Ideal Sprint for the Next Million Vehicles: Only with Extended-Range Vehicles, It Can't Run Fast or Far.

Text by Anqi Li

Edited by Qin Li

"The aim is to achieve the second one million vehicles as soon as possible on a monthly basis."

On October 14, Li Auto witnessed the offline of its one millionth vehicle, which took 58 months, nearly five years. At the supplier conference held concurrently, an industry insider disclosed Li Auto's acceleration plan for the two millionth vehicle.

By the end of the third quarter, Li Auto sold 341,800 vehicles this year. If Li Auto can maintain a monthly sales volume of 53,000 in the fourth quarter, it will sell 500,000 vehicles this year. The rapid realization of the second one million vehicles seems not very challenging.

Although the pure electric products failed to open the market at the beginning of the year, after the launch of the Extended Range model L6, with a monthly sales volume of around 25,000, it directly supported Li Auto's monthly sales situation.

According to Meng Qingpeng, Vice President of Li Auto's Supply Chain, the potential of the L6 has not yet been fully released. The internal decision is that the L6 is to aim for a monthly sales of 30,000 next year. He said that the company will invest 150 million yuan to expand production, and partners will also invest and allocate resources.

Whether it is the achievement of the two millionth vehicle or the monthly sales of 30,000 for the L6, it continuously tests Li Auto's product popularity and the ability to stably supply products on a larger scale.

The stable improvement of the supply chain capacity is a lifelong proposition for auto companies. As a new force that has achieved the offline of one million vehicles the fastest, Li Auto's supply chain growth has something worth learning from.

Meng Qingpeng introduced at the media communication meeting that the construction of Li Auto's supply chain can be divided into three stages.

In the first stage when making the Li ONE model, due to the high-end vehicle positioning, Li Auto invested in the best cooperative resources. "Because the best partners must have good quality, and the supply system must be stable. This can ensure that the quality of the first vehicle to be launched is the best, and the cost was not considered at that time."

But it is not easy to knock on the doors of good suppliers. Many cooperations were personally sought and introduced by Li Xiang.

In the second stage, Li Auto was in a hurry to ensure supply during the epidemic and chip shortage. Meng Qingpeng said that there were many sales orders at that time, but the delivery bottleneck was always in the supply chain. At that time, Li Auto had about 180 suppliers, but some suppliers failed to ensure supply, so Li Auto began to support domestic components.

Meng Qingpeng said that the third stage is the stage of systematic construction of Li Auto's supply chain. "At the end of 2022, we found that the entire Li Auto supply chain system has been busy fighting and moving blindly in the past three and a half years."

But more important things such as system construction and supplier management were not done well. "The company is about to enter the 1 - 10 stage in 2023, and the supply chain system lags behind the company's business development. Therefore, at the beginning of 2023, Li Auto initiated an integrated supply chain reform to conduct a comprehensive process system transformation and upgrade."

In the continuous maturity of the supply chain, Li Auto has also tasted the benefits of supply chain scale and vehicle manufacturing platform. For example, the L7/L8/L9 models have a high degree of platformization and a high parts sharing rate. After platformization, it can also help auto companies reduce production quality problems and achieve rapid production 爬升. (Note: It seems that "爬升" is a Chinese term that might not have a direct equivalent in English. It might refer to a concept related to increasing or climbing in a certain aspect. Without further context, it's challenging to provide a more accurate translation. For now, I've left it as is to maintain the structure of the original text.)

For the next stage of supply chain construction, Li Auto's plan is digitization and AI to connect and collaborate with the supply chain through digital construction. Once there is a market adjustment, information can be synchronized to suppliers at any time.

"Today, the market competition is changing very fast, and we must provide more flexibility for the sales end and the market end. For example, the L6 quickly increases sales, and the sales of another model changes. We must give the fastest response in terms of production adjustment." Meng Qingpeng said.

In addition, Meng Qingpeng also talked about the boundary between Li Auto's self-developed technology and purchased products.

Meng Qingpeng said that Li Auto has its own judgment criteria: If the expansion speed of partners cannot keep up with Li Auto's needs, and the quality consistency does not meet the requirements, Li Auto will consider doing it itself.

On the other hand, if the technology can achieve a leading position, even if it is only a half-year lead, Li Auto will do it. "This year, the homogeneity speed of competing products is very fast. Our refrigerator, sofa, and big TV were quickly imitated by others after half a year. But even a half-year lead is very important."

For example, Li Auto has conducted self-research in intelligent parts such as autonomous driving and intelligent cockpit. Li Auto believes that the next technical trend is the intelligent chassis, including wire-controlled steering, wire-controlled braking, and high-end suspension systems, etc.

