Li Auto Q2 2026 Earnings Live Stream
[AI Key Takeaways]
Financial Performance
- Q2 total revenue was RMB 25.7 billion, down 15.1% year-over-year but up 11.7% quarter-over-quarter
- Vehicle gross margin stood at 9.4%, a significant decline from 19.4% in the same period last year
- Operating loss reached RMB 2.3 billion, compared to an operating profit of RMB 827 million in the same period last year
- Cash reserves totaled RMB 87.5 billion, with operating cash flow turning positive to RMB 15 million
Business Progress
- The L series has undergone a comprehensive refresh, featuring core proprietary technologies such as the self-developed Mocha M100 chip
- The Li Auto L6 has ranked among the top three best-selling models priced above RMB 200,000 for six consecutive months
- 4,141 5C ultra-fast charging stations have been put into operation, covering nearly 300 cities nationwide
- Overseas market expansion has extended to regions including Kazakhstan and Uzbekistan
Next Quarter Guidance
- Q3 deliveries are projected to range between 95,000 and 100,000 vehicles
- Total revenue for Q3 is expected to be between RMB 26.6 billion and RMB 28.0 billion
- Full-year capital expenditure is estimated at approximately RMB 6.0 billion
- Q4 delivery performance will determine whether full-year cash flow turns positive
Opportunity
- Continuously unlocking hardware capabilities through OTA updates; Mahe VLA performance improved by 20%
- Proprietary three-electric system achieves structural cost reduction and operational efficiency improvement
- Accelerating overseas market expansion, with entry into the European market in Q4
- Reached a strategic partnership with Kazakhstan's leading automotive group
Risks
- Facing intense market competition and pressure from model iteration cycles
- Rising raw material prices, including chips and lithium carbonate, are creating cost pressures
- The model transition phase involves pressure from clearing legacy inventory and launching new products
- Overseas business expansion faces uncertainties such as the geopolitical environment
[AI Conference Transcript]
Operator
Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Second Quarter 2026 Earnings Conference Call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Miss Janet Seng, Investor Relations Director of Li Auto. Please go ahead, Janet.
Janet Seng
Thank you, operator. Good evening and good morning, everyone. Welcome to Li Auto's second quarter 2026 earnings conference call. The company's financial and operating results were published in a press release earlier today and posted on the company's Investor Relations website. On today's call, we will have our Chairman and CEO, Mr. Li Xiang, and our CFO, Mr. Johnny Tilley, to begin with prepared remarks.
Our President, Mr. Ma Donghui, and CTO, Mr. Yan Xi, will join for the Q&A discussion. Before we continue, please be reminded that today's discussion will contain forward-looking statements made under the Safe Harbor provision of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may differ materially from the views expressed today.
Further information regarding risks and uncertainties is included in certain company filings with the SEC and the Stock Exchange of Hong Kong Limited. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that Li Auto's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures.
Please refer to Li Auto's disclosure document in the IR section of our website, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Our CEO will start his remarks in Chinese. There will be an English translation after he finishes all his remarks. With that, I will now turn the call over to our CEO, Mr. Li Xiang. Please go ahead.
Li Xiang
Hello everyone, I am Li Xiang. Welcome to today's earnings conference call. Despite fierce market competition and the vehicle model iteration cycle, Li Auto remained the top-selling Chinese brand in the new energy vehicle (NEV) market priced above RMB 200,000 in the first half of this year. With the continuous advancement of our dual-energy strategy, the order structure for Li Auto's extended-range electric vehicles (EREVs) and battery electric vehicles (BEVs) is now balanced, approaching a 50/50 split.
Since the second quarter, the Li Auto L series has undergone a comprehensive refresh. A series of our core technological achievements have been successfully integrated into our vehicles, ranging from our self-developed Mocha M100 chip and Mocha VLM model to the 800V active suspension and fully wire-controlled chassis, as well as the third-generation self-developed range extender and 5C ultra-fast charging batteries. These comprehensive hardware and software upgrades have redefined new standards for technology and user experience.
In the pure electric segment, the Li Auto i6 has ranked among the top three best-selling models across all vehicles priced above RMB 200,000 for six consecutive months. Together with the Li Auto R6, it will become a leading product in its respective sub-segment, further consolidating our leadership position in the RMB 200,000 to 300,000 SUV market. The iteration and upgrade of our pure electric products are also proceeding smoothly. In late July, the Li Auto i8 added a rear-wheel-drive long-range version and, addressing user feedback and demands, introduced features such as an electric front trunk and dual-flow power seats in the front row. These enhancements have strengthened our product competitiveness and driven sales growth.
On September 2, the next-generation Li Auto Mega will be launched. We have further refined its avant-garde styling and introduced a new generation of interior design, spatial experience, intelligent platform, and driving dynamics. The all-new pure electric flagship SUV, the Li Auto i9, will also be launched in mid-September, further perfecting Li Auto's pure electric product matrix. We expect the proportion of orders for subsequent pure electric models to continue rising.
With the launch and production ramp-up of several models in the second half of the year, we are confident that Li Auto will rank among the top three brands by sales volume in the Chinese passenger vehicle market priced above RMB 200,000. Through independent R&D of core technologies, we continue to deepen our competitive moat and gradually translate it into user value and operational efficiency. Currently, 5C ultra-fast charging has become a decisive factor for consumers, and Li Auto's self-built ultra-fast charging network is a key competitive advantage.
In terms of batteries, we have achieved full-stack in-house development, including battery cells, BMS, and packs. Following our self-developed motors and electronic controls, we have completed the final piece of our 'three-electric' systems portfolio. Through integrated design with the whole vehicle system and accumulated expertise in 5C ultra-fast charging technology, Li Auto's self-developed batteries deliver industry-leading performance in safety, quality, and lifespan. Currently, Li Auto's self-developed batteries have been officially installed in the all-new Li L8, the next-generation Li L6, and the Li MEGA.
