Li Auto is sprinting towards giants

Author | Chai Xuchen

Editor | Wang Xiaojuan

Perhaps when Li Xiang, the chairman of Chehejia (predecessor of Li Auto), founded the company, he did not anticipate that in less than five years, Li Auto would grow from a newcomer to a quasi-giant on par with Tesla.

On October 18th, Li Auto delivered its 1 millionth new car, completing Tesla's 12-year journey in just 58 months. Meng Qingpeng, Vice President of Supply Chain at Li Auto, told Wall Street News that Li Auto's pace is vertical climbing, going public, delivering, scaling up... drawing a steep curve.

In an interview after the offline production of one million Li Auto vehicles, Meng Qingpeng couldn't hide his excitement: "Supply and production capacity have shifted from bottlenecks in the past to becoming Li Auto's pride."

Behind this, Meng Qingpeng's restructuring of the supply chain system has supported Li Auto's rapid front-end demand overflow, becoming a key driver of performance snowballing.

Starting from Li ONE, seizing the market rapidly with core technology is the logic behind its fast expansion. With soaring performance, Li Auto gains more abundant resources to iterate product capabilities, forming a positive cycle of scaling up.

However, Li Auto cannot achieve this alone. It must receive support from suppliers to land key technologies in a timely manner and share profits appropriately. Meng Qingpeng's "strategy" is to learn from Tesla, gather suppliers to expand the cake, and incubate top domestic suppliers.

Meng Qingpeng mentioned that in two years, the number of Li Auto's suppliers has increased from over 300 to over 450, while the procurement amount has grown several times. As the cake grows bigger, suppliers prosper together, and they are more willing to share their best technology and products with Li Auto and share profits appropriately.

"Li Auto is a technology company that won't do everything, but will persist in investing in technology research and development in the long term." Meng Qingpeng's inspiring story makes suppliers willing to follow and dedicate themselves wholeheartedly.

With the strong momentum gained from binding suppliers, Li Auto has reached the "50,000 units per month" milestone, surpassing BBA in the third quarter. Collaborating companies are also flooded with Li Auto's orders.

Three years ago, Meng Qingpeng, the "number one" in Li Auto's supply chain, was like a guerrilla leader, busy with all kinds of firefighting, experiencing real despair and helplessness. After a comprehensive transformation and upgrade of the supply chain last year, and the addition of a group of domestic suppliers willing to deeply bind with Li Auto, Li Auto's supply chain system has finally taken the lead in business development.

Having found the secret of rapid growth, Li Auto is urgently sprinting towards the next million, aiming to become the first domestic luxury brand in China, firmly establishing its position in the 200,000+ market. Meng Qingpeng pointed out to Wall Street News that the market share of the 200,000+ segment in China is 6 million units, with the three BBA companies totaling about 2 million. Li Auto's ambition to occupy the BBA territory is now clear.

However, the market is currently full of uncertainties. Whether Li Auto can achieve a new round of class leap is another gamble for the company.

Meng Qingpeng mentioned that the market share above 300,000 yuan is declining, and the growth in the 200,000-300,000 yuan segment is not as expected (currently at 23%). Competitors are also rapidly advancing, "Now the homogenization speed of competing products is very fast, our refrigerators, TVs, and sofas are copied by others within half a year." Ideal wants to outperform the market. On one hand, it is preparing to continue releasing the potential of L6 next year, aiming for monthly sales of 30,000 units per month; on the other hand, it aims to overcome the obstacle of pure electric vehicles.

"We definitely need to boost our pure electric products. It is our other pillar. If we only rely on extended-range vehicles, we won't go far or fast." Meng Qingpeng believes that what Tesla can achieve, Ideal can also achieve, and this still depends on the assistance of the supply chain.

"I believe that in the future, electric vehicles have the opportunity to charge for 5 minutes and have a range of 500 kilometers." Meng Qingpeng stated that partners are willing to make technological breakthroughs, and both parties are investing resources to achieve this. To avoid fluctuations in sales volume, Ideal is also ramping up production capacity ahead of sales and creating a certain level of flexibility.