Li Auto said that it invested 10.6 billion in R & D expenses last year, and plans to increase it by 25% this year. Meng Qingpeng said that Li Auto cannot invest in the R & D of all parts itself, but will grasp the core parts, and jointly develop parts in other fields with all partners.

"Considering the R & D investment of partners, our expenses should be at least tripled. We invest 10 billion, and the entire parts industry will invest another 30 billion."

The following is a conversation between 36Kr and other media and the Vice President of Li Auto's Supply Chain, edited and excerpted:

Q: How many stages are there in Li Auto's supply chain construction? How to go from 0 to 1?

Meng Qingpeng: In the initial stage, our goal was to produce high-end vehicles, so we found the best resources in the industry to do it. Because the best partners must have good quality, and the supply system must be stable. This can ensure that the quality of the first vehicle to be launched is the best, and the cost was not considered at that time.

But it is very difficult to get in touch with good suppliers. At that time, Li Auto was an ordinary player in the new energy vehicle enterprises. Many cooperations were personally sought and introduced by Brother Xiang.

In the second stage, we experienced the epidemic and chip shortage. At that stage, we needed to ensure the supply. There were many sales orders, but the bottleneck was always in the supply chain. At that time, Li Auto had about 180 supply chain partners, and encountered many difficulties and challenges. We could coordinate with private enterprises for the chip shortage, but it was difficult to adjust with foreign enterprises, and mid-to-high-end chips were dominated by foreign enterprises. The institutional reasons of foreign enterprises restricted Li Auto's growth to a certain extent.

We realized that we should make some complementary categories in the original supply chain layout. For those parts that limited our rapid growth, we found substitutes, so we promoted some domestic categories.

The second reflection is the insufficient relationship building with the headquarters of foreign enterprises. We couldn't go abroad due to the epidemic, but those three years were the three years with the greatest progress in China's new energy. Last August and September, we went to Europe and the United States, and had a lot of exchanges with the headquarters of suppliers. We transported two cars, went to each one, let them experience our cars, and then introduced our strategy, value proposition, and business situation. Their cognition was subverted, and they gave the best policies to support us.

In the third stage, by the end of 2022, we found that the entire Li Auto supply chain system has been busy fighting and moving blindly in the past three and a half years. But important things such as system construction and supplier management were not done well, and it is in the 0 - 1 stage. And the company is about to enter the 1 - 10 stage in 2023, and the supply chain system lags behind the company's business development.

So at the beginning of 2023, we entered the integrated supply chain reform, learning from Huawei, and comprehensively conducted the process system transformation and upgrade last year. Only this year can we promote digitization and AI.

Q: How to persuade core component manufacturers to OEM for Li Auto's self-developed technology?

Meng Qingpeng: There are self-developed OEM and self-developed and self-produced. For example, in intelligence, many partners want to give us intelligent driving and intelligent cockpit solutions, but today the speed of partners cannot support us to take the lead in the intelligent field.

For example, for the front electric drive, we self-developed and self-produced, and we have a joint venture to do it, while the rear three-in-one electric drive is purchased externally.

In the intelligent part, it is generally self-developed, and partners do the OEM. How to persuade suppliers? The automotive business model will change. For the controller module in the intelligent part, if it reaches L4 autonomous driving, it will gradually become more equal in the future, and the space for technological breakthroughs will become smaller and smaller, and it may return to parts enterprises to do it.

But the next 5 - 8 years is a period of racing against time. In each stage, the division of labor with partners will be adjusted. If I do it and have the greatest resource advantage, I will do it; if some parts have the greatest advantage for you to do, you will do it. They understand, and the long-term planning and forecast should be clearly explained to partners.

Q: The parts commonality rate of Model 3 and Model Y is 75%, which can be simply and roughly understood that the number, type, and complexity of the parts of these two models are approximately equal to 1.25 models. Li Auto's big product strategy has great advantages. Can you elaborate on the advantages of the parts commonality rate in supply chain management?

Meng Qingpeng: Tesla has done very well in platformization and integration. The parts commonality rate of Tesla 3/Y exceeds 70%. Integration is how many assembly parts are used in a vehicle, and its number of parts is at the level of 70 - 80% of the industry models. The number of parts is less than others. For example, the rear floor integrated die-casting turns dozens of parts into one part, which is called integration. After integration, it is platformization, and both Model 3/Y can be used.

Second, in the purchasing strategy, Tesla's strategy is that if one supplier can do it, choose one; if one cannot do it, add another one. These two strategies are combined, so Tesla has only 150 partner players for the two models, which is very few. The production lines of Tesla's partners are fully operational every day, and the capacity utilization rate is more than 80%. Now the average capacity utilization rate in the industry is less than 50% (including vehicle manufacturers and parts enterprises).

We are also learning. Li Auto is often joked that the front and rear of the vehicle look the same. Li Auto's platformization ability is also very high. The platformization commonality of the L7/L8/L9 is very high, and the L6 will be somewhat different. But we should view platformization rationally. The user groups of different L series models are different, so in terms of styling or interior space design, differences should be made as much as possible where users can feel; in many invisible places, technologies such as battery architecture, chassis, autonomous driving, and intelligent cockpit should be made as equal as possible.

Platformization has benefits for QCDM (Q - Quality, C - Cost, D - Delivery, M - Manufacturing). From the prototype trial production to mass production, the climbing of traditional players is said to take half a year to reach 5,000 or 8,000 vehicles per month, because after the volume increase, the problems of the entire process will be tested out.

But after platformization, when the first line is stable, we will replicate according to the standard process and mature process of the first line. The capacity and quality of the second line are very stable, which is beneficial for investment sharing and management cost sharing.

The platformization strategy is the starting point of our aggregation strategy. The aggregation strategy is initially called platformized procurement, and we go to the lower-level raw material selection together, such as the intelligent driving control module and chip selection of L7/L8/L9 are the same. The overall aggregation strategy is end-to-end connected.

Q: Platformization has made a great contribution. Is there a rough digital manifestation?

Meng Qingpeng: There is no comprehensive calculation, but in the past two years, our internal and external cost competitiveness has increased by 16%.

Q: This year, for cost reduction, how much cost reduction pressure is borne by suppliers?

Meng Qingpeng: First, we have established a cost evaluation system. It will be established for each category and each part. The cost has a standard, which can be evaluated from the perspective of raw materials and processes. Our cost system leaves a reasonable profit margin for partners, and it is left according to different types.

After rationalization, we compare. If it exceeds 100%, it means there is a premium. If it is 100%, it is reasonable. If it is less than 100%, it means the support given to me is greater.

After the system is established, we focus on scanning those that exceed 100%. We look at a very objective system, without excessive squeezing of profits. We discuss with the senior management, and they will also give different supports and provide a path to reach the goal through consensus.

The second part is strategic cooperation in parts. We need to focus on doing big things, and we establish strategic cooperation with these players. Simply put, they have sufficient ability to support me to go for a long time, and I also have the ability to lead them and give more scale.

When I layout the business, I will give them projects as much as possible, but they also have to give me the best technology. For example, Ningde's 5C new battery is launched here first, and NVIDIA's new products must support us. We give projects, and you have to give me the best cost.

The third is to deeply share our values and make suppliers continuously recognize and trust us. Because they need to support us to gain more market share and business success. For example, this year is a scale of 500,000. If they can give me the cost priority of a scale of 1 million this year, it will greatly help us expand my market share in the shortest time.

Therefore, when jointly building a strategy with the senior management of partners, we will definitely describe clearly to them the changes in the scale of Li Auto in the next three years as the scale of Li Auto accumulates. We align the scenarios for the next three years. After that, it will be very simple. Although Li Auto is only at a scale of 500,000 now, if suppliers can provide a corresponding scale of 800,000 in advance, we will grow faster and also feed back to partners. Because when the scale is 800,000, we will not find new partners to come in. When we become the industry leader, partners will become the TOP 1 in the parts field. This incidental relationship is very obvious.

For example, Konghui is the TOP 1 in China's air suspension, with a domestic market share of 45%. After the market share was driven up with the L9 launch, Konghui received more than 20 projects within one year after our mass production. Later, when I communicated with Konghui, I mentioned that the resources of the enterprise are limited, and they should choose a good customer or a good project of a good customer. Don't invest development resources, verification resources, and production line investment wrongly. Not every vehicle is a hit. This is the first problem.

Q: The intelligent driving bracket chip is highly dependent on NVIDIA. How is the figure of 98% healthiness of Li Auto's parts obtained?

Meng Qingpeng: Currently, high-end chips are still dominated by foreign enterprises. For some MCUs, we may layout 2 - 3 companies, and dualize in product design. We believe that different players are good for the supply and cost balance competition system. We have signed five strategic cooperation agreements with these major chip suppliers and established many strategic consensuses with the top management. They are willing to help us build an innovation laboratory to help us establish the ability of chip development, verification, and quality failure analysis. This layout is very healthy.

Healthiness does not necessarily mean using domestic substitution. Chips are divided into 8 major categories, including power supply, computing power, MCU, etc. At present, the difficulty of domestic substitution of the highest-end chips is relatively large. For the rest, we are trying to localize, and we have set some goals, such as how much the localization rate will be in the next year. There are other solutions to break through in the high-end chip part. Therefore, combined with solution breakthroughs, domestic layout, and dual-resource layout of MCUs, etc., the current layout of our chip