In the coming months, we will equip all our models with self-developed batteries. We firmly believe that, in the long term, batteries and chips will constitute the most significant technical barriers and competitive moats in the embodied AI industry. In May, we began delivering our complete autonomous driving system based on Li Auto's self-developed Thor M100 chip. To date, deliveries of the Thor M100 chip have exceeded 50,000 units, maintaining strong quality performance.
Beyond chips, we are continuously breaking through in R&D areas such as model controllers and software systems, gradually translating these advancements into enhanced product experiences. By late July, via OTA 9.1, the overall performance of the VLA model improved by 20%, and the user mileage penetration rate nearly doubled compared to the previous computing platform. In September, the VLA model will also be rolled out to users on the Thor and Orin platforms. Moving forward, leveraging Li Auto's data accumulation, we will accelerate model training and capability enhancements specifically for the Thor M100 chip, further maximizing the computational advantages of our self-developed chips.
The July OTA 9.1 update enabled VLA to match and surpass human drivers in reaction speed. The October OTA 9.2 update will fully adopt 3D Vision perception for VLA, enabling farther and more precise detection. The year-end OTA 9.3 update will multiply the model parameters for VLA, significantly enhancing task understanding and reasoning capabilities in complex scenarios. Faster reaction, more accurate perception, and stronger reasoning are the three most important improvements for the Thor M100 and VLA this year.
Looking ahead, we will continue to focus on our core strategy of building embodied AI vehicles. Through full-stack in-house development and continuous iteration of software-hardware integration, we aim to make cars truly intelligent agents that protect human safety, operate independently, and perform tasks more efficiently than humans. Now, I would like to invite our CFO, Mr. Lu Tie, to present our financial performance.
Zhang Li (English Translation)
Hey everyone, this is Visa and thank you for joining our earnings conference call today. In the first half of this year, in the midst of intense market competition and a complete product refresh, Lee Auto has remained the top selling Chinese automotive brand in the RMB 200,000 and above and EV market. The continued rollout of our dual energy strategy has resulted in a healthy product mix with E reps and DIP apps each accounting for 50% of total sales.
Since Q2, we have updated the entire DL series showcasing our latest technologies. Key updates include our in health mock 100 M 100 chip running mock VLA model, 800 Volt active suspension and drive by wire chassis and our third generation range extender with 5C supercharging battery. The hardware and software upgrades set new standard for the technology and user experience once again.
Turning over to our Bev lineup, the Lee I6 has been one of our top top three selling models priced over RMB 200,000 for six consecutive months. Lee I 6 and and the L6 are the top sellers in their respective segments, further solidifying our leadership in the RMB 200 to 300,000 SUV market. Upgrades to our Bev lineup is also underway. In late July, we launched the rear wheel drive long range version of VI 8.
Based on user feedback, we added features such as the Powerfrunk and zero-gravity driver and passenger seats. These updates bolstered our product competitiveness and translated into a notable sales uplift. The new Generation V Mega is scheduled for launch on September 2nd. We have further refined its pioneering design and completely revamped the interior, cabin experience, intelligent platforms, and build quality.
Additionally, the all-new flagship SUV i9 will also be launched in mid-September, further enriching our automotive product lineup. We anticipate that this model will account for an even larger share of total sales over time. With new models launching and ramping up in the second half of this year, we are confident in maintaining a top-three position among all brands in China's passenger vehicle market priced above RMB 200,000.
By developing core technologies in-house, we are continuously deepening our competitive moat, steadily translating these technological advancements into tangible user value and commercial efficiency. Ultra-fast charging has become a prerequisite in user purchase decisions, and our proprietary supercharging network stands as one of our key competitive advantages. Regarding batteries, we are able to develop cells, BMS, and packs fully in-house, completing the final piece of the electric powertrain puzzle following electric motors and control units.
Operator
This is the operator. Please hold, and the conference will resume shortly. Thank you. The conference is reconnected. Please go ahead.
Zhang Li (English Translation Continued)
Apologies for the interruption. To continue with the CEO's remarks: Through integrated design with the overall vehicle system, combined with the technology and experience we have accumulated in 5C supercharging, we are confident that Li Auto's in-house batteries will deliver industry-leading performance, quality, safety, and service life. Our in-house batteries are already developed and deployed on our all-new L8, the new L6, and the MEGA.
Within the next few months, all of our models will be equipped with our proprietary batteries. We firmly believe that batteries and chips are going to be the most critical technological barriers in the embodied AI industry. In May, we started shipping our full-stack ADAS solution based on the NVIDIA Orin X chips. Today, shipments of the Orin X chips have exceeded 50,000 units, maintaining an excellent quality track record.
Beyond chips, we are also making R&D breakthroughs across models, controllers, and software. These achievements have steadily translated into improved product experience. In late July, with OTA 9.1, overall VLA model performance improved by 20%, and user mileage penetration nearly doubled compared to the previous generation platform. In September, we will also roll out the VLA model to cars with NVIDIA Drive Orin X chips.
Building on the data we have accumulated, we will accelerate model training and iterations to fully leverage the compute advantage of our chips. The July OTA 9.1 update allows the VLA to match and surpass human drivers in reaction speed. The October OTA 9.2 update will enable the VLA to fully adopt 3D Vision Transformers, providing long-range perception and better precision, and the year-end OTA 9.3 update will see the VLA model parameter scale expand exponentially, significantly enhancing task comprehension and reasoning capabilities in complex scenarios.
Faster reactions, sharper vision, and stronger reasoning are the three most crucial upgrades for the Orin X and VLA this year. Going forward, building embodied AI vehicles will remain at the core of our strategy through full-stack in-house development across hardware and software. With continuous iteration, our vision is that vehicles will become true intelligent agents that can not only look after humans but also complete tasks independently and more efficiently than humans. With that, I'll turn the call over to our CFO, Li Tie, to walk you through our financial performance.
Johnny Tilley
Thank you, Lee. Hello, everyone. Given time constraints, my remarks today will be limited to our second-quarter financial highlights. All figures will be quoted in RMB unless otherwise stated; please refer to our earnings press release for further details, including the corresponding U.S. dollar amounts.
