China's EV boom faces a reality check: recent layoffs signal industry challenges

Opinion: Cars are almost becoming fast-moving consumer goods

China's electric vehicle (EV) industry is booming, offering a chance to become a global leader. But there's a catch: endless price wars among EV makers are heating up. Li Auto (NASDAQ: LI) and Tesla (in China) just cut staff to manage costs in this fierce competition.

This sounds similar to the "overcapacity" issue, which we covered in this newsletter in April. Could EVs be facing a similar problem? (In China, "involution" describes this phenomenon: intense competition and unequal resource distribution lead to a self-defeating cycle of ever-increasing effort with no real progress.)

In today's newsletter, I will translate an article from Lengjing, a finance and business news outlet owned by Tencent. (Some paragraphs may be shortened for clarity.) This article covers in-depth observations of the recent layoffs at Li Auto and their implications for China's EV market. I will also include some commentaries and data from BigOne Lab to help you get the latest on China's top EV makers.

Layoffs after glory

Back in early April, rumors started circulating online about layoffs at Li Auto. On April 3rd, Li Auto released an internal announcement, stating that they would optimize their current organizational structure.

However, during the May Day Beijing Auto Show, the buzz around new energy vehicles reached its peak, diverting attention away from the operational pressures faced by car companies. At the Li Auto booth, the debut of the L6 model attracted a lot of attention.

This spotlight on the company temporarily made people forget the controversies surrounding MEGA and its negative impact.

[ Baiguan: Many Chinese netizens responded negatively towards Li Auto's new car model MEGA and joked that it looks like a hearse. Mega is the first battery electric vehicle from Li Auto, and was recently launched on March 1st 2024. ]

Photo credit: https://www.sohu.com/a/762325083_115362

In reality, the past few months haven't been smooth for Li Auto. According to their latest financial report, in the first quarter of this year, Li Auto delivered 80,400 vehicles, a year-on-year increase of 52.9% but a quarter-on-quarter decrease of 39%. The company's revenue for the first quarter was 25.6 billion yuan, up 36.4% year-on-year but down 38.6% quarter-on-quarter.

After the auto show excitement died down, news of layoffs began to draw attention to the company's performance pressures. More layoff information revealed that over 400 employees from the sales and service operations department would be cut, the recruitment department would shrink from over 200 employees to 40-50, and the intelligent driving team would be reduced to less than 1,000 people.

"Layoffs are normal, not just for Li Auto, even Tesla is laying off people," said Zhang Ting (a pseudonym). She used to work for a big company and a few years ago joined a new energy vehicle company jointly formed by an internet company and a traditional car manufacturer.

Over the years, her company has been constantly adjusting its structure. She believes this is understandable for new industries and companies. "Look, Tesla has high-profit margins and big sales, and they are also laying off people."

Recently, the reversal of fate for Tesla's supercharging team left a deep impression on Zhang Ting. On April 29th, Elon Musk sent an internal memo announcing the departure of Rebecca Tinucci, the head of the Tesla Supercharger team, and Daniel Hoe, the head of new products, along with their entire team of about 500 people. But shortly after, Tesla began rehiring some of the Supercharger team members.

In Zhang Ting's view, expanding and adjusting simultaneously is characteristic of new energy car companies. Compared to Tesla, domestic new energy companies face greater operational pressures and a stronger sense of crisis.

"Tesla's layoffs are clearly aimed at reducing costs and increasing efficiency," explained Yan Jinghui, a member of the Expert Committee of the China Automobile Dealers Association. He stated that the development of the new energy vehicle industry has far exceeded expectations. At this stage, car companies will optimize their organizational structures and personnel based on their financial situations during expansion.

When discussing Li Auto's layoffs, Yan Jinghui described Li Xiang (founder and CEO of Li Auto) as a very enterprising yet calm individual.

Yan Jinghui believes that while Tesla handles its own production and management, many domestic new energy companies are still in collaboration and outsourcing stages, requiring more spending and facing more complex issues. He thinks that the structural adjustments of new energy companies require greater courage.

[ Baiguan: According to the job posting data we track across major online recruitment platforms in China, Li Auto has been expanding hiring rapidly since 2023H2. ]

Fierce competition in launching new models

Tesla and Li Auto's layoffs are related to their ambitious expansions not meeting expectations.

Li Auto has always been one of the "best-performing" domestic new energy companies. In 2023, Li Auto delivered 376,000 vehicles and achieved an annual revenue of 123.85 billion yuan, a significant increase of 173.5% compared to 2022. Importantly, the net profit exceeded 11.8 billion yuan, making it the third most profitable new energy car company after Tesla and BYD.

[Baiguan: Last year, we posted an analysis of online consumer sentiment across China's major social media platforms regarding their views on EV makers. Check out how Li Auto has successfully won over young urban families in China, despite not having the most cutting-edge technology. We recommend giving it a read, as despite the disappointing recent earnings results, the product design philosophy is still worth a look. ]

Why Li Auto wins out with not-so-superior technology

The good business situation led the usually cautious Li Auto to become somewhat aggressive.

In June 2023, in a letter to all employees, Li Xiang stated that in the coming years, Li Auto aims to achieve the highest sales among all luxury brands in the Chinese market, with annual deliveries of 1.6 million vehicles. Entering the fourth quarter, Li Auto set a goal to sell 800,000 vehicles in 2024.

Selling 800,000 vehicles a year, double the 2023 figure, requires a larger team. At the fall strategy meeting in September 2023, Li Auto decided on a large-scale recruitment plan, and departments started accelerating their hiring processes.

Public data shows that in July 2023, Li Auto's sales and service operations team had less than 200 people, but by early 2024, it had grown to nearly 1,000 people. The intelligent driving team grew from around 600 people in early 2023 to nearly 1,000 by early 2024.

"New energy car companies are like internet companies; when things go well, they expand quickly," analyzed Liu Min.

In Liu Min's view, the strategy of internet companies is to not miss any trend. When a new concept or model emerges, they recruit heavily and build teams. "When education and training became popular, they did education and training; when games became popular, they did games; when AI became popular, they did AI. If it works, great; if not, the team disbands on the spot."

New energy car companies have adopted this business approach, but instead of focusing on new businesses, they focus on new models.

"Fierce competition to launch new models" has become a characteristic of new energy car companies. In the past, launching a new model took traditional car companies a long time. A model like the Camry has been sold for over 40 years. But new energy car companies have greatly shortened this cycle. Lei Jun created the Xiaomi SU 7 from scratch in three years, shocking many in the industry.

"Cars are almost becoming fast-moving consumer goods. Previously, it took three or four months to launch a new car; now, they want to launch one every month," Liu Min sighed.

A large team is essential for quickly launching new models, but not every new car sells well. If sales are poor, the team behind it will be affected.

Today, in the context of new energy cars becoming fan-driven, whether a new car can stand out is full of uncertainty. MEGA was originally a battery electric vehicle MPV (MPV: minimum viable product) highly anticipated by Li Auto, but it was suddenly compared to a "coffin" by netizens, leading to a sales flop. Many believe that Li Auto's layoffs are related to MEGA's poor sales.

Unlike internet companies, the cost of launching new models for car companies is much higher, with longer development cycles, more involved supply chains, and less room for error.

Leaving the table means no chance of winning

Implications for EV makers, social media sentiment data, and Xiaomi's role in the market are covered next. You can also get free access by sharing us.