Li Auto, once the poster child of China’s new-energy vehicle (NEV) start-ups, has entered a period of pronounced underperformance as the industry’s second wave of competitors capitalises on expanding market demand. In the fourth quarter of 2025 the company reported vehicle sales revenue of 27.3 billion yuan, a 36.1% year-on-year drop, and full-year car sales revenue of 106.7 billion yuan, down 23%. Average transaction price fell to about 250,000 yuan in Q4, dragged down by both the higher share of lower-priced i6 sales and steep discounts on outgoing L-series range-extended models.
The margin squeeze has been acute. Q4 vehicle gross margin fell to 16.8% from an adjusted 19.8% in Q3, while the company’s headline net profit for 2025—roughly 1.1 billion yuan—owed more to financial income than core operations. Li Auto booked roughly 1.9 billion yuan in interest and investment income last year and carried over a cash pile of about 101.2 billion yuan at year-end. Strip out those finance gains and recent quarters point to operating losses, underscoring that ample cash is cushioning a sharp deterioration in underlying profitability rather than concealing a durable recovery.
The firm’s strategic dilemma is structural: the commercial advantage of its original range-extended (REX) architecture is reaching its limits even as the market pivots toward full battery-electric vehicles (BEVs). REX’s lower technical barrier has invited intense competition: brands such as AITO (backed by Huawei), Leapmotor and Xiaomi offer similar or cheaper alternatives, with Huawei’s software and driving assistance a particular draw for value-conscious buyers. Li Auto’s response—cutting prices, trimming versions and accelerating model refreshes—has helped defend volumes but at the expense of unit economics.
The shift to pure EVs has not offered an easy out. Li’s i8 and MEGA models have failed to generate the hoped-for sales lift, leaving the company to rely on the mainstream i6 to carry volume targets. The company plans a simplified i8 lineup and may introduce smaller-battery variants to lower price points, while the next-generation L9 range-extender is due in the second quarter with claims of upgrades across powertrain, ADAS, chassis and packaging. Yet these moves risk product cannibalisation: cheaper BEV trims could undercut higher-margin L-series vehicles, perpetuating downward pressure on average selling price and margins.
Management is hedging with a two-pronged turnaround plan that mixes commercial restructuring and heavy investment in AI. From March 1 Li Auto has trialled a “partner” mechanism for stores, sharing decision rights and profitability with store managers while pruning low-performing outlets. Concurrently the company is funneling roughly half of its R&D spend into AI-related projects: in 2025 it spent 11.3 billion yuan on R&D with about 50% earmarked for AI, and it plans similar intensity in 2026, including chip development, compute and advanced driver assistance systems (ADAS).
That AI emphasis is strategic but long-dated. CEO Li Xiang has publicly framed AI and even humanoid robotics as a future frontier, yet internal feedback suggests the company has not yet formed a coherent, company-wide roadmap for turning AI into near-term revenue. Unlike rivals that pitch standalone AI or robotics products, Li Auto embeds AI chiefly as a way to accelerate intelligent driving and cabin experience, a pragmatic approach but one that will take sustained investment to close the gap with rivals such as Tesla, Huawei and Xpeng on software-led features.
The broader industry context sharpens the stakes. China’s NEV market is expanding, and other new entrants have translated growth into both volume and profitability: Leapmotor, Xiaomi and Xpeng reported robust sales growth and improving margins in 2025. Li Auto has trimmed its 2026 sales growth target to 20%, markedly below peers that are targeting 30–75% expansion, signalling management’s expectation of fiercer competition and constrained market share upside.
For global observers, Li Auto’s predicament exemplifies a recurring dynamic in fast-maturing hardware markets: an early, defensible feature set can secure leadership for a time, but rivals that combine aggressive pricing, stronger software stacks or superior supply-chain partnerships can quickly erode that advantage. Li Auto’s strong balance sheet buys time to reprice products and invest in AI and chips, but the company must translate those investments into tangible improvements in ADAS, product fit and cost structure if it wants to reclaim momentum without sacrificing margins.