Summary of Key Points
Facing rising prices for raw materials such as lithium carbonate, copper, and aluminum, Leapmotor has not yet passed on the increased costs to its customers. The company is managing these challenges through collaboration with suppliers, internal cost-saving measures, leveraging economies of scale, and developing its own technologies. However, if material prices continue to rise in the future, it may be forced to adjust its pricing strategy. In the first quarter, Leapmotor’s gross profit margin fell by nearly 5 percentage points, resulting in a net loss of 390 million yuan. The newly launched flagship model, the D99, adopts a cost-based pricing approach, which yields a higher profit margin compared to its more affordable models. While overall industry sales and profits have declined, Leapmotor has seen growth in both deliveries and exports. The company’s autonomous driving capabilities have improved significantly over the past two months.
1. How Does Leapmotor Avoid Price Hikes?
Lithium carbonate (a key component for batteries) and copper/aluminum (used in vehicle bodies and parts) have seen continuous price increases this quarter, putting significant pressure on many automakers. However, Leapmotor has managed to avoid raising prices for its customers. The company has adopted several strategies:
- Collaboration with Suppliers: Negotiating long-term agreements with leading suppliers to obtain more favorable purchase terms and share costs.
- Internal Cost Reduction: Optimizing production processes to minimize waste and cutting unnecessary expenses.
- Economies of Scale: The more vehicles sold, the lower the fixed costs (such as factory equipment and R&D expenses) per vehicle.
- In-house Development and Platformization: Producing its own battery systems, motors, and electronic controls, as well as building a modular production platform that allows for the use of shared components across multiple models, thereby reducing costs.
2. Profit Pressure Increases: Less Profit Per Vehicle Sold
Leapmotor’s gross profit margin in the first quarter dropped from 14.9% last year to 9.4%. In simple terms, if it used to make a profit of 14.9 yuan on every 100 yuan worth of sales (after deducting direct costs), it now makes only 9.4 yuan—almost half less. The company reported a net loss of 390 million yuan for the quarter. Zhu Jiangming indicates that the gross profit margin in the second quarter is not expected to be much better or worse, meaning the losses will not be more severe, but profits are also unlikely to materialize immediately.
3. The D99 Launch: A High-End Model with Cost-Effective Pricing
The D99 is Leapmotor’s flagship model, priced at 249,800 yuan, which is considered reasonable given its features. Zhu Jiangming notes that the D99’s profit margin is higher than that of its more basic models like the A10, but the pricing is still based on actual production and R&D costs, without relying on excessive brand premiums. To ensure quality and control costs, Leapmotor has partnered with top suppliers such as Bosch and CATL and owns 17 component manufacturing facilities. By developing its own core technologies, the company can maintain quality while reducing expenses.
4. The Challenging Automotive Industry
The automotive market has been sluggish this year. Data from the China Association of Automobile Manufacturers shows that retail sales of passenger vehicles in the first three weeks of June were 23% lower than last year, and annual sales for the first four months were 20% lower. The industry’s overall profit margin was only 3.4%—meaning companies are making very little profit on each vehicle sold. This is due to rising costs of raw materials (copper, aluminum, oil), as well as the fact that lithium batteries are cheaper when exported but more expensive domestically, increasing the cost burden on automakers.
5. Leapmotor’s Growth Despite Challenges
Leapmotor has managed to achieve growth despite the industry’s difficulties, with cumulative deliveries exceeding 1.5 million units and exports exceeding 75,000 units in the first five months (more than the entire volume of last year). However, it still faces several challenges:
- Improving Autonomous Driving: The company invested less in this area initially and is catching up, with expected improvements in the next two months.
- Continuing Cost Pressures: If raw material prices continue to rise, Leapmotor will need to raise prices. Whether it can offset these costs by increasing sales volumes or through technological advancements (such as more efficient batteries) remains to be seen.
In summary, Leapmotor is focusing on a strategy of “low margins and high volume” along with in-house cost reduction. It is maintaining growth through its competitive pricing and exports during tough market conditions. However, long-term profitability will depend on the success of its autonomous driving improvements and continued cost control efforts.