Earlier this year, Li Xiang himself stated, "The changes in the new energy market above 200,000 RMB will be beyond imagination. In the fourth quarter of this year, three brands will capture 70% of the market share." The industry has already reached a consensus that only a few top players will remain in the future automotive market, and Ideal wants to ensure that it stays until the end.

Next, can the supply chain system built by Ideal break through higher ceilings next year and lead this new force to reshape the "0-1" of pure electric vehicles, sprinting towards the next million?

The following is a transcript of the conversation between Wall Street News and Meng Qingpeng, Vice President of Ideal Automotive Supply Chain (edited):

Q: How many stages are there in the construction of Ideal's global supply chain management from 0 to 1?

Meng Qingpeng: In the initial stage, we positioned ourselves as a high-end car manufacturer. We brought in the best resources in the industry at that time, regardless of cost, with the sole requirement of good quality and a stable supply system to ensure that the quality of our first car to market is the best.

At that time, Ideal Automotive was just one of many new energy vehicle companies, without established capabilities or brand scale. We needed the industry's top players to endorse us. To open doors, Li Xiang personally spent a lot of time introducing our car-making philosophy and values, allowing them to see the style of Ideal.

I remember clearly that when introducing Ideal, there would always be a page showing our supply chain system, with names of top suppliers such as Bosch, CATL, and Continental listed. In the Ideal ONE cycle from November 2019 to October 2022, the first batch of suppliers were very supportive, and their profits on ONE were also very high.

The second stage was during the chip shortage and the pandemic, where coordinating supply was very difficult as orders far exceeded production capacity bottlenecks. The rigid internal processes and rules of foreign partners constrained our growth speed. We realized that the supply chain layout needed to be supplemented based on the existing foundation.

We identified which categories and components were restricting our production volume and supplemented them, implementing localization and domestication strategies.

The second reflection was that our relationship with foreign partners at the headquarters was not smooth, and they were skeptical when the China region president reported during the pandemic. So last year, we took L9 and L7 to Europe and the United States to visit in person, allowing them to experience and absorb our strategies and propositions, changing their perception of Ideal and the industry, and providing better policy support for us In the third phase by the end of 2022, we found that from mass production of ONE to the release of L9, the Ideal supply chain system has been busy fighting fires and lagging behind the company's business development for three years. Therefore, we immediately carried out a comprehensive supply chain transformation and upgrade, because without solidifying these basic capabilities, the scale cannot be achieved.

Last year, we focused on the most fundamental process construction, and only after the processes were improved could we promote digitization and AI. It is most important to solidify the foundation of the entire process system architecture and all strategic planning. In the next three years, our management team will spend 50-60% of their time thinking about this most important matter. In the past, 95% of the time was spent on firefighting, with no time to sit down and brainstorm together.

Question: We have always emphasized self-developed core components at Ideal, how do we convince core component manufacturers to be willing to do OEM production?

Meng Qingpeng: In fact, many suppliers now also want to do intelligent driving and intelligent cockpit, but their speed cannot support us in maintaining a leading position in intelligence. If a technology is something we will need in the future, even if it is half a year ahead of us, we must do it ourselves. The speed of homogenization among competitors is very fast now.

So how do we convince suppliers?

We use a combination of cooperation and self-development. For example, for the L-series electric drive, half is done by us, and the other half (the differentiated parts for different models) is done by partners. In addition, the business model will also change with the development of the business. When L4 is truly achieved, the realization of technological equality may gradually lead to the peak of technological breakthrough space. At that time, these components will still be returned to suppliers for production, because what remains is just some simple iterations.

We will make some adjustments to the division of labor with partners at each stage. But the next 5-8 years are a time to race against the clock. During this time, the advantage of self-development is greatest, so we do it ourselves, and suppliers help with OEM production.

Clearly explain the long-term plan to partners, let them see that we are not taking the path of vertical integration and self-manufacturing everything, and they will understand. Ideal emphasizes the efficiency of platformization. L7, 8, and 9 are all on one platform, with very high economies of scale and platform efficiency.