Total revenues in the second quarter were RMB 25.7 billion, down 15.1% year-over-year and up 11.7% quarter-over-quarter. This included RMB 24.1 billion from vehicle sales, down 15.7% year-over-year and up 11.8% quarter-over-quarter. The year-over-year decrease was mainly driven by reduced vehicle deliveries and a lower average selling price due to a different product mix. The sequential increase was mainly attributable to a higher average selling price due to a different product mix and increased vehicle deliveries.
Cost of sales in the second quarter was RMB 22.8 billion, down 5.6% year-over-year and up 7.8% quarter-over-quarter. Gross profit in the second quarter was RMB 2.8 billion, down 53.3% year-over-year and up 56.9% quarter-over-quarter. Vehicle margin in the second quarter was 9.4%, versus 19.4% in the same period last year and 6.1% in the prior quarter. The year-over-year and sequential changes were mainly due to a different product mix.
Gross margin in the second quarter was 11%, versus 20.1% in the same period last year and 7.9% in the prior quarter. Operating expenses in the second quarter were RMB 5.1 billion, down 2% year-over-year and up 6.9% quarter-over-quarter. R&D expenses in the second quarter were RMB 2.8 billion, down 1.2% year-over-year and up 2% quarter-over-quarter. SG&A expenses in the second quarter were RMB 2.3 billion, down 16.2% year-over-year, mainly due to lower employee compensation, and up 11.2% quarter-over-quarter, mainly due to higher marketing and promotion spending.
Loss from operations in the second quarter was RMB 2.3 billion, versus income from operations of RMB 827 million in the same period last year and a loss from operations of RMB 3 billion in the prior quarter. Operating margin in the second quarter was -9%, versus 2.7% in the same period last year and -13% in the prior quarter. Net loss in the second quarter was RMB 1.7 billion, versus net income of RMB 1.1 billion in the same period last year and a net loss of RMB 2.3 billion in the prior quarter.
Diluted net loss per ADS attributable to ordinary shareholders was RMB 1.69 in the second quarter, versus diluted net earnings of RMB 1.03 in the same period last year and a diluted net loss of RMB 2.26 in the prior quarter. Now turning to our cash flow and balance sheet: Net cash provided by operating activities in the second quarter was RMB 15 million, versus RMB 3 billion used in the same period last year and RMB 6.1 billion used in the prior quarter.
Free cash flow was negative RMB 1.3 billion in the second quarter, versus negative RMB 3.8 billion in the same period last year and negative RMB 7.4 billion in the prior quarter. Our quarter-end cash position remained robust at RMB 87.5 billion. This solid cash position gives us the flexibility to invest in product and technology innovation. We are also returning value to our shareholders through share repurchases.
To date, we have repurchased a total of 91.7 million Class A ordinary shares, including 23.7 million ADSs, for total consideration of about USD 631.5 million. Now for our business outlook for the third quarter of 2026: The company expects vehicle deliveries to be between 95,000 and 100,000 units, and quarterly total revenue to be between RMB 26.6 billion and RMB 28 billion.
This business outlook reflects the company's current and preliminary view on its business situation and market conditions, which is subject to change. That concludes our prepared remarks. I will now turn the call over to the operator to start our Q&A session.
Operator
Thank you. If you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press *2. If you are using speakerphone, please pick up the handset to ask your question. For the benefit of all participants on today's call, please limit yourself to two questions. If you have additional questions, you may re-enter the queue.
If you are a Mandarin speaker, please ask your questions in Chinese first, followed by an English translation. Your first question comes from Tim Hessio with Morgan Stanley.
Tim Hessio
Hello management, this is Tim. I have two brief questions. The first question concerns the Li Auto L series. Since the model year update for the L series has been completed this year, could management provide an update on its market performance since launch? That is my first question.
Ma Donghui
Hello Tim, this is Ma Donghui, and I will answer this question. This year, we completed a full product generation update for the L series, covering models from the L9 and L8 to the L6, all transitioning to the new-generation platform. Our entire lineup is equipped with our self-developed Mocha M100 chip and Horizon Robotics' 5C core technology. Furthermore, for the L series vehicles, we have implemented a fully drive-by-wire chassis, achieving complete coverage across the RMB 200,000 to 500,000 price range for extended-range SUVs.
In terms of delivery performance since launch, user acceptance of the high-end versions has exceeded expectations. Since its launch, orders for the L9 Premium version have accounted for approximately 85%. A significant number of users are willing to pay for hard-core technologies such as the fully drive-by-wire chassis and advanced intelligent driving capabilities, which has further consolidated our market position in the family SUV segment priced between RMB 400,000 and 500,000. Since the launch of the L8, the Pro version has become the main volume driver, demonstrating strong conversion rates at dealerships.
Regarding the new generation, the L6 has inherited the user base from the previous generation. Cumulative deliveries of the previous-generation L6 have approached 400,000 units, laying a solid market foundation. For the new-generation L6, we have addressed shortcomings highlighted in prior user feedback, specifically short pure-electric range and slow charging speeds. Additionally, zero-gravity seats and a 29-inch panoramic display have further enhanced the riding experience.
Since its launch, order momentum has been strong, with the potential to achieve a stable monthly sales volume of 10,000 units. This makes it our most critical volume model in the RMB 200,000 to 300,000 price segment. At the same time, we have observed transitional disruptions caused by the generation switch. Factors such as inventory clearance of older models, the launch of new products, and policy transitions have created阶段性 (phased) pressure on operations, which we are currently optimizing.
Moving forward, we will focus on two key areas. First, software iteration to continuously enhance product value. This generation of our L series features a robust hardware foundation and performance; we will continue to unlock intelligent driving capabilities through OTA updates and gradually roll out features related to autonomous intelligence. Second, we will continue to densify and expand our self-built 5C ultra-fast charging network.
