Author: Zheng Senhong
Cash flow is negative, gross profit margin hits a historic low, executive leadership changes, and organizational transformation. Ideal aims to return to the starting point.
Affected by the season for car model upgrades, Ideal’s overall data was not impressive in the third quarter.
According to the financial report, Ideal sold only 26,000 vehicles in Q3, with a net loss of 1.65 billion yuan, far exceeding the net loss of 21.5 million yuan in the same period last year; its free cash flow was negative 1.96 billion yuan, while it held 1.16 billion yuan in cash flow in the same period last year.
The overall gross profit margin reached a new low of 12.7%, a near 50% decrease year-on-year and even lower than Xpeng’s Q3 gross profit margin of 13.1%.
However, with the continuous delivery of over 10,000 units of L9/L8 in the past two months, Ideal has given out a new high delivery guidance: it is expected to deliver 45,000 to 48,000 units in Q4, representing an increase of 27.8% to 36.3% compared to the same period last year.
In addition to the financial report, Ideal also announced a new round of personnel and organizational changes on the same day:
President Shen Yanan resigned from the board of directors, and Chief Engineer Ma Donghui will replace Shen Yanan as the President of Ideal and will join the board of directors, responsible for research and development and supply groups; Senior Vice President Xie Yan will serve as CTO of Ideal, responsible for the system and computing group, with full authority.
In addition, towards the goal of selling 200,000 vehicles annually, Li Xiang has launched an organizational upgrade to move towards a matrix-based organizational model needed to achieve a hundred-billion-scale.
Overall, with the increase in scale, Ideal needs to speed up its catch-up in the research and development field.
## Production suspension of Li Auto ideal ONE costs Li Xiang RMB 800 million
The slower-than-expected delivery in the third quarter is mainly due to the launch of Li ONE L9, which caused Li Auto ideal ONE orders to be redirected.
In the stagnant August of old and new product alternation, Li Auto delivered only 4,571 vehicles, a month-on-month decrease of 56.1% and a year-on-year decrease of 51.7%.
This is the main reason for the overall poor financial report data of Li Auto in the third quarter.
Since the release of L9 in June this year, the sales of Li Auto ideal ONE have started to decline by 5,000 per month.
Obviously, there is a serious “internal fight” between Li ONE L9 and Li ONE, which Li Auto did not expect.
At that time, Li Xiang believed that only a few people had a budget of 300,000-350,000 yuan, which suddenly increased to nearly RMB 500,000, and the proportion was probably less than 10%, not the real big market of Li ONE L9.
But the fact refuted Li Xiang’s calculation.
Li Auto ideal ONE sold less than 5,000 units in August. Li Auto had to launch L8 and L7 in September to replace the vacancy of Li Auto ideal ONE.
The delisting of Li Auto ideal ONE not only had an impact on sales, but also caused Li Auto’s gross profit margin to plummet from 21.2% in the same period last year to 12.0%, which was also due to Li Auto ideal ONE.
Shen Yanan said that due to the faster-than-expected decline of Li Auto ideal ONE, the loss amounts of inventory preparation and procurement commitment of Li Auto ideal ONE reached RMB 800 million.
If the losses caused by Li Auto ideal ONE are excluded, Li Auto’s vehicle sales gross margin ranks first among new car manufacturers with a score of 20.8%.
In comparison, Li Auto’s gross profit for selling a car was basically around RMB 60,000 before. Since the delivery of L9, Li Auto makes a net profit of RMB 71,100 for selling a car.After a slow season of model updates and the early introduction of L7 and L8, NIO pinned their hopes on Q4.
For Q4, NIO expects to deliver between 45,000 to 48,000 vehicles.
Excluding the 25,086 cars delivered cumulatively in the first two months of Q4, this means that NIO’s December deliveries will fall between 19,914 and 22,914 vehicles, potentially becoming the first new EV automaker to surpass monthly sales of 20,000 cars.
