Li Auto (LI) Q2 2026: Vehicle Deliveries Decline 12% Amid Product Refresh, Margins Improve Sequentially
Li Auto navigated a challenging market with a major model refresh, maintaining leadership in China's premium new energy vehicle segment despite delivery declines. The launch of new L-series models and proprietary technologies underpin margin recovery and product differentiation. Strategic investments in embodied AI and global expansion set the stage for growth in the second half of 2026.
Summary
- Product Refresh Cycle Impact: Delivery declines reflect inventory transitions amid a full L-series upgrade.
- Technology-Driven Differentiation: In-house chips and batteries enhance embodied AI capabilities and user experience.
- Global Expansion and Margin Recovery: International launches and improved product mix support sequential margin gains.
Business Overview
Li Auto is a leading Chinese manufacturer of new energy vehicles (NEVs), specializing in extended-range electric vehicles (EREVs) and battery electric vehicles (BEVs). The company generates revenue primarily through vehicle sales and related services, with its product lineup segmented into the L-series SUVs, I-series BEVs, and flagship MPVs. Li Auto also invests heavily in proprietary technologies including in-house chips and battery systems, supporting its embodied AI strategy.
Performance Analysis
In the second quarter of 2026, Li Auto reported total revenues of RMB 25.7 billion, down 15.1% year-over-year but up 11.7% sequentially. Vehicle deliveries totaled 98,330 units, marking an 11.5% decline compared to the prior year, primarily due to the ongoing product refresh cycle and inventory adjustments. The average selling price shifted lower year-over-year due to product mix changes but improved quarter-over-quarter, reflecting early traction of new models.
Gross profit contracted sharply by 53.3% year-over-year to RMB 2.8 billion, translating to an 11.0% gross margin, down from 20.1% a year ago but up from 7.9% in Q1 2026. This margin recovery was driven by the launch of the all-new Li L9 and improving product mix favoring higher-end trims. Operating expenses remained broadly stable year-over-year at RMB 5.1 billion, with a slight increase quarter-over-quarter due to marketing investments. The company reported a loss from operations of RMB 2.3 billion, narrowing from the prior quarter but still negative compared to operating income last year.
- Delivery Decline Reflects Model Cycle: The full refresh of the L-series, including Li L9, L8, and L6, caused temporary headwinds in volume as old inventory cleared and new models ramped.
- Margin Improvement Tied to Product Mix: Sequential gross margin expansion was supported by higher sales contribution from Livis trims and new model introductions.
- Cash Flow Stabilization: Operating cash flow turned positive to RMB 15 million, a significant improvement from prior quarters, with free cash flow losses narrowing substantially.
Overall, the quarter reflects the transitional challenges of a major product upgrade cycle, with early signs of stabilization in profitability and cash generation as new models gain traction.
Executive Commentary
"Amid intense market competition and a major model refresh cycle, Li Auto remained the best-selling domestic automotive brand in China’s RMB 200,000-and-above NEV market in the first half of 2026. Our enhanced product portfolio positions us well for growth. Backed by our unwavering user-centric product philosophy and leading in-house technologies, we will continue to pursue product excellence, expand our global footprint, and forge a sustainable path toward long-term value creation."
Mr. Xiang Li, Chairman and CEO
"Our gross margin improved sequentially to 11.0%, benefiting from the launch of the all-new Li L9. We anticipate further margin expansion for the second half of the year as our product mix optimizes, with a higher sales contribution from the Livis trim and the launch of refreshed BEV models and Li i9. Coupled with a sustained focus on operational efficiency, we expect our bottom-line to improve gradually."
Mr. Johnny Tie Li, CFO
Strategic Positioning
1. Comprehensive L-Series Product Refresh Completed
Li Auto finalized the upgrade of its L-series SUVs, integrating proprietary Mach M100 chips, 5C supercharging batteries, and advanced chassis technologies including drive-by-wire and active suspension. This refresh spans the Li L9, L8, and L6 models, covering a broad price range from RMB 200,000 to 500,000. Early sales data indicate strong consumer preference for higher-end Livis trims, with the L9 Livis accounting for approximately 85% of orders, reinforcing leadership in the premium family SUV segment.
2. Embodied AI and In-House Technology as Core Differentiators
Li Auto continues to invest heavily in its proprietary full-stack technology, including chips, batteries, and AI models. The Mach M100 chip powers advanced driver-assistance systems (ADAS) and embodied AI features, with over 50,000 units shipped. OTA software updates are enhancing perception, decision-making, and user interaction capabilities. The company views batteries and chips as critical technological moats in the evolving smart vehicle landscape, with in-house battery systems rolling out across all models to improve quality, safety, and cost control.