As of the end of July, Li Auto had put 4,141 supercharging stations into operation, with over 22,800 charging piles. We have completed the connectivity of 18 national-level highways along the "Nine Vertical and Nine Horizontal" grid, covering nearly 300 cities across the country. Our self-built 5C supercharging network serves both pure electric vehicles (BEVs) and the new generation of 5C mid-range extended-range models, and has become a key consideration for users when purchasing vehicles.
I believe that after the L series completes its model refresh, it will complement the I series' pure electric products, jointly supporting overall business growth. Currently, the order structure between extended-range electric vehicles (EREVs) and BEVs is roughly balanced. Going forward, as we launch more pure electric models, the proportion of BEV orders is expected to increase further. Thank you.
Dong Hui Ma (English Translation)
This year, we completed the full refresh of the L series, including the L9, L8, and L6. All models have transitioned to the latest platform, which incorporates core technologies such as Qualcomm chips and 5C extended-range capabilities, and are now available as live models. We also feature our latest fully drive-by-wire chassis. With these advancements, we have achieved comprehensive coverage of the RMB 200,000 to 500,000 extended-range SUV market.
Since we began deliveries, several trends have emerged. First, our high-end models have exceeded both user and company expectations since launch. The Li version of the L9 accounts for over 85% of total sales. Many users are willing to pay for the fully drive-by-wire chassis, high-end ADAS systems, and other core technologies. This has further solidified our leadership in the RMB 450,000 home and family SUV market.
Furthermore, since its launch, the L8 Ultra version has become a key sales driver, with very strong conversion rates at our dealerships. Secondly, the new-generation L6 has successfully retained the user base from the previous generation, which laid a solid foundation by delivering nearly 400,000 units. The new generation addresses key user feedback regarding EV range, charging speed, and intelligent thermal management platforms. It also enhances the user experience with features such as gravity seats in the front row and a 29-inch panoramic screen.
Since its launch, the L6 has received a very positive market reception, and we expect steady monthly demand of around 10,000 units going forward. This makes it a strong pillar for sales in the RMB 200,000 to 300,000 market segment. Meanwhile, we have observed some temporary disruptions caused by the model refresh cycle, including clearing old inventory, ramping up production for new models, and transitioning sales policies, all of which have created short-term operational headwinds. We are currently working hard to optimize our processes and address these challenges.
Going forward, we will focus on two key areas. First, we will further enhance product value through OTA (Over-the-Air) updates. The all-new L series is built on robust, industry-leading hardware. Therefore, we will continue to unlock these hardware capabilities and AI features via OTA updates. Second, we will continue to expand our 5C supercharging network, increasing both its density and coverage.
As of the end of July, we had 4,141 charging stations in operation, with over 22,800 charging stalls. We have established a "9x9" grid covering 18 national-level highways and more than 300 cities. Our in-house charging network and 5C charging capability have become decisive factors for many users in their vehicle purchase decisions.
With the L series refresh now complete, it will complement our I series BEV products to jointly drive overall business growth. Currently, EREVs and BEVs each account for half of our total sales. We expect the share of BEVs to rise further as we launch more new models later this year. Thank you.
Tim Hessio
Thank you, management. My second question is regarding the MEGA. The company released a teaser video for the updated Li Auto MEGA today. Could management please introduce the direction of the MEGA's refresh and share your sales expectations?
Dong Hui Ma
Sure, thank you. I am Ma Donghui. Today, we released teaser materials for the updated MEGA. This refresh is primarily based on extensive feedback from real users since the launch of the previous generation MEGA, focusing on optimizing key pain points. The improvements mainly concentrate on three areas. First, enhancing the chassis and handling experience. We addressed user feedback that MPVs of this size are not flexible enough for U-turns and parking in urban areas.
For the updated MEGA, we will equip it with rear-wheel steering, a drive-by-wire steering system, and active anti-roll bars. These features will significantly reduce the turning radius and improve body roll during cornering, balancing the spaciousness of a large vehicle with agile driving control. Second, we are comprehensively upgrading the intelligent hardware. The full suite of perception hardware will be upgraded, featuring our self-developed Maxwell M100 perception chip to complete side and rear perception capabilities, thereby strengthening the performance of Navigate on Autopilot (NOA) in complex urban intersections and automated parking scenarios.
The cabin will also be upgraded with Qualcomm's high-performance cockpit chip, delivering better interaction and entertainment experiences. Third, we are optimizing the family-oriented cabin and detailed user experiences. We will continue the MEGA's positioning as a family MPV, upgrading the seating experience in the second and third rows, and improving interior ambiance and interactive details to better meet the travel needs of multi-member families.
As our flagship all-electric family MPV priced above RMB 500,000, the MEGA has a very clear positioning. This refresh addresses the shortcomings highlighted in concentrated user feedback, resulting in a systematic enhancement of product competitiveness. Regarding future sales and performance, it will depend on order conversion rates after launch, production ramp-up, and changes in market demand. Moving forward, we will fully focus on product delivery, store experience, and user operations. We will keep everyone updated on its market performance after the launch.
Dong Hui Ma (English Translation)
As many of you have noted, we officially released the first batch of teaser information for our new-generation MEGA today. This new generation is truly based on real user feedback from the previous-generation MEGA, aiming to address important feedback and product shortcomings of the prior model. These improvements mainly fall into three categories.
The first is the improvement in chassis and handling experience. Many view MPVs as very large and cumbersome in cities. Therefore, the new-generation MEGA will be equipped with rear-wheel steering, a drive-by-wire system, and active anti-roll bars. These features will greatly reduce the turning radius and minimize body roll during cornering, making the car more flexible and agile in urban environments.
Secondly, we upgraded to an intelligent platform. We enhanced the entire ADAS (Advanced Driver Assistance Systems) using our in-house simulation and 100 chips. We have also completed the integration of LiDAR sensors to improve performance in urban environments, such as Los Angeles, handling complex intersections, and automated parking. On the cabin side, we are upgrading to the latest Qualcomm chips to deliver a better interactive and entertainment experience.