As Q4 sales continue to grow, NIO is also getting closer and closer to achieving break-even status.
On November 11, Li Xiang stated on Weibo:
“The NIO L9 and L8 together meet the needs of families with a price range of 300,000-500,000 yuan. We strive to achieve a monthly income of over 10 billion yuan in 2022. When the two products are delivered simultaneously, it’s also time to say goodbye to seven years of consecutive losses.”
During the earnings call, Shen Yanan stated that, combined with existing orders, NIO’s delivery volume in Q1 2023 will outperform the wider market.
“In 2023, L9 monthly sales will stabilize at around 8,000-11,000 units, while L8 sales will be between 10,000-15,000 units,” Li Xiang further revealed the 2023 sales outlook for NIO.
At the same time, NIO’s R&D investment continues to increase.
In Q3, NIO’s R&D investment reached a record high of 1.8 billion yuan, an increase of 103.1% YoY, with expenses mainly spent on the development of new vehicle models and personnel costs.
“Considering that the company will launch a pure electric platform car next year, R&D investment will probably continue to climb in the future. When revenue is low, the pressure on the R&D expense ratio will be very high. This quarter is such a state: the R&D expense ratio is 19.3%, almost consuming the gross profit margin earned from selling cars,” Shen Yanan explained.
According to Li Xiang, internal R&D is mainly divided into three major areas:
- The first is product R&D, i.e. the development of new vehicle models.- The second is the research and development of technical platforms, including the new generation of range-extended electric vehicle platform, high-voltage pure electric vehicle platform, intelligent cockpit platform, and intelligent driving platform;
- The third is the research and development of underlying systems, mainly the infrastructure construction of underlying software.
If ranked by the investment level, Li Xiang believes that platform R&D > vehicle model R&D > underlying system R&D.
Shen Yanan stated that the research and development expenditure in 2022 will be approximately 7 billion yuan, and it is expected to increase to 10-12 billion yuan in 2023.
Reorganization of Senior Management and Organizations to Support a Trillion-Yuan Market
With the release of the financial report, also came the announcement of personnel adjustments, which will take effect on January 1, 2023.
Firstly, the executive director and president Shen Yanan will resign from the board, and his jurisdiction over the supply team (including supply chain, manufacturing, and quality) will be taken over by CEO Ma Donghui, while the business team (including sales, service, and charging network) will be directly managed by Li Xiang.
On this basis, Li Xiang’s scope of responsibility has also changed. The Human Resources and Enterprise Systems teams that he previously managed will be transferred to CFO Li Tie for management, and Li Tie will be responsible for organization and financial groups.
At the same time, Ma Donghui will take over the role of President and Director vacated by Shen Yanan, and he will be in charge of the R&D and supply groups.
It is understood that when Li Auto’s former CTO, Wang Kai, resigned, Ma Donghui had already taken over the product R&D group, responsible for overall vehicle electrification, intelligent space, intelligent driving, computing architecture, R&D and operation, styling design, and other business modules. The team has nearly 4,000 members and is also responsible for the ongoing range-extended and pure electric vehicle models under development.
Therefore, with the addition of Shen Yanan’s work on the supply chain, manufacturing, and quality, Ma Donghui now holds the two major powers of research and development and production.
Based on Li Xiang’s internal letter, it can be seen that in the past seven years, the product and technology research and development group that Ma Donghui is responsible for led the development and delivery of the Ideal ONE from 0 to 1, as well as the successful R&D and delivery of Ideal L9, L8, L7 and other products from stages 1 to 10.
In 2019, Ma Donghui also led the team to successfully develop four major technical platforms: extended-range electric, high-voltage pure electric, intelligent space, and intelligent cockpit.
In addition, Xie Yan, who joined from Huawei Consumer BG, will serve as the Ideal Car CTO with full responsibility for the system and computing group.
