Li Auto’s blockbuster drive deserves a sequel

Clever Li. Li Auto is hitting the fast lane. The Chinese carmaker founded and led by Li Xiang is celebrating its first year of profitability as an exclusive focus on hybrid models pays off. Now, Li is taking a calculated risk by test-driving pure electric vehicles.

The company is one of a trio of Chinese upstarts that went public in New York just as electric-car hype revved up. But since its listing in 2020, the mania has given way to a harsh reality for those specialising in pure battery power. Xpeng and Nio's shares have both lost more than 70% of their value over the past three years.

However, Li Auto's stock gained nearly two-thirds over the same period. Consumers concerned with fully electric models' range and sticker price were readier to try the company's cars, helping sales jump. Hybrids also proved less susceptible to fluctuating battery material costs. A decision to hold off from expanding overseas was wise too, as policymakers in Europe and the U.S. push back against Chinese exports. While Li Auto on Monday reported earnings of 11.8 billion yuan ($1.64 billion) for 2023 after five consecutive quarters of positive earnings, Nio and Xpeng have yet to turn a net profit.

However, founder Li is not sitting back to enjoy the ride. In March his company will launch its first battery-electric vehicle. He's also venturing abroad by setting up a sales network in the Middle East, a region that is relatively open to Chinese investments.

While that sacrifices Li Auto's unique selling point, there are reasons to change direction now. For one, rivals are jumping on the hybrid wagon. Toyota Motor, itself a pioneer of the technology, is redoubling efforts in China, where BYD is piling on too. At the same time, although hybrids are enjoying a moment, the case for them is weakening as batteries become more powerful and affordable, and as fast-charging networks grow. Fully electric cars offer more potential to cut emissions, too, in the long run.

Li is also betting that the success of his strategy so far is about more than the power train. His brand specialises in designing cars for families. This niche is big business in the world's largest auto market: Ma Donghui, the company's president, estimates that the segment could yield up to 1 trillion yuan in sales for the marque by 2030 for models priced over 200,000 yuan.

Whether or not this calculus proves right, the company's 2024 sequel will be well worth watching.