Thirdly, we improved the cabin and details to further strengthen our market positioning. As a family MPV, we made significant upgrades to the second and third rows, including interior ambiance and interactive features, to better serve the needs of large families. The Mega is clearly positioned as a flagship SUV priced above RMB 500,000. This new generation has effectively addressed user feedback, completely revamping the product and enhancing its overall state.
Sales performance will depend on many factors, including sales conversion rates, production ramp-up, and market dynamics. However, we are committed to focusing on the delivery store experience and user operations. We will keep everyone updated on sales performance as we launch the product. Thank you.
Tim Hessio
Thank you all for sharing.
Operator
Your next question comes from Paul Gong with UBS.
Paul Gong
Ah, thank you for taking my question. I have two questions. The first is regarding the impact of recent raw material price increases on the company's profit margins. Can you provide an estimate on a per-vehicle basis? Specifically, could you offer some directional guidance for Q2 entering Q3? What measures are you taking to cope with these raw material price hikes? So my first question is regarding the impact of commodity cost inflation. How much can you quantify in terms of the impact in Q2 and moving into Q3, and what would be your strategy to counter such cost inflation challenges and margin pressure? Thank you.
Dong Hui Ma
Hello Pang, this is Ma Tonghui. This year, cyclical fluctuations in core upstream raw materials and components have imposed significant cost pressures on the automotive industry, including on us. Looking at the specifics, the rapid development of the AI industry has driven strong demand for chips and PCBs, leading to tight supply and rising prices. Memory chips have also seen price increases.
Relying on our previous volume commitments and long-term procurement framework agreements, our exposure to price volatility has been lower than the industry average. Regarding batteries, the price of lithium carbonate has also experienced significant cyclical fluctuations this year. To address these cyclical cost fluctuations, we have two initiatives: first, we will continue to advance refined operations to achieve cost reductions.
On the other hand, we rely on our full-stack technical resources and proprietary supply chain system to build long-term structural cost reduction capabilities. First, we will continue to develop a highly self-controlled 'three-electric' system (battery, motor, and electronic control) to solidify our competitive foundation in both technology and cost. In the electric drive sector, we have achieved in-house R&D and manufacturing of modules for motors, electronic controls, and silicon carbide chips.
By deeply mastering key components and leveraging an integrated architecture, we continuously optimize energy consumption and iterate on technical solutions to amortize hardware costs per vehicle. Additionally, in the battery system sector, we synchronously develop and deeply couple battery packs with the overall vehicle architecture. This allows us to achieve an optimal balance in energy consumption, thermal management, safety, and space utilization, thereby enhancing product experience while controlling costs.
Currently, we have established core in-house R&D capabilities in cell system design, pack structural design, thermal management, and BMS algorithms. We are promoting the application of our self-developed battery systems across more vehicle models to build competitiveness in quality, performance, and cost. Furthermore, through our self-developed intelligent driving chips, we aim to create competitive advantages in core technology and cost.
Our self-developed 'Mach 100' chip offers significant structural advantages in computing power and cost control through innovative data flow architecture and integrated software-hardware design. In summary, in the short term, we will manage periodic cost pressures through volume-locked long-term orders and refined operations. In the medium to long term, we will rely on the scaled implementation of proprietary technologies to stabilize gross margins and support the company's long-term high-quality development. Thank you.
Dong Hui Ma (English Translation)
This year, we've seen cyclical fluctuations in the upstream raw materials and core components, which has been created temporary cost pressures for both the industry and our company, which has been further impacted our gross margin. To look this, look at this in more detail. On the AI side, because of the development in the AI sector has this has driven demand for chips and PCBS pushing prices up.
On the memory side, memory chips price have also risen, but with our early volume commitments and long term procurement agreements, the price impact on us is less than the industry average average. And on the battery front, lithium carbonate prices also experienced cyclical fluctuations this year. And to navigate the cyclical cost fluctuations, we're taking A2 pronged approach.
On the one hand we're continuously driving cost reductions through more efficient operations and on the other hand we're leveraging our full stack in house technology and proprietary supply chain to build the long term structural cost advantages. So specifically first on the on the electric drivetrain front, we will continue to be committed to owning and driving the R&D and supply chain of the three key electric systems to solidify our dual modes and technology and cost.
On the electric drive side, we have a cheap in house development and manufacturing of motors, controllers and silicon carbide chip modules which ensures our control over the critical components. By leveraging our integrated architecture, we're continuously optimizing energy consumption and iterating on our technological solutions which has steadily amortized the hardware cost per vehicle.
And in terms of battery system, we develop in tandem and deeply integrate our battery packs with the overall vehicle architecture, which allows us to achieve the best possible balance between energy, energy consumption, thermal management, safety and packaging efficiency, which further develops delivers an exceptional user experience while maintaining strict cost central.
We have established in-house R&D capabilities in core areas, including cell packs, thermal management, and BMS algorithms. We are accelerating the deployment of our proprietary battery systems across a broader range of models, establishing a strong competitive edge in quality, performance, and cost. Secondly, regarding self-developed chips, we are building a strong competitive advantage in both technology and cost.
Furthermore, our proprietary Mockun 100 chip is built on an innovative data flow architecture that integrates hardware and software customization, delivering structural advantages in computing performance and cost efficiency. Overall, in the short term, we aim to smooth out temporary cost fluctuations and pressures on our business through volume commitments and operational refinements. In the medium to long term, we rely on the scaled deployment of our in-house technologies to stabilize gross margins and support the company's high-quality, sustainable growth. Thank you.
Paul Gong
Considering the rise in raw material costs and intensified homogeneous competition, what is our current gross margin target? Thank you.
Zhang Li
Hello, this is Li Xiang. The rising costs of core components such as batteries and memory chips this year are a common challenge facing the entire industry. As Li Auto's products feature higher levels of intelligence, they require greater usage of memory and semiconductors, making us more significantly impacted. Beyond these cost factors, Li Auto strictly manages manufacturing expenses, including mold amortization and depreciation of other equipment.