It is reported that Ideal’s system development department includes business such as operating systems and computing platforms. The computing platform business includes the self-developed intelligent driving chip team, which has a scale of dozens of people and a clear schedule for mass production.
As for Shen Yanan, as one of the co-founders of Ideal, Li Xiang affirmed his contributions in the internal letter:
Shen Yanan has extraordinary judgment and leadership in the supply chain and business direction, including helping Ideal to establish its Changzhou factory, the extended-range electric platform for Ideal ONE and L series models, as well as the supply chain for the high-voltage pure electric platform.
Regarding Shen Yanan’s departure, there were early warnings. According to the Hong Kong Stock Exchange, Shen Yanan sold Ideal Car shares twice on September 2 and 6 this year, with a total of approximately RMB 91.13 million. In December last year, Shen Yanan had already reduced his holding of 2 million shares of Ideal Car stocks and cashed out more than RMB 200 million.“`
Continuous stock dumping twice and the reasons behind it are unknown.
Before leaving, Shen Yanan had one more task – to join the process reform committee, to support the new round of process reform and organization upgrading.
Specifically, Ideal will add 5 new entity departments: Commercial Department, Supply Department, Process Department, Organization Department, and Finance Department on the basis of the original two horizontal entity departments (Strategic Department and Product Department), supporting the company’s management mode from “Vertical function organization” to “Matrix-type organization“.
Li Xiang explained that the biggest feature of a matrix-type organization is to ensure the management quality of the entire process, with horizontal teams responsible for path planning, modification, operation, and vertical teams responsible for car manufacturing, driving, and operating.
“In the past, Ideal adopts the management mode of ‘Vertical function organization’. This method has helped Ideal achieve a revenue of tens of billions of yuan per year. By 2022, Ideal will achieve a revenue of over 40 billion yuan. However, when it comes to achieving hundreds of billions and challenging trillions of revenue in the future, the management mode of ‘Matrix-type organization’ will be a more suitable remedy,” Ideal further explained.
At this stage, Li Xiang believes that “any major bad decision, any low-quality product delivery, will cause disastrous blow to the company”.
Therefore, Ideal also plans to land seven segmented processes in the next three years, forming the smallest operating closed loop of Ideal’s “Matrix-type organization”:
- DSTE (from formulating strategies to implementing them)
- IPD (integrated product development)
- IPMS (integrated product marketing and sales)
- ISC (integrated supply chain management)
- BT&IT (construction, handover and information technology)
- LTD (personnel decoding)
- IFS (integrated finance)
Li Xiang also provided an example to prove his decision:
In 2021, Ideal established the first horizontal organization product department in product development and conducted IPD pilot. Ideal ONE and the development of Ideal L9, L8, and L7 are all products of IPD.
This is a matrix-wide organizational upgrade, which expands the experience gained from previous trials to the entire company.
In Li Xiang's view, organizational upgrade is the most important test for a company to enter a larger and more difficult stage. Over 90% of failed companies do not actually have problems with their businesses. Business problems are just symptoms, and the essence lies in the inability of organizational capabilities to adapt to the expansion of scale and changes in the industry.
From the perspective of this ideal organizational adjustment, Li Xiang hopes to fully leverage everyone's strengths to accumulate strength for the development of the new stage.
Li Xiang believes that in the 0-1 stage, speed is efficiency, while in the 1-10 stage, quality is efficiency.
- Internally: high-quality cognition, planning, execution, and review
- Externally: high-quality research and development, manufacturing, products, and services
It can be seen that the main evolutionary direction of the ideal organizational change is led by technical experts, and then followed by a matrix-type organization that "ensures the management quality of the entire process" and "delivers the continuous creation of value to consumers."
## Red Ocean Competition: The tough times for ideals have just begun
"What is a market scale of trillions?" This is what Ideal is facing.
If we look at the revenue and sales of Ideal in 2022 and require the company to maintain a growth rate of over 120% in 2023, it means that it needs to sell over 200,000 Ideal L9 vehicles.