3. Global Expansion with Focused Regional Strategies
International growth remains a strategic priority. Li Auto launched the L9 in Kazakhstan and Uzbekistan, with plans to enter the Middle East market via Dubai and expand European presence with the Li i6 debuting at the Paris Motor Show. Localization efforts include assembly partnerships to adapt to regional markets. The company emphasizes compliance, brand building, and after-sales network development to support sustainable overseas expansion.
4. Dual Powertrain Strategy Balances EREV and BEV Growth
The company’s product mix balances extended-range electric vehicles (EREVs) and battery electric vehicles (BEVs), each contributing approximately half of total sales. BEV offerings such as the Li i6 and upcoming flagship Li i9 SUV are positioned to gain market share, complementing the L-series EREV models. This dual approach allows Li Auto to address diverse consumer preferences and regulatory environments.
5. Cost Management Amid Raw Material Volatility
Li Auto is navigating cyclical cost pressures from raw materials and semiconductor markets through long-term procurement agreements and operational efficiencies. The company leverages its vertically integrated supply chain and in-house R&D to develop cost-effective powertrain components and chips. Management targets a sustainable gross margin range of 15% to 20%, balancing competitive pricing with profitability.
Key Considerations
Li Auto’s Q2 results underscore the complexities of managing a major product refresh in a competitive and cost-volatile environment. Investors should weigh the following considerations:
- Model Refresh Transition: Temporary delivery softness is expected as new L-series models ramp and old inventory clears, with sequential volume recovery anticipated.
- Technology Leadership Investment: Continued capital allocation towards embodied AI, chip development, and battery manufacturing positions Li Auto for differentiation but weighs on near-term margins.
- International Market Execution: Expansion into Central Asia, Middle East, and Europe introduces regulatory and operational risks but offers meaningful growth opportunities.
- Margin Recovery Path: Sequential gross margin improvement is encouraging, but sustaining profitability depends on managing raw material inflation and scaling higher-margin BEV sales.
- Cash Flow Improvement: Positive operating cash flow in Q2 signals improving working capital management, though free cash flow remains negative amid ongoing investments.
Risks
Li Auto faces risks from intense competition in the Chinese NEV market, potential delays in new model ramp-up, and cost inflation in raw materials and semiconductors. Overseas expansion introduces geopolitical and regulatory uncertainties. Execution on embodied AI technology and supply chain integration remains critical to maintaining competitive advantage. Market acceptance of new BEV models and the ability to sustain margin expansion are key risk factors for investors.
Forward Outlook
For Q3 2026, Li Auto expects vehicle deliveries between 95,000 and 100,000 units, representing a year-over-year increase of 1.9% to 7.3%. Total revenues are projected to range from RMB 26.6 billion to RMB 28.0 billion, with a possible year-over-year variance from -2.8% to +2.3%. Management anticipates continued margin improvement driven by product mix optimization and new BEV launches, including the Li i9 flagship SUV scheduled for mid-September. Full-year capital expenditures are forecasted around RMB 6 billion, supporting product innovation and global expansion.
Takeaways
Li Auto’s Q2 performance reflects a critical inflection point as it completes a comprehensive product upgrade cycle while investing in next-generation embodied AI technologies.
- Delivery and Revenue Transition: Temporary volume declines are offset by sequential revenue growth and improving ASPs, signaling early acceptance of new L-series models.
- Technology and Product Leadership: Proprietary chips and batteries underpin a differentiated product portfolio, enhancing user experience and long-term competitive positioning.
- Growth and Profitability Balance: Management’s focus on operational efficiency and margin expansion, alongside strategic international growth, sets a foundation for sustainable value creation.
Conclusion
Li Auto’s second quarter reflects the challenges and opportunities of a major model refresh in a dynamic NEV market. While delivery declines weigh on near-term results, the company’s technology investments, product enhancements, and global expansion efforts provide a clear pathway to margin recovery and growth in the second half of 2026 and beyond.
Industry Read-Through
Li Auto’s experience highlights broader industry dynamics including the critical importance of proprietary technology in NEV differentiation, the operational complexities of major product refresh cycles, and the growing role of embodied AI in the automotive sector. The company’s dual powertrain strategy and focus on in-house battery and chip development signal a shift towards vertical integration that other NEV manufacturers may increasingly adopt to manage cost pressures and enhance user experience. Additionally, Li Auto’s international expansion underscores the challenges and opportunities for Chinese NEV players seeking global growth amid diverse regulatory environments.