This includes the handling of model updates and related matters. With the successive launch of new models this year, gross margins are gradually improving. However, we must also squarely face the impact of rising costs for chips, PCBs, and other semiconductors. We will not pass these cost increases on to consumers; instead, we will leverage integrated design and industrial capabilities, including further in-house R&D and implementation of battery systems, to strengthen our self-sufficiency and supply chain in the 'three-electric' (battery, motor, and electronic control) sector.
Through enhanced cost management capabilities, including improved efficiency and cost reduction within our sales system, we aim to convert these savings into tangible benefits for our users. In the long run, I believe the company's healthy gross margin will range between 15% and 20%. The primary factor influencing the variance within this range will be future fluctuations in various raw material costs.
Zhang Li (English Translation)
As we have observed this year, there has been a significant increase in the costs of batteries and memory chips, which is a common challenge for the entire industry. Because Li Auto's products are more intelligent, they consume more memory and semiconductors, resulting in a greater impact on us. Apart from the impact on BOM (Bill of Materials) costs, we are also experiencing amortization and depreciation on our tooling and production equipment.
We will adhere to stricter standards in managing production items as we launch new products this year. Over time, we are already seeing improvements in gross margins. However, we must also confront the rising costs of chips, PCBs, and other semiconductors. We have decided not to pass these price increases on to our customers.
Instead, we will continue to leverage our integrated design and supply chain capabilities, such as deepening our in-house R&D deployment for batteries to make our system more self-sufficient. Secondly, we will strengthen our cost control and management capabilities. Thirdly, on the sales front, our partner program has helped us achieve lower sales costs, a better operational mindset, and improved efficiency.
Thus, these lower prices driven by low costs will translate into tangible long-term benefits for our users. In my view, the company's healthy gross margin will range between 15% and 20%, with raw material costs being the primary driver. Thank you.
Operator
Thank you very much. Your next question comes from Lynn Zukwel with Scitex.
Lynn Zukwel
Thank you to the management team for taking my questions. I am Qiao Wenzuo from CITIC Securities. I have two questions. The first is regarding the upcoming Li Auto I9. Could management share any current information with us? So my first question is about the I9. What information could you please share about the upcoming Li Auto I9?
Dong Hui Ma
Hello, I am Ma Donghui, and I will answer this question. I would like to share three points. First, regarding product positioning, the I9 is our all-electric flagship six-seater SUV designed for multi-member families, continuing our core product DNA focused on family travel. In terms of our product matrix, the I9 and the Mega will form a precise complement—one being a flagship SUV and the other a flagship MPV—jointly covering the high-end all-electric mobility market for multi-member families.
Once the product is officially launched, the I6 and I9 will further strengthen our all-electric product lineup, forming a dual-energy synergy with our EREV L-series to further完善 our product layout in the high-end new energy vehicle market priced between RMB 200,000 and RMB 500,000. Second, regarding the foundation of core technologies, the I9 will feature an 800-volt 5C high-voltage platform and adopt our new generation of self-developed electric drive systems. Leveraging our nationwide self-built 5C ultra-fast charging network, we aim to provide users with an excellent ultra-fast charging experience.
In terms of intelligence, we will equip the vehicle with our self-developed Maxus 100 intelligent driving chip to provide sufficient computing power for advanced intelligent driving and subsequent iterations of large-model AI features. The cabin will also feature our new generation of high-performance Qualcomm cockpit chips to support complex scenarios such as multi-tasking parallel processing and AI intelligent interaction. Finally, regarding core user value, the I9 focuses on the travel scenarios of all members in multi-member families.
We have prioritized optimizing the layout for extra-large space, ensuring a comfortable riding experience for all passengers, and enabling comprehensive intelligent interaction capabilities, striving to deliver a flagship-level comprehensive experience for every passenger in the vehicle. Regarding the launch schedule, the I9 is planned for an official release in mid-September. For specific pricing and configurations, please stay tuned to our official launch event. We welcome your continued attention. Thank you.
Li Xiang (English Translation)
There are three points regarding the i9 that I would like to share. First, product positioning. The i9 is designed as a flagship six-seater SUV for large families, continuing our core DNA of building products for this demographic. In terms of product lineup, the Mega i9 will complement the Omega; one is a flagship SUV, and the other is a flagship MPV. Together, they will satisfy the needs of large families looking to purchase an electric vehicle.
With the launch of the i9, it will also become an important addition to our EV flagship profit line, while complementing the L series, which features our proprietary range-extended powertrain product lines. Collectively, these models will complete our coverage of the high-end new energy vehicle market priced between RMB 200,000 and RMB 500,000. The second point I would like to share concerns our technological foundation. The i9 will be equipped with an 800-volt 5C high-voltage charging platform.
It will be powered by our latest generation of in-house developed electric motors, leveraging our nationwide 5C charging network to provide an excellent charging experience for our users. On the intelligence front, the i9 will feature the M108S chip, powering not only autonomous driving but also embodied AI capabilities going forward. Regarding the smart cabin, we have also adopted the latest high-performance Qualcomm chipset to support multi-task parallel processing and AI intelligent agents.
Thirdly, in terms of user focus, the i9 targets large families traveling together. Therefore, our focus is on interior comfort for every family member as well as spatial interactive experiences, aiming to provide a flagship-level experience for everyone. Regarding the launch timeline, the i9 will be launched between mid-July and mid-September.
Unfortunately, due to disclosure regulations, I cannot provide detailed information on pricing and specific trim levels at this time. We will release complete details during the official product launch event. Please stay tuned. Thank you.
Li Xiang
Thank you, management, for the response. My second question is about autonomous driving. Could the company please update us on the progress of co-optimization between the M100 chip and the autonomous driving model? Additionally, what are the key milestones and quantitative metrics for autonomous driving algorithm upgrades in the second half of the year?
