Li Auto Margins Crushed by AI-Driven Chip Costs as Company Bets Everything on Vertical Integration
Q2 2026 earnings call, August 26, 2026
Li Auto's second-quarter results laid bare a margin story investors haven't had to reckon with before: the same AI boom fueling demand for Nvidia GPUs and hyperscaler capex is now squeezing Chinese EV makers from the supply side. Total revenue fell 15.1% year-over-year to RMB 25.7 billion, gross margin collapsed to 11.0% from 20.1% a year ago, and the company swung to a net loss of RMB 1.7 billion versus net income of RMB 1.1 billion in the prior-year period. Vehicle margin nearly halved to 9.4% from 19.4%.
AI Demand Is Now a Cost Headwind, Not Just a Tailwind
The most novel disclosure on the call came from CEO Xiang Li, who explained that surging AI infrastructure demand is directly inflating Li Auto's bill of materials. "Because of the development in the AI sector, this has driven demand for chips and PCBs, pushing prices up," he said, adding that memory chip prices have also risen industry-wide. Because Li Auto's vehicles are more compute-intensive than peers, he acknowledged the company is "more impacted" than the broader industry, even as early volume commitments and long-term procurement agreements have partially cushioned the blow relative to competitors. Lithium carbonate has also seen cyclical price swings this year, adding pressure on the battery side.
Management was explicit that it will not pass these costs on to consumers, instead betting on deeper vertical integration to absorb the hit. Li set a long-term gross margin target of 15% to 20%, with raw material costs as the primary swing factor — a level the company is nowhere near today and won't reach until commodity cycles normalize and in-house component production scales further.
Completing the Vertical Stack: Batteries Join Chips and Motors
Li Auto is finishing what it calls the "final piece of the electric powertrain puzzle" by bringing battery cells, packs, and battery management systems fully in-house, joining motors and controllers that were already proprietary. In-house batteries are already deployed on the new L8, L6, and i8, and management said all models will carry proprietary batteries within the next few months, with a full brand rollout starting in the second half of the year.
Xiang Li framed this as a strategic necessity rather than a rebuke of suppliers, drawing a direct comparison to how Apple and Huawei hold core technology in-house. "By choosing to develop these components in-house doesn't mean that our suppliers' products aren't great," he said, name-checking Nvidia and CATL specifically as respected partners. "We believe that in the era of embodied AI, chips and batteries are going to be the most important competitive advantage." The company's proprietary MACH M100 chip has now shipped more than 50,000 units since May, powering the ADAS stack on the refreshed L9, L8, and L6.
Product Refresh Cycle Creating Near-Term Turbulence
The completed refresh of the L-Series — spanning L9, L8, and L6 onto the new MACH M100 platform, 5C supercharging, and drive-by-wire chassis — has landed unevenly. Li Auto disclosed that the Ultra/Livis high-end trims are outperforming, with the L9's flagship Livis version accounting for over 85% of that model's sales, while the broader transition has created what Xiang Li called "temporary disruptions," including old inventory clearance, new model ramp-up, and sales policy changes that have weighed on near-term operations. Management is targeting a steady run-rate of 10,000 units per month for the new L6 as the segment stabilizes.
Two major launches are set to test whether the refresh cycle turns into a genuine inflection: the redesigned Li MEGA on September 2, addressing chassis agility and cabin complaints from the first-generation MPV, and the all-new flagship i9 SUV in mid-September, targeting the RMB 200,000 to RMB 500,000 large-family segment with an 800-volt 5C platform and dual MACH M100 chips. BEV and EREV sales are now split 50/50, and management expects BEV share to keep climbing as the i8, i9, and MEGA ramp through year-end.
Autonomous Driving Roadmap Gets More Specific
CTO Yan Xie laid out unusually granular targets for the MACH VLA autonomous driving stack. The upcoming OTA 9.2 update will shift to a full 3D Vision Transformer architecture with 3 times the parameter count and 4.6 times the compute of the current system, with fourth-quarter goals including perception range beyond 250 meters, spatial accuracy within 5 centimeters, and reductions of 20% to 50% in hesitant or unnecessary driving interventions depending on the scenario. Xie also confirmed the chip's ambitions extend past driving: vehicles with dual MACH M100 chips can now run a fully multimodal foundation model on-device across voice, language, and video, which he described as expanding the car's role toward "an embodied intelligent agent" capable of understanding intent and planning tasks rather than executing only predefined functions.
Cash Position Solid, But Free Cash Flow Still Negative
Li Auto ended the quarter with RMB 87.5 billion in cash, and operating cash flow turned roughly breakeven at RMB 15 million versus a RMB 6.1 billion outflow in the prior quarter. Free cash flow remained negative at RMB 1.3 billion, though CFO Tie Li said full-year free cash flow will hinge on fourth-quarter delivery volumes and confirmed that 2026 cash flow performance will be stronger than 2025 regardless. Full-year capex guidance stands at roughly RMB 6.0 billion, including continued buildout of the 5C supercharging network, which has grown to 4,141 stations and over 22,800 stalls across more than 300 cities. The company has repurchased 91.7 million Class A shares, including 23.7 million ADSs, for approximately $631.5 million to date.
Overseas Expansion Advancing Methodically
International rollout is proceeding on a market-by-market basis rather than a broad push. The L9 launched in Kazakhstan and Uzbekistan in July, with a Dubai launch planned for September and a local assembly partnership with Kazakh group Allur already in place. Europe will lead with BEVs, as the i6 debuts at the Paris Motor Show in October ahead of Q4 sales, while right-hand-drive markets including Hong Kong, Singapore, and eventually a right-hand-drive i6 round out the strategy. Xiang Li was candid that geopolitical and regulatory uncertainty remain the primary risks to the pace of expansion, signaling the company intends to prioritize brand positioning and compliance over speed.
For the third quarter, Li Auto guided to deliveries of 95,000 to 100,000 vehicles and revenue of RMB 26.6 billion to RMB 28.0 billion, implying sequential improvement but still reflecting a business absorbing both a product transition and a cost environment that management does not expect to normalize quickly.