.33 billion, up 58.6% year on year and 10.2% quarter on quarter.

Fortunately, Ideal Auto’s gross margin in the second quarter did not fall sharply as NIO and XPeng did in the first quarter. The gross margin of vehicles in this quarter remained stable at 21.2%, and the overall gross margin was 21.5%.

In the first quarter, due to the offset of some of Ideal’s inventory, although the price of power battery went up, the overall performance in financial data was not significant. In the second quarter, despite the successive delivery of orders, even if Ideal raised its prices in April, it still could not offset the impact of cost increase, so the gross profit margin of vehicles fell for the first time.

However, with the delivery of L9 pulling up the average selling price and the continuous decrease in battery costs, it is expected that Ideal’s gross profit margin will be greatly improved.

Rationally speaking, the main reason for the decline in Ideal’s financial data in this quarter is the combination of external environmental factors and internal changes. In addition, the balance of Ideal’s cash and cash equivalents, restricted cash, term deposits, and short-term investments is also relatively sufficient, reaching CNY 53.65 billion.

However, in the delivery guidance for the third quarter, Ideal gave a relatively conservative number, about 27,000-29,000 units, even without any clear negative signals from the outside world. In other words, in the absence of the impact of the epidemic and with new car deliveries, Ideal’s delivery volume in the third quarter can only remain basically unchanged from the second quarter.The ideal delivery volume in July was 10,422. Deducting this number, the average delivery volume of the remaining two months is expected to be between 8,289-10,289. According to the Ideal Q2 conference call, it is estimated that over 10,000 L9s will be delivered in September, which means that the proportion of Ideal ONE is almost negligible.

The Ideal officially recognized that the number of Ideal ONE orders is currently slowing down. The reason given is that some potential customers of Ideal ONE have switched to L9. The company has also launched a 7,000 yuan discount promotion to stimulate Ideal ONE order growth.

However, unlike XPeng’s recent promotion policy, we believe that this is also a “growing pain” for Ideal’s mass production.

In fact, the delivery volume of Ideal ONE experienced a substantial decline in May last year, mainly due to the news of the launch of the new Ideal ONE, which caused some car owners to adopt a wait-and-see attitude. Due to the lack of synchronization of information and the inability to upgrade old models, some buyers of old models were very dissatisfied at that time and questioned the Ideal’s “clearance” suspicion.

Recently, the news that L8 will replace Ideal ONE has also been widely circulated on the Internet. Li Xiang himself confirmed the existence of L8 in the conference call and revealed that the release of L8 will be earlier than expected and faster than L9 from release to delivery.

In a sense, Ideal’s default attitude is also deliberately avoiding “repeating the same mistakes”. After all, this year, Huawei and Cyrus’s cooperation in the field of smart EVs has surged, making Ideal unable to catch up in the short term with the traffic and partial intelligence brought by Huawei, even if M7 has not yet been delivered.

This also means that if the discount policy does not work, the “inventory” of some Ideal ONE may have to be carried by Ideal itself.

Li Xiang has repeatedly stated that Ideal’s car-making philosophy will still focus on family users, also known as scenario-based car-making.

From Ideal ONE to L9, Ideal has been enriching various usage scenarios based on the premise of family car purchases. For example, the triple screen meets the entertainment needs of the co-pilot, and the comfort of the rear seats is considered for long-distance rides for the elderly and children. Even the “three major components of Ideal EVs”, namely, “TV, fridge, and big sofa”, still have their usage scenarios.

At first glance, the scenario-based car-making of Ideal only targets family users and may limit the further expansion of brand users.

He XPeng, CEO of XPeng Motors, also raised a question after the launch of L9: “In the fiercely competitive, global market, non-fast-moving consumer goods industry, 2C non-protected areas, which good products rely on accurate positioning to gain advantages or barriers in the midterm or long term?”