Yan Xi
This is Yan, and let me answer your question. Our in-house Smart M100 chip began mass production with the all-new L9 in Q2 and is now deployed across the all-new L9, L8, and L6. Currently, chip production capacity is sufficient to meet market demand. Our ADA system, powered by our in-house Max M100 chip, has been delivered to customers with the all-new L9 since May.
Leveraging the strong capabilities of the Mac platform, we expect to continue making significant improvements to our models. OTA 9.1 began rolling out at the end of July, further reducing end-to-end latency. We also introduced two new speed preference modes for our Mark VRA model—Efficient and Comfort—improving responsiveness across a broad range of driving scenarios.
The upcoming OT 9.1 will represent a major architectural upgrade. On the model side, we are evolving toward a full 3D vision transformer architecture with three times the parameter count and 4.6 times the compute capacity. This upgrade will deliver systematic improvements across key dimensions of driver assistance systems, including safety, comfort, efficiency, and navigation.
In Q4, our goal is to further enhance the perception and decision-making capabilities of Mark VRA. Specifically, first, longer-range perception: The effective perception range will exceed 250 meters, enabling early speed adjustment and passing planning. We expect this to reduce undesirable behaviors, such as hesitation and unnecessary lane changes, by more than 30%.
Second, higher perception accuracy: 3D spatial perception accuracy for key objects will improve to within 5 centimeters, increasing the success rate in challenging scenarios such as narrow road driving, passing through gates, and other tight-clearance maneuvers by 50%. Third, stronger scene understanding: Rather than simply recognizing individual objects, the system will be able to infer intent based on the broader traffic context.
In scenarios such as yielding on narrow roads, navigating around construction zones, and making unprotected turns, it will make more decisive yield-or-proceed decisions, reducing unnecessary standstills and hesitations by more than 20%. Additionally, VRA 2.0 for NVIDIA Orin and Thor platforms will launch in early September. The share of driving mileage completed with driver assistance systems engaged is a key metric for us at this stage.
On the MARK platform, ADAS mileage penetration in urban scenarios has nearly doubled from previous levels as deliveries of MARK-powered vehicles continue to ramp up. Our all-scenario MPI (Miles Per Intervention) has increased by 25% in recent months. Thank you.
Operator
Your next question comes from Jing Chang with CICC.
Jing Chang
Okay, thank you for taking my question. I have limited time, so I will mainly ask one question. We observed that the company's operating cash flow basically turned positive in the second quarter, but free cash flow may still be negative, and cash reserves have declined slightly. For the second half of the year, could you provide guidance on whether free cash flow will turn positive in the third and fourth quarters? Also, what is your outlook for the cash position for the full year? So my only question is about cash flow. We see operating cash flow nearly turned positive in the second quarter, but free cash flow remains negative, and we also see some decline in our cash position. Could you share your outlook for the second half, specifically whether our free cash flow will turn positive, and what the trend for our cash position will be? Thank you, Johnny.
Johnny Tilley
This is Li Xiang. I will address the question from the third quarter. With the delivery of our new models, we expected to maintain stable quarterly operating cash flow. Currently, we have ample cash on hand, which provides strong support for our product innovation, technological breakthroughs, and global expansion. This year, we remain committed to R&D investment and capital expenditure (CapEx), including our supercharging network.
We expect our full-year CapEx to be around RMB 6 billion. Achieving positive operating cash flow and free cash flow will ultimately depend on our fourth-quarter deliveries. One thing is certain: our overall cash flow performance this year will be stronger than last year. Thank you.
Jing Chang
I have a follow-up question regarding intelligent autonomous driving. We have observed that the self-developed M100 chip and the software-hardware integration are being progressively advanced. What key roles do these play in enhancing our autonomous driving capabilities? Could you share some more details?
Yan Xi
This is Yan Xi. Let me answer this question. The rapid progress we have made in intelligent driving, both in terms of performance and delivery speed, is driven by the close integration of our in-house chip and full-stack system capabilities. Firstly, we have streamlined our organizational structure so that the chip and model teams can work much more closely together, jointly designing model architectures that can fully leverage the computing capabilities of the Mega M100.
From a hardware interface perspective, the Mega M100 gives our models, algorithms, and operating systems significant design flexibility, allowing the chip, algorithm, and system software to be optimized together for the best overall performance. Secondly, regarding data and training optimization: with our in-house chip as the foundation, we are able to explore and optimize the training process at a much deeper level.
In particular, our reinforcement learning approach built around the platform has significantly enhanced model capabilities within our world model framework. In addition, the data management and shadow data system built on the Mega platform enabled faster model iteration and improvement. Thirdly, we achieve system-level optimization through our in-house Li Auto OS. Li Auto OS enables deep integration between upper-layer applications and the underlying chip, improving both resource utilization and overall system performance.
This also helps improve engineering quality and accelerate development cycles. Together, the chip, model, and OS form a tightly integrated full-stack architecture, creating a complete technology loop for our intelligent driving system. The value of our in-house chip is now extending beyond intelligent driving into embodied intelligence. A vehicle equipped with dual Mega M100 chips...
...allows us to run a full multimodal foundation model entirely on-device, supporting inputs across voice, language, and video. The model is capable of general-purpose problem understanding, environmental understanding, and task planning. This means the vehicle is no longer limited to executing predefined functions. It can increasingly understand user intent and the physical world, then plan and execute tasks related to given objects.
We believe this will significantly expand the capability boundaries of the vehicle as an embodied intelligent agent and represent an important new direction enabled by our integrated hardware-software architecture. Thank you.
Operator
Your next question comes from Ming Sun Li with Bank of America.
Ming Sun Li
Hello, management. I have two questions. First, could management provide an update on the progress and plans for your overseas strategy? Second, regarding the company's embodied intelligence strategy, will you continue to maintain high R&D spending amid the current competitive landscape?
Ma Donghui
Yes. Thank you. This is Ma Donghui. I will answer the first question regarding our overseas markets. Overseas expansion is a long-term strategy for the company. Currently, the overall progress in market expansion and product deployment is in line with our expectations. Regarding regional layout, for the Middle East and Central Asia markets, we will focus on the mid-to-long range models of the Li Auto L series as our key products. In July, our all-new L9 officially launched in Kazakhstan and Uzbekistan.
