Li Auto reported significant year-over-year margin compression during the second quarter of 2026 as lower vehicle sales and a changing product mix weighed on profitability, even as several key measures improved sequentially from the first quarter.
Vehicle deliveries totaled 98,330 during the quarter, down 11.5% from 111,074 in the prior-year period.
Deliveries nevertheless improved from 95,142 in the first quarter, providing some indication that demand began stabilizing sequentially as Li Auto moved through a significant product transition.
Vehicle sales declined 16.7% year-over-year to approximately $3.5 billion.
Total revenue fell 15.1% to approximately $3.8 billion.
The larger decline in vehicle sales relative to deliveries suggests that changes in product mix and average selling prices also affected revenue during the quarter.
Profitability came under substantially greater pressure than the top line.
Vehicle margin declined to 9.4% from 19.4% in the prior-year quarter, a reduction of 1,000 basis points.
Although that represented a significant sequential recovery from 6.1% in the first quarter, vehicle margin remained less than half the level reported a year earlier.
Li Auto said the changes in vehicle margin primarily reflected product mix.
The company’s shifting lineup has altered the mix of vehicles being delivered, which can materially affect profitability because different models carry different pricing, component costs and margin characteristics.
As customers move between vehicle models and Li Auto introduces updated products, the resulting mix can create significant quarter-to-quarter changes in average margins.
Gross profit fell 53.3% year-over-year to approximately $418 million.
Gross margin declined to 11% from 20.1% in the prior-year quarter.
That represented a decrease of approximately 910 basis points year-over-year.
Sequentially, however, gross margin improved from 7.9% in the first quarter.
The quarter therefore showed two contrasting trends.
Compared with a year earlier, profitability deteriorated sharply.
Compared with the immediately preceding quarter, several important metrics improved.
Vehicle margin increased by 330 basis points sequentially, while overall gross margin improved by 310 basis points.
That sequential recovery suggests some of the most severe pressure experienced during the first quarter began to moderate, even though profitability remained well below historical levels.
Lower gross profit flowed through to operating results.
Li Auto recorded an operating loss of approximately $339.1 million during the quarter, compared with operating income in the prior-year period.
Net loss was approximately $251.3 million, compared with net income a year earlier.
Both the operating loss and net loss improved from the first quarter, providing another indication that financial performance was beginning to recover sequentially.
Still, the move from profitability a year earlier to substantial operating and net losses underscores the financial cost of the company’s current product transition.
Li Auto is in the middle of a major refresh of its vehicle lineup.
The company launched an updated Li L8 in June and introduced a new Li L6 in July.
Those launches are intended to strengthen the company’s competitive position as China’s electric vehicle market remains intensely contested across pricing, technology and product features.
Product refreshes can create temporary disruption because customers may delay purchases ahead of new models, while manufacturers simultaneously incur launch, marketing and manufacturing costs.
Older models may also require promotional activity or pricing adjustments as companies clear inventory ahead of refreshed vehicles.
Those dynamics can contribute to both weaker sales and margin pressure during transition periods.
Li Auto’s second-quarter results appear to reflect some of those challenges.
The company’s sequential improvement in deliveries and margins suggests the business may be moving beyond the weakest part of the transition, but the year-over-year comparisons remain difficult.
The new Li L6 and updated Li L8 will therefore be important to the company’s effort to restore both volume growth and healthier vehicle margins.
Li Auto is also investing heavily in proprietary artificial intelligence and computing technology as it seeks to differentiate its vehicles through software.
The company showcased its MACH M100 chip and MACH VLA machine intelligence model as part of its broader technology strategy.
Developing proprietary chips can give automakers greater control over the computing architecture used for advanced vehicle functions.
It can also potentially reduce dependence on external semiconductor suppliers while allowing hardware and software to be designed together around specific vehicle requirements.
The MACH VLA model represents another part of Li Auto’s push into vehicle intelligence.
As automakers compete increasingly on assisted-driving capabilities, in-car AI and software-defined features, machine intelligence is becoming a larger component of vehicle differentiation.
Li Auto’s investment in its own hardware and models indicates that the company views AI as a core strategic capability rather than simply a feature sourced from third parties.
Those investments can strengthen the company’s competitive position over time, but they also require substantial research and development spending.
That creates another near-term tension for Li Auto as it works to restore vehicle profitability while simultaneously investing in future products and technology.
The company’s operating loss of approximately $339.1 million shows that current gross profit is not sufficient to fully absorb its broader operating expense base.
Improving vehicle margins is therefore likely to be especially important for returning the company to sustainable operating profitability.
Vehicle margin historically has been one of the most closely watched indicators of Li Auto’s financial performance because it measures the profitability of the core automotive business before broader corporate expenses.
The decline from 19.4% to 9.4% represents a substantial deterioration.
However, the recovery from 6.1% in the first quarter suggests that the trajectory improved during the second quarter.
If new models gain traction and product mix becomes more favorable, Li Auto may have an opportunity to rebuild margins from current levels.
The company also continues returning substantial capital to shareholders despite the near-term earnings pressure.
As of the earnings release, Li Auto had repurchased approximately 91.7 million Class A ordinary shares, including American depositary shares, for roughly $631.5 million under its $1 billion share repurchase program.
That means the company had utilized approximately 63% of the authorized program.
The buyback represents a significant capital commitment at a time when the company is simultaneously funding product launches and substantial technology investments.
Share repurchases reduce the number of shares outstanding and can increase the ownership percentage of remaining shareholders.
They can also signal management’s belief that the company’s shares represent an attractive use of capital.
However, the capital allocation decision becomes more notable when a company is reporting operating losses and undergoing a significant business transition.
Li Auto’s willingness to continue repurchasing shares suggests management remains confident in the longer-term prospects of the company despite current margin pressure.
The remaining approximately $368.5 million of authorization also gives the company room to continue the program if management chooses to do so.
The second-quarter results therefore illustrate a company in the middle of a significant transition.
Li Auto continues to generate billions of dollars in quarterly vehicle sales and delivered nearly 100,000 vehicles during the period, but the economics of those deliveries have changed sharply from a year earlier.
Vehicle sales fell 16.7%, vehicle margin dropped by 1,000 basis points and gross profit declined by more than half.
At the same time, sequential trends provide some encouragement.
Deliveries increased from the first quarter, vehicle margin improved from 6.1% to 9.4% and gross margin rose from 7.9% to 11%.
Operating and net losses also narrowed sequentially.
The next several quarters will therefore be important in determining whether the second-quarter improvement marks the beginning of a more durable recovery.
The new Li L6 and updated Li L8 could help improve demand and product mix if customer adoption strengthens.
Meanwhile, investments in the MACH M100 chip and MACH VLA model could strengthen Li Auto’s longer-term position in AI-enabled vehicles and intelligent driving.
For now, however, the company’s financial results remain under significant year-over-year pressure.
Revenue declined to approximately $3.8 billion, gross profit fell to roughly $418 million and the company recorded a net loss of approximately $251.3 million.
The sharp reduction in vehicle margin remains the most significant financial issue.
Li Auto’s ability to rebuild that margin while maintaining delivery growth will be central to restoring profitability.
The second quarter showed early signs of sequential progress, but with vehicle margin still less than half its prior-year level, the company remains in the early stages of that recovery.
KEY QUOTE:
“Our enhanced product portfolio positions us well for growth.”
Xiang Li, Chairman and Chief Executive Officer of Li Auto
