The only constant in the market is change.
From surpassing expectations with its 2023 annual performance report released at the beginning of the year to a significant decline in revenue and net profit, and a shift from operating profit to loss in the first quarter of 2024. Ideal Automotive’s business situation has changed drastically in a short period, catching many by surprise.
In response to the setbacks, Ideal Automotive swiftly made a series of adjustments: revising targets, adjusting prices, and restructuring, putting on the brakes to slow down. After a quarter of adjustments, Ideal Automotive released its Q2 performance report on August 28.
According to the financial report, Q2 revenue was 31.7 billion yuan, a 10.6% year-over-year increase. Vehicle sales revenue was 30.3 billion yuan, up 8.4% year-over-year, while other sales and service revenue was 1.4 billion yuan, up 99.6%. In Q2. Ideal Automotive’s delivery volume was 108.581 vehicles, a 25.5% increase year-over-year.
Despite the steady increase in delivery volume and vehicle sales revenue, the profit margin for Ideal Automotive is gradually narrowing.
Ideal Automotive founder, chairman, and CEO Li Xiang had previously stated, "As a smart electric vehicle company, we believe a healthy threshold is a 20% gross margin." However, in Q2. the adjusted net profit attributable to shareholders was 1.5 billion yuan, a 44.9% decrease year-over-year. The company’s gross margin was 19.5%, down 2.3 percentage points from the previous year (21.8%), with a vehicle gross margin of 18.7%.
Following the financial report release, as of the close of trading on August 28 in the Eastern Time Zone, Ideal Automotive’s stock price dropped 16.12% to $17.80 per share, with a total market value of $18.89 billion. Compared to the market value of $22.55 billion on August 27. it decreased by $3.625 billion. This drop is nearly equivalent to the market value of one Zeekr (which is $3.739 billion).
Increased Sales but Gross Margin Falls to 18%
After ending the growth myth in the first quarter, the plan to release three pure electric models in the second half of the year was affected by the Ideal MEGA PR crisis. Li Xiang stated that no new pure electric SUV models would be launched this year, with the earliest launch scheduled for the first half of next year.
With the slowdown in the release of pure electric vehicles, Ideal Automotive retreated to focus on its extended-range models, with the Ideal L6 becoming a crucial product.
Released in Q2. the Ideal L6 is positioned below the Ideal L7. a five-seat extended-range mid-size SUV priced from 249.800 yuan, making it the most affordable model from Ideal Automotive so far.
However, the relatively lower price of the Ideal L6 has also reduced the average price of Ideal vehicles. In Q2. the average revenue per vehicle fell to 279.000 yuan, compared to 323.000 yuan in the same period last year and 302.000 yuan in the previous quarter.
Correspondingly, the company’s gross margin decreased from 20.5% in the same period last year to 19.5%. The vehicle gross margin fell to 18.7%, compared to 21% in Q2 2023 and 19.3% in Q1 2024.
Previously, Bank of America Securities had predicted that Q2 would be the most challenging quarter for Ideal Automotive’s gross margin due to the lower profit margin contributions from the Ideal L6. with vehicle gross margins potentially dropping to 18%.
Ideal Automotive is facing not only the setback of the MEGA but also an industry-wide price war.
Ideal Automotive had previously announced that starting April 22. the 2024 models of Ideal L7. Ideal L8. Ideal L9. and Ideal MEGA would adopt a new pricing system. Price reductions ranged from 18.000 to 30.000 yuan, with the Ideal MEGA seeing the largest reduction of up to 30.000 yuan.
To boost L series sales, Ideal also made adjustments to its sales channels. During the earnings call, Ideal Automotive’s Senior Vice President of Sales and Services, Zou Liangjun, stated that the company had made several adjustments to its sales channels this year, gradually replacing existing network stores with central stores in major automotive cities.
Currently, the proportion of central stores has increased from 24% at the end of 2023 to 31% at the end of June 2024. with plans to further increase this proportion to nearly 50% by the end of the year. As the proportion of central stores rises, the showroom capacity has also increased. The number of vehicles per store has risen from 4.6 at the end of 2023 to 5.1 at the end of June 2024. with a plan to increase it further to 6 per store by the end of the year.