Ideal is a technology company that will not do everything on its own. Light assets are the ultimate trend. If one day there is a Foxconn-like company in the consumer electronics industry, we will also entrust them to do it, and focus on technology research and development.

Question: Will China produce top suppliers like Bosch and ZF in the future?

Meng Qingpeng: The answer is definitely yes. China's automotive parts industry, especially in the field of new energy vehicles, is already globally leading and is also contributing to the world. In other fields, we are also continuously making breakthroughs.

New forces like Ideal are nurturing local companies while leveraging foreign partners. Our culture and some advanced tools are also empowering local suppliers, who are very willing to fully open up their digital systems, something that foreign companies find difficult to achieve.

China will definitely produce companies like Bosch and ZF, but it must be linked with OEMs to accelerate and have the possibility of becoming global leading OEMs, so that supporting parts companies can also become global leaders. Companies like Ideal Auto must have strategies and tactics in this regard to lead.

In the intelligent field now, apart from Tesla, the four major OEMs in Europe, Japan, Korea, and the United States are far behind us in terms of intelligence. China has a very good foundation in intelligence, benefiting from the accumulation of the past twenty years of the Internet, with very sound infrastructure and well-trained consumer minds. Consumers' acceptance is much higher than in foreign countries, which helps promote intelligent vehicles The core breakthrough today is chassis technology. It must be acknowledged that foreign partners have accumulated data and experience in mechanical digitalization for over a hundred years, and China will need time to surpass them. High-end chassis technology is not achieved overnight. Give Chinese companies another ten years, and China's chassis industry can also contribute to the world.

Some suppliers have already made breakthroughs in suspension, and next, CDC, active suspension, electronic steering, wire-controlled braking, and rear-wheel steering will also make breakthroughs. The first step is to establish a strong presence in China, become a top 3 leading company, and eventually contribute to the world.

Question: How can the ideal platform strategy demonstrate the advantage of component commonality in supply chain management?

Meng Qingpeng: First, it must be acknowledged that Tesla has done a great job in platformization and integration. The component commonality of Model Y and Model 3 is very high; its integration is also very well done, with dozens of components integrated into one with a monolithic cast rear floor, embodying the concept of integration.

Therefore, these two models only use components from over 150 suppliers, benefiting the partners greatly. Due to Tesla's large scale and single product, supplier capacity utilization can reach over 80%, far higher than the industry average of below 50%. Ideal is also learning from them, with a high degree of platformization for L7, 8, 9, and a bit more differentiation for L6.

Platformization brings benefits in terms of quality, cost, supply, and manufacturing. For quality, the traditional way of components would take half a year to reach a production volume of 5,000-8,000 per month, but after platformization, once the first production line is stable, the mature process can be replicated; for supply, if the components of three models are all different, from early development to later order supply and management will become complex.

But we must look at platformization rationally, try to differentiate as much as possible in visible areas, let users feel the differences in appearance and interior space; in invisible areas, strive for platformization, achieving technical equality in electronic architecture, chassis, and intelligence.

The strategy of aggregation is to achieve end-to-end integration, with platformization being the first step. The gross profit margin of L models is very good, and fewer suppliers can also share more profits. One-third of the cost competitiveness we have improved in the past two years comes from the platformization route.

Question: When suppliers reached out to help reduce prices this year, where did the modernization of Ideal help reduce costs?

Meng Qingpeng: Our first step was to establish an industry-leading cost evaluation system, where each category and component will be evaluated. The system leaves reasonable margins for partners, based on different categories. Once the system is established, we focus on scanning components with a premium of over 100% and negotiate with suppliers, who will also provide different support.

The second step is to control the cost of core materials. Less than 30 categories account for 70% of the cost, and we need to strategically bind with these suppliers. When planning, we try to aggregate as much as possible for them, but they need to provide the best to Ideal.