But the reality is that the battle that Ideal is about to face in 2023 will not be easier than in 2019.
On the one hand, the current new energy vehicle market is different from two years ago, and Ideal is no longer the "only child" in the extended range race, which also indicates that the "road to revival" for Ideal faces great challenges.
Since 2022, more and more extended-range products have emerged in the new energy race, including the NIO M5/M7, the Deep Blue SL03, the Nio ES8, the Geely Xingyue L, and the Zero Run that regards the extended range route as a support for balancing brand profits and losses, etc.
Zhu Jiangming, CEO of Zero Run, believes that the proportion of extended-range hybrid vehicles may increase to 50% or even higher by 2025.
From the outdated technology to the mainstream, the “exciting scene” of the extended-range market is undoubtedly due to the commercial myth created by IDEAL ONE.
But what is more important behind it is the turning point of when automakers can truly “earn money.”
With the continuous soaring of the price of lithium materials for power batteries, automakers have begun to focus on battery capacity.
Choice data shows that in November 2022, the price of raw material lithium carbonate is around 600,000 CNY/ton, which was only about 50,000 CNY/ton three years ago.
From a market perspective, the battery capacity of the WM Motor EX5 electric and extended-range versions are 80kWh and 40kWh respectively; the battery sizes of NEZHA S 715Km electric and extended-range versions are 85.11kWh and 43.88kWh respectively, and the battery capacity of the pure electric product is almost twice that of the extended-range version.
If we take the price of 1,000 CNY/kWh for power batteries disclosed by CATL as an example, the cost of the battery alone means that there is already a price difference of 40,000 CNY between the pure electric and extended-range versions of the WM Motor EX5.
Reflected in the terminal price, the price difference between the pure electric and extended-range versions of the WM Motor EX5 for standard after-drive is only 28,800 CNY, which undoubtedly means that the extended-range version of the WM Motor EX5 has higher profit.
This “cost reduction and efficiency enhancement” strategy can not only reduce the use cost of batteries but also improve the gross profit margin of each vehicle, which is the core factor that more and more players embrace the extended-range market.
On the other hand, the extended-range market is also continuously squeezed by policies.
For example, from 2023 in Shanghai, the purchase of plug-in hybrid vehicles (including extended-range) will no longer be granted new energy license plates, similar policies have already been implemented in Beijing.
This also means that buying an extended-range vehicle will be the same as buying a fuel vehicle, requiring bidding or lottery to obtain a license plate.
Regarding this, Li Xiang believes that the policy will have some impact on sales volume, and there have been corresponding sales strategy adjustments internally. However, most of the ideal customers belong to the category of car upgrades, already have license plates, and the sales volume in Shanghai accounts for only about 5%-6% of the total sales volume.
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Although the restrictions on the range in Shanghai will not have a significant impact on IDEAL, it does not rule out the possibility that other cities will follow in the footsteps of Beijing and Shanghai in the future.
This also means that if IDEAL only has range-extended products, it may be in a passive state for a long time.
According to the plan, IDEAL will release its first pure electric vehicle model next year, and is currently developing a self-developed 800-volt high-voltage pure electric platform component, including power chips, power modules, electronic control, and motors. Its power semiconductor R&D and production base has been launched in Suzhou New District.
At the same time, IDEAL believes that intelligent manufacturing is the core competitiveness of any successful car manufacturer.
IDEAL’s self-developed management software Li-MOS can greatly improve the efficiency and quality of production processes. In the future, the system will be applied to all IDEAL factories, helping new factories shorten the implementation cycle by more than 3 months.
However, the effectiveness of these technologies and systems can only be seen when IDEAL’s pure electric vehicle products are launched.
For IDEAL, how to maintain its existing market share, make newly launched and future models recognized by the market, may be a more urgent task than improving gross margin and achieving short-term profits.
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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.