In September, we plan to hold a new product launch event in Dubai, which will kick off sales in the Middle East market. Meanwhile, we have reached a strategic cooperation agreement with a leading automotive group in Kazakhstan to advance local assembly partnerships. Leveraging overseas localization adaptations of our existing models and local assembly projects, we are gradually building a global business framework encompassing R&D, product manufacturing, sales, and service.
For the European market, we will prioritize the introduction of our pure electric model, the Li Auto i6. We plan to make its first public overseas debut at the Paris Motor Show in October and aim to begin our European market rollout in the fourth quarter of this year. For right-hand drive markets, in addition to planning the launch of the MEGA in Hong Kong, Singapore, and other right-hand drive regions within the year, we will also introduce a right-hand drive version of the i6 to continuously improve our product matrix in these markets.
Of course, expanding our overseas business faces many objective challenges, including geopolitical environments and regulatory uncertainties. Li Auto will persist in its premium brand positioning overseas. We will manage the pace of development by combining our own capabilities with the differentiated characteristics of each regional market, while simultaneously ensuring product compliance, building after-sales service networks, and strengthening brand construction. Thank you.
Ma Donghui (English Translation)
Overseas expansion has been our long-term strategy, and we have made steady progress in market expansion and product deployment. Overall, the progress has been on track and within our expectations. In terms of regional strategy for the Middle East and Central Asia, we will focus on our L-series range-extended models as the key offering. In July, we launched the all-new L9 in Kazakhstan and Uzbekistan.
In September, we plan to launch in Dubai to kick off our sales in the Middle Eastern market. Meanwhile, we have already formed a strategic partnership with Allure, a leading local automotive group in Kazakhstan, to drive the local assembly of our vehicles. By advancing local adaptation and assembly of our current models, we are steadily building a comprehensive global presence across R&D, products, manufacturing, sales, and service.
In Europe, we will prioritize our BEV models; therefore, the I6 will debut at the Paris Motor Show in October and officially go on sale in the European market in Q4. For right-hand drive markets, in addition to launching the Li Mega in the Hong Kong SAR and Singapore by the end of this year, we will also roll out the right-hand drive version of the I6 to complete our model lineup in these markets.
That said, overseas expansion comes with its own set of challenges, particularly uncertainties regarding the geopolitical environment and market regulations. We aim to position Li Auto as a premium brand in overseas markets as well. We will carefully manage our pace, tailoring our approach to leverage our strengths and the unique dynamics of each market, while ensuring product compliance, building after-sales service networks, and continuing to strengthen our brand. Thank you.
Zhang Li
Hi, this is Li Xiang. Let me address the question regarding R&D. In the earlier stage, Li Auto was in its startup phase. Moving forward, a key focus is sustained R&D investment to build competitive moats. Specifically, chip resources represent a long-term strategic priority we established quite some time ago. We will continue to invest in and advance the iterative development of our chip models, which underscores our company's competitiveness in AI. Therefore, we view chips as a key moat, driven by model competitiveness.
Furthermore, we will continue to invest in R&D for the 'three-electric' systems, including batteries. Taking batteries as an example, our in-house development covers a complete system including cell technology, BMS, and thermal management. Through an integrated R&D strategy and the technical expertise accumulated over the past few years in 5C ultra-fast charging, we are highly confident in the leading quality, safety, and lifespan of our self-developed batteries.
Starting later this year, Li Auto-brand batteries will be progressively installed across our entire vehicle lineup. It is important to emphasize that in-house development does not imply that supplier products are inferior. Our self-developed Maxus chips do not change the fact that NVIDIA remains the world's leading chip brand. Similarly, our self-developed batteries do not diminish the status of brands like CATL as among the best battery manufacturers globally.
In the era of embodied AI, our strategic judgment is that batteries and chips constitute the core moats, while 'three-electric' technology and superior products form the company's core competitiveness. In-house development reflects our desire to control future core technological moats ourselves, similar to Apple and Huawei. Thank you.
Zhang Li (English Translation)
Regarding R&D, looking back at our history, the first ten years were truly our startup phase. Going forward, the next stage involves continued investment in R&D to build our competitive barriers. Among these initiatives, developing chips in-house is a core long-term strategy we established quite some time ago. We remain committed to continuing our investments and improving and iterating on our in-house chips over time.
If we view chips as a core competitive advantage, then AI models will define competitiveness. Beyond chips and AI, we have also been investing in the core components of the electric powertrain. Taking batteries as an example, we have developed our battery packs, Battery Management Systems (BMS), and even thermal management systems in-house. This entire offering is integrated with our actual vehicle products through a unified R&D approach, including pairing and adaptation.
We have accumulated extensive experience in 5C charging technologies, which gives us confidence in the quality, safety, and lifespan of our in-house batteries. Starting in the second half of this year, we will roll out Li Auto-branded batteries across all our vehicles. I need to emphasize that choosing to develop these components in-house does not imply that our suppliers' products are inferior.
We developed our in-house MX100 chips. This does not diminish NVIDIA's status as the world's leading chip company. Similarly, developing our in-house batteries does not diminish CATL's reputation as one of the best battery manufacturers. We regard CATL and many other brands as excellent battery providers; their standing remains unshaken.
We believe that in the era of embodied AI, chips and batteries will constitute the most important competitive advantages, while the electric powertrain and superior products will be key to our product competitiveness. Choosing to develop these technologies in-house demonstrates our desire to emulate companies like Apple and Huawei by keeping control of the key components of our competitiveness in our own hands. Thank you.
Operator
As we reach the end of our conference call, I would like to turn the call back to the company for closing remarks. Ms. Jenna Feng, please proceed.
Janet Seng
Thank you once again for joining us today. If you have further questions, please feel free to contact the Li Auto Investor Relations team. This concludes the conference call. You may now disconnect your line. Thank you.
Operator
Thank you.
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