Aiming for the next million vehicles, Li Auto plans to invest another 40 billion RMB in "grouping"

Image source AI generated

On October 14th, Li Auto's 1 millionth complete vehicle rolled off the production line at its Changzhou base. Since the launch of its first extended-range product, the Li ONE, in November 2019, Li Auto has become the first Chinese new energy vehicle company to reach one million vehicles in just five years. With monthly sales exceeding 50,000 units, it is considered "far ahead" in the new energy vehicle market.

However, the journey from 0 to 1 million vehicles has been filled with difficulties and challenges. "The biggest bottleneck the company faces before 2023 is the supply chain issue."

After the offline ceremony, Meng Qingpeng, Vice President of Supply Chain at Li Auto, mentioned this topic in communication with Titanium Media App.

For Li Auto, the success of its first product, the Li ONE, was a good start. However, during the market outbreak phase, supply is crucial. One core aspect is factory capacity, while the other core aspect is the supply chain.

In 2022, the successive chip shortages, battery price increases, and the pandemic crisis caught Li Auto off guard.

A traditional fuel vehicle has approximately 30,000 components, while although the number of components in a new energy vehicle is halved, it still exceeds tens of thousands, illustrating the complexity of its supply chain. It is reported that at that time, Li Auto had around 180 partners of all sizes.

"From the mass production of the Li ONE in November 2019 to the launch of the Li L9 in 2022, Li Auto's supply chain system has been busy fighting battles and dealing with emergencies for more than three years, lagging behind the company's business development," Meng Qingpeng said.

However, by the end of 2022, Li Auto identified the issues and began to address them, leading to a transformation and upgrade of the supply chain's underlying processes.

Li Auto's Chairman and CEO, Li Xiang, once again emphasized at the 1 millionth vehicle offline ceremony that since its establishment, Li Auto has always regarded "self-developed core technology" as a crucial cornerstone of its business development.

With the achievement of the first one million vehicle milestone, Li Auto invested 10.6 billion in R&D last year and plans to increase it by 25% this year. Meng Qingpeng stated, "Considering the R&D investment of our partners, our expenses need to be multiplied by at least 3 times. If we invest 10 billion, the entire component industry needs to invest another 30 billion."

Boundary of self-development

Starting from July this year, Li Auto entered the 50,000 units per month sales club. Although there was a slight decline in August, it continued to rise in September, with sales figures of 51,000, 48,122, and 53,709 for July, August, and September respectively, according to Li Auto's data.

At the same time, Meng Qingpeng revealed that the Li L6 is now stable at a monthly delivery volume of 25,000 to 26,000 units, aiming to reach 30,000 units per month next year. "If a luxury car maintains a stable monthly sales volume of 50,000 units, it means that the company has entered a mature stage." Image source: on-site shooting

Maturity corresponds to scale, which means solving two key issues, the first being a controllable supply chain.

During the communication process, Meng Qingpeng revealed a number: by 2024, Li Auto's procurement partners will exceed 450, with a procurement amount exceeding 120 billion.

"We need to build a comprehensive supply chain system to support the company's business success. This system is vertical, including quality, cost, supply, joint innovation, intelligent manufacturing, and horizontal best operational planning," Meng Qingpeng said.

So, how deep is the vertical integration of the supply chain for Li Auto? Where is the boundary between the car company and the supplier?

He mainly follows three principles: first, whether the development speed of partners can support the speed of Li Auto and match its own needs; second, whether the technology is the next positioning requirement for Li Auto, "if we can achieve even half a year of lead, we must do it ourselves, because the speed of homogenization of competing products is very fast"; third, based on the demand for quality consistency, if the quality consistency cannot be guaranteed by partners, Li Auto will also do it themselves.

At the same time, Meng Qingpeng also emphasized that Li Auto's self-developed areas are quite extensive, but not everything is self-manufactured, but selectively self-made, such as silicon carbide, power supply modules, electric drive, range extender systems, etc.

The reason for choosing self-manufacturing, Meng Qingpeng said, is that the investment in these areas is very large, with the investment in range extender systems starting at 30 million, making partners invest 60 million or even one or two hundred million at the beginning. Therefore, when the performance stage has not reached the expected level, we choose to complete these tasks ourselves, that is, self-manufacturing.

Specifically, in the traditional automotive parts sector, Li Auto will choose to cooperate with mature suppliers and not build factories on its own.

In the field of power batteries, including batteries, motors, and electronic controls, Li Auto will be deeply involved, jointly developing the industry's first mass-produced 5C supercharging battery with CATL, cooperating with Huichuan to develop the front-drive five-in-one assembly, and assisting Xingwangda in Jiangsu to build and operate battery PACK production lines.

Most of the intelligent field is self-developed, such as autonomous driving, intelligent cockpit solutions, etc., are self-developed, while control modules are outsourced to partners.

In the process of the continuous maturation of the supply chain, Li Auto has also tasted the sweetness. "In the company's cost strategy, the contribution of the supply chain business to the company was very significant last year," Meng Qingpeng said.

Platformization Choices

To achieve scale, the second key issue to be addressed is platformization.

Platformization means investing more costs and time to develop several platforms, determining most common parts, leaving some room for adjustment, and being able to design and develop similar to "nesting dolls" on the platform for a certain period in the future.

A blogger once dismantled the Tesla Model Y and found that the Model Y shares about 75% of its components with the Model 3 electric sedan, with one major reason being that these two models share the same platform.

According to Meng Qingpeng, "The platformization degree of Li Auto's L7, 8, 9 three models is very high, while L6 will be somewhat differentiated." He further explained that platformization is beneficial for QCDM (Q-Quality, C-Cost, D-Supply, M-Manufacturing).

For quality, components need to go through the process from prototype to trial production to mass production. The traditional method takes about half a year to reach a production volume of 5,000-8,000 units per month, which is a step-by-step maturation process. Only after accumulating a certain quantity can problems in the manufacturing process be identified. However, with component platformization, once the first production line is stable, the standard mature processes of the first production line can be replicated to ensure production quality.

For supply, if the components of three models are different, managing three sets of components increases the complexity. From early development to later order fulfillment, supply, and management, the process becomes more complex. Differentiation must also be made during the production process, which increases management complexity.

However, he also mentioned the importance of a rational view towards platformization because the user groups for different models in the L series are distinct. Different user groups have different demands, varying in terms of exterior design, interior space, chassis, and power requirements.

Therefore, Li Auto will differentiate in terms of design and internal space, while achieving technological equality in advanced technologies such as electronic architecture, chassis, intelligent driving, and smart cockpit, allowing most customers to benefit. For example, the AD 3.0 control module and chip selection are the same for Li Auto's L7, L8, and L9.

Amidst the intense price competition in the domestic market, many new energy vehicles are selling at a loss, with Xiaomi's SU7 reportedly losing 66,000 yuan per unit. Li Auto, on the other hand, can achieve high gross profit margins, showcasing the supply chain and cost advantages brought about by platformization.

Being able to achieve a production output of 1 million vehicles in just 58 months, Li Auto's continuous improvement and iteration of the supply chain system are among the key reasons. To aim for the next million vehicles, Meng Qingpeng stated that after laying a solid foundation in 2023, the focus in 2024 will be on further process improvement, followed by a focus on digitalization and AI.

(This article was first published on the Titanium Media App. Author | Han Jingxian Editor | Zhang Min)