Summary of Key Findings
In the first half of 2026, the financial reports of new Chinese automakers revealed a crucial contradiction: there is a disconnect between sales volume and profits. ZeroRun, which sold the most vehicles (356,000 units), earned less than 600 yuan per car; Li Auto, which was once profitable, lost 4 billion yuan in the first half of the year; Xpeng relies on technology sales to maintain a gross profit margin, but its core business is still in the red; and Xiaomi relies on its parent company for support, with higher losses the more cars it sells. This situation is due to three major pressures: price wars, the shift to lower-priced products, and rising raw material costs, leading to a "low-quality scale" strategy (increasing sales through price cuts, but failing to generate substantial profits). The era of low-quality scale is over, and these new players must now focus on "precision farming" – emphasizing real profits and sustainability rather than simply chasing sales volume.
Why Do Higher Sales Volumes Lead to Lower Profits? Three Pressures Undermine the Old Logic of "Scale = Profit"
In the past, the industry assumed that "the more you sell, the more you can spread costs and thus increase profits." However, this chain has broken down for three reasons:
1. Price wars have pushed profit margins to their limit: In the first quarter of 2026, the industry-wide profit margin was only 3.2%, and all brands were competing by cutting prices, driving profits down to a minimum (for example, ZeroRun's profit per car is equivalent to the cost of a cup of milk tea).
2. Lower-priced products are dragging down gross profit margins: Li Auto used the affordable i6 to boost sales, and ZeroRun relied on its B-series models. Xiaomi's SU7 standard version also aimed at the mid-range market. While these models increased sales, they reduced the overall gross profit margin.
3. Rising raw material costs: The price of battery-grade lithium carbonate remains between 90,000 and 110,000 yuan per ton, and chip supply is still tight, making it difficult to reduce costs.
The combination of these three pressures results in a vicious cycle where larger scale leads to faster cash burn and higher losses.
What is "Low-Quality Scale"? Four Indicators to Identify It
Simply selling more does not equate to a good business scale. There are four key indicators of low-quality scale (meeting two of them is sufficient):
1. New models have lower gross profit margins than average: For example, the i6’s margin is lower than that of other Li Auto models, dragging down the overall company performance.
2. Sales volume increases, but gross profit margins decline: ZeroRun’s sales volume increased by 60%, yet its margin dropped from 14.1% to 11.7%.
3. New profits cannot cover additional expenses: The money from selling new cars is not enough to cover increased research and development and marketing costs.
4. Cash flow depends on external sources: Xiaomi’s improved cash flow comes from technology licensing, not car sales.
Using these indicators, all four companies are more or less struggling with the issues associated with low-quality scale.
Survival Paths for the Four New Automakers
Each company represents a different survival strategy, with its own strengths and challenges:
- Li Auto: Focusing on restoring profit margins. It was once the only new player to profit consistently but is now in the red due to the impact of the i6 on average prices and the high investment in electric vehicles. To turn things around, it needs to raise its margin to over 15% or increase quarterly sales from 98,000 to 155,000 units, both of which are challenging.
- ZeroRun: Its profit margin is very thin (600 yuan per car). It relies on exports (27% of sales) but faces competition from Stellantis in overseas markets, which may further reduce its margin if export sales increase.
- Xpeng: Generating revenue from technology licensing (75% gross profit margin). Although its car sales decreased by 15%, its technology licensing revenue increased to 20.6%. However, its core car business is still loss-making, and technology sales can only cover part of the gap; it needs to make its car business profitable on its own.
- Xiaomi: Its losses are increasing with higher sales volumes (2.6 billion yuan in the second quarter), but it has a smartphone business as a backup. Its annual target of 550,000 cars was only met in the first seven months, and its new Pengcheng model needs to achieve monthly sales of 45,000 units to meet targets. It must prove that its automotive business can be self-sustaining.
The End of the Low-Quality Scale Era: The Time for Precision Farming
The capital market no longer favors strategies that rely on increasing sales volume at the expense of profit margins. The critical questions for these new players are no longer "can we sell one million cars?" but rather "how much profit do we make from each car?" and "is the profit enough for the next round of investment?"
Each company has specific indicators to monitor its performance:
- Li Auto: Can it restore its gross profit margin to over 15%?
- ZeroRun: Can expanding overseas markets increase per-car profits?
- Xpeng: Can its technology licensing revenue be sustained, and can its core car business improve its margin?
- Xiaomi: Can it reduce losses per car, and can its new Pengcheng model avoid dragging down overall margins?
Those that continue to rely on low-margin models will face consequences in their next financial reports. The era of precision farming and focusing on real profits has begun, and these indicators will determine the survival of these new automakers in the second half of the year.