However, in reality, the scenario of family use cars is an important factor that affects Chinese consumers’ car purchasing decisions. According to the data provided by Li Xiang himself, up to 89% of the consumers in the purchase group above 200,000 RMB are family users.

Strictly speaking, this sentence should be expressed as: Among the purchase group above 200,000 RMB, 89% of the consumers will consider the scenario of family use cars.

It is generally believed that in the early stage of the mid-to-high-end new energy vehicle market, the main focus was on additional purchases, and the purpose of consumers’ additional purchases was to make up for the missing use scenarios of traditional fuel vehicles (such as license plate restrictions) or as a one-time trial. Ideal’s positioning from the beginning seemed to be more inclined towards replacement or first-time buyers, and the latter valued a complete use scenario.

Due to the existence of extended range/high-voltage fast charging, Ideal’s listed and planned models are not exclusively for individual family members to use. Therefore, as the new energy vehicle market continues to expand and the traditional fuel vehicle market declines, the proportion of replacement and first-time buyers will be greater than that of additional buyers, which is also the underlying logic of Ideal’s best-selling models.

However, while Ideal’s past has demonstrated its ability to create popular models, it is still difficult to establish a significant cost advantage compared to the models of the traditional fuel vehicle era or Tesla Model 3/Y, with their “mass production + high component commonality” advantages. If the focus is solely on satisfying personalized needs without considering research and development investment and costs, the resulting cars are unlikely to be affordable for many.

Therefore, in order to control the rising cost and thereby reduce the overall cost-effectiveness, Ideal has made adjustments to its business model, with everything except for isolated personalized configurations becoming standard on all models.

For example, traditional car companies’ optional packages, which often run into tens of thousands of RMB, are not simply seeking excessive profits, but are more due to the fact that the low number of optional packages drives up the shared cost. However, when Ideal makes all configurations standard, the overall cost-effectiveness will be higher than that of similarly-equipped models in the same segment.

Looking at the continuation of the L9, Ideal’s subsequent models will also continue to adopt the business model of full standard equipment to amplify its advantages.

During a Q1 conference call, Li Xiang provided a brief overview of the company’s mid-term product lineup, namely the dual approach of hybrid and pure electric vehicles.

However, this product strategy still has a visible “defect,” i.e., which of the two, hybrid or pure electric, will be the main driver of sales? If Ideal is still relying on extended range to support sales in the same price segment, it is not difficult to see that as the penetration rate of new energy rapidly increases, the license plate advantage of new energy vehicles will gradually weaken.

When will the capacity of urban transportation and the pressure of fiscal subsidies reach the critical point? This is a question that Ideal has not answered. Pure electric vehicles still have some buffering space, but the “pre-emptive volume” will surely be applied first to extended range models. First-tier cities such as Beijing and Shanghai have already begun to exclude extended range models from the “new energy” category.

If more than half of the products in the automotive industry are affected by the macro environment, their competitiveness in the same price range will greatly decrease.

The benefits brought about by large-scale production grow exponentially, but so do the pressure and difficulties that come with it. In the rapid expansion of companies like NIO and XPeng in their early stages, we have seen similar scenes: severe changes in core personnel or actions deformed due to information blockage between management and execution layers, resulting in a decline in reputation, delayed products, and even slow sales.

In addition, scenario-based car manufacturing for Chinese families will also have a certain impact on the competitiveness of car models in foreign markets. Currently, NIO and XPeng view the European market as the next driver of sales growth. NIO even plans to launch a separate brand in Europe, while the ideal international plan is still in a “wait and see” stage.

Ideal ONE has fully demonstrated the ability of Ideal Motors to grasp product demand and operate efficiently. It is also through this model that investors such as Wang Xing from Meituan and Huang Mingming from Mingchu Capital show their approval.

Ideal Motors has a dreamy version that can capture investors’ imagination, but it also faces urgent problems that need to be solved in order to stand out from the competition between new forces and traditional automakers. Li Xiang needs to continuously provide better answers.

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.