Leapmotor’s Gross Profit Margin Increases by 20 Percentage Points: Further Room for Price Reduction

Aug 28, 2023, 15:42pm2023/08/28 15:43:29 Pandaily

As a second-tier domestic new force in the automobile industry, Leapmotor has released its performance report for the first half of this year after a price reduction in the second quarter.

On August 25th, Leapmotor disclosed its mid-term performance report for 2023 on The Stock Exchange of Hong Kong. The data shows that in the first half of this year, Leapmotor’s total revenue was 5.81 billion yuan (approximatly ＄800 million), a year-on-year increase of 14%. Among them, vehicle sales revenue was 5.8 billion yuan and service revenue was approximately 10 million yuan (＄1.4 million). During the reporting period, Leapmotor’s net loss was 2.28 billion yuan (＄320 million), a year-on-year narrowing of 7%. Adjusted net loss was 1.94 billion yuan (＄260 million), a year-on-year narrowing of 17%.

Since its launch, Leapmotor has been known in the industry for offering high configuration at a low price. Currently, Leapmotor has three models available for sale. Among them, the T03 is a pure electric small car priced between 60,000 and 90,000 yuan (＄8,234-＄12,350). The C11 is a medium-sized SUV priced between 150,000 and 220,000 yuan (＄20,584-＄30,190). The C01 is a mid-to-large-sized sedan priced between 150,000 and 230,000 yuan (＄20,584-＄31,562). In order to cope with increasingly fierce competition, Leapmotor launched a lower-priced extended-range version of the C11 in March this year.

Due to the impact of product switching, in the first half of this year, Leapmotor’s new car deliveries were only 44,500 units, a decrease of 14% compared to the same period last year when it was 52,000 units. At the beginning of this year, Leapmotor set a delivery target that is double compared to last year, which is 200,000 units. This target is considered average among domestic new energy vehicle manufacturers. As of July, Leapmotor has delivered a total of 58,800 units with an achievement rate below 30% for the whole year.

However, according to Maggie Jing, the Senior Vice President and Secretary to the Board of Directors at Leapmotor, in Q1 this year, Leapmotor has completed the transition to its 2023 lineup. In the first half of this year, the C-series models accounted for 80% of Leapmotor’s sales. Compared to last year when they mainly relied on the entry-level model T03, with the support of C01 and C11 models, Leapmotor’s average selling price per vehicle has reached around 130,000 yuan (＄17,839).

With the changes in product portfolio, the gross profit margin of Leapmotor has significantly improved. Data shows that in the first half of this year, Leapmotor’s overall gross profit margin was -6%, an increase of 20 percentage points compared to the same period last year. In addition, according to management disclosure, in Q2 of this year, Leapmotor’s gross profit margin has reached -5.2%. As a result, in the first half of this year, Leapmotor’s operating cash