In addition to product adjustments, Ideal Automotive reportedly started a new round of personnel optimization in May, affecting multiple departments including HR, branding, strategy, supply, sales, styling, production, and supply chain, with over 5.600 people optimized, accounting for 18% of the total workforce.
The financial report shows that as of the first half of this year, Ideal Automotive had a total of 30.899 employees. Since the Q1 financial report did not disclose the number of employees at that time, there is no specific number to verify this layoff ratio.
Employee Numbers in the First Half of 2024
However, comparing the operating expenses for the two quarters of this year, Q1 was 5.9 billion yuan and Q2 was 5.7 billion yuan, indicating a reduction.
Ideal Automotive’s CFO Li Tie provided guidance during the earnings call, stating that with optimized scale effects and adjusted sales policies, the vehicle gross margin in Q3 is expected to recover slightly, reaching over 19%, and the overall gross margin is expected to return to over 20%.
Competition with Huawei
Ideal Automotive is realigning itself, and the sales of extended-range models are indeed recovering, but full recovery is not easy, especially under the competitive pressure from Huawei.
Currently, Huawei’s "HarmonyOS Automotive" has three brands on sale: AITO, Zhiji, and Xpeng. AITO accounts for over 80% of total sales.
According to Seres’ financial data, in the first half of 2024. AITO delivered a total of 181.153 vehicles. Among them, the AITO M9 has seen more than 100.000 pre-orders since its launch; the new AITO M5 has accumulated over 10.000 deliveries; and the new AITO M7’s sales surpassed 110.000 in the first half of the year.
On August 26. Huawei HarmonyOS Automotive held a new product launch event, announcing the launch of the AITO M7 Pro. Four models were introduced, with prices ranging from 249.800 to 289.800 yuan. For Huawei, this "entry-level smart driving" model is tasked with defending against the Ideal L6 in the 250.000 yuan price range.
During the earnings call, Ideal Automotive’s Chairman and CEO Li Xiang was also asked about the intense competition with Huawei. He stated, "HarmonyOS Automotive is our strongest competitor in the market. We believe both sides will coexist healthily in the long term. From another perspective, our core attitude is to continuously learn from Huawei’s technology R&D system and business management system."
In terms of technology R&D, Ideal Automotive’s investment has indeed been increasing. In Q2 2024. R&D expenses amounted to 3 billion yuan, up 24.8% from 2.4 billion yuan in the same period last year. The total R&D expenses for the first half of the year were 6.1 billion yuan, a 42% increase from 4.3 billion yuan last year.
This year has seen a significant increase in end-to-end enthusiasm. If the current end-to-end logic and direction are accurate, the arrival of the end-to-end era will also mark the onset of a tipping point for intelligent driving, which will drive a tipping point for new energy vehicles. Therefore, it is not difficult to understand Ideal’s high investment in R&D—if this cannot optimize the business model through intelligent driving, making profits from selling cars may become increasingly difficult.
Regarding the effectiveness of investment in intelligent driving, Ideal Automotive’s President and Chief Engineer Ma Donghui stated that the metrics should be result-oriented and evaluated from two aspects: first, whether users are willing to use it, such as the usage time of intelligent driving, mileage proportion, etc.; second, whether users are willing to buy it.
He further explained that from the user perspective, since the full rollout of NOA (Navigate on Autopilot) in July, the daily activity and driving mileage of city NOA have significantly increased, even multiplying several times. From the market perspective, the proportion of potential users coming to the store to test drive NOA has doubled, and the order proportion for AD Max across all models has been increasing, especially for models above 300.000 yuan, where the AD Max order proportion is approaching 70%.
For the end-to-end + VLM system, Ideal Automotive started pushing the system for early bird testing with a thousand users at the end of July, and it has now gone through nine versions, with updates occurring every 3-4 days. The amount of model training data has increased from the initial 1 million clips to 2.3 million clips. Testing with 10.000 users is expected to take place in September.