Third, we penetrate our value proposition and culture with partners to gain full trust. For example, with a scale of 500,000 units this year, if a supplier advances the cost of 1 million units to me, it will greatly help Ideal expand market share in the shortest time possible. Their revenue will also increase significantly, from 5 billion this year to 12 billion in the following year, making me quickly become their top customer Becoming the industry leader will make our partners the TOP1 in the field of components, this kind of relationship is very obvious. Currently, Kong Hui is the TOP1 in China with a domestic market share of 45%. After boosting the market share in the L9 launch, Kong Hui secured over 20 projects within a year of our mass production.

Localization is at 60% currently, and next year pure electric vehicle models will be officially mass-produced. After mass production, some partners will gradually start their own mass production, and this proportion will increase. However, considering the issue of partners' production capacity utilization, we adopt an overall "flexible strategy" to maximize the utilization of existing production capacity by partners. There is no rush to establish local factories, the focus is on getting through the intense competition in the next three years.

Question: Will MEGA's performance affect suppliers' confidence in pure electric vehicles?

Meng Qingpeng: MEGA did not meet expectations mainly due to our inaccurate predictions of the competitive landscape and economic environment, resulting in significantly lower volume than planned. However, our goal is definitely to make pure electric products successful. It is our other pillar, as we cannot go far or fast with only extended-range vehicles.

There are successful practices for pure electric products now, with models like Model Y and Model 3 selling well. Why can't we do well? It's just that we need to position our pure electric products correctly from the 0-1 stage, and success is possible next year. Recent feedback from partners has been quite positive, showing strong enthusiasm.

MEGA will not be easily abandoned, it is our flagship model. Next year, our goal is to capture more market share in the MPV market of over 500,000 units. Although the volume of MPVs over 500,000 units is small, we are aiming for market share.

Question: What is the bottleneck for L6 to achieve the production target of 30,000 units next year?

Meng Qingpeng: The expansion of Li Auto L6 is invested by partners themselves, and most of them can currently meet production needs. There are probably 3-5 partners facing bottlenecks, while the rest of the partners' production capacity can meet the requirements. Once these 3-5 partners expand, the target will be achieved.

Question: How does Li Auto overcome the delivery difficulties, a common issue for new forces in the industry?

Meng Qingpeng: Prior to delivering new vehicles, the most important aspect is to compress the industrialization cycle and ramp up production capacity vertically. Competitors can replicate quickly, so our new vehicles must be launched and produced at the fastest speed to seize the opportunity.

This requires the most basic industrial capabilities, with two important indicators. The first is industrialization speed, and the second is vertical production capacity ramp-up. The initial monthly production capacity of Li ONE is 1,000 units, while Li Auto L6's first-month production capacity is 13,000 units, growing 13 times. Whether mass production can vertically increase in the first month requires systematic capabilities, and I believe Li Auto's capabilities in this aspect are leading in the industry.

Furthermore, after mass production, orders will continue to fluctuate. Timely follow-up is needed for any fluctuations. We need to address the efficiency of these connections. Therefore, an integrated plan has been established to connect all information through a deeply interconnected system. Once there are relevant adjustments, they will be immediately linked. By adopting a flexible strategy, partners' production capacity can be made universal and compatible, enabling rapid expansion In the current market situation, it is impossible to make a 100% accurate plan, which requires relying on the two means of mass production before and after to respond.

Question: The changes in industry structure and technological advancements have led to changes in the cooperation models between automakers and suppliers. What will be the future cooperation model between automakers and suppliers?

Meng Qingpeng: The previous cooperation model was a single-line model, with OEMs → Tier 1 → Tier 2 → Tier N, managed layer by layer. However, the ideal model is a diversified collaborative model.

We will involve process-related personnel in the management of some key components' sub-components. This is a networked communication approach, as linear progressive management cannot solve the issues of speed and cost. Therefore, the future trend will definitely be diversified.

With diversification, suppliers in the future will also undergo reshuffling and integration like OEMs. Players with high vertical integration depth will evolve into system integrators and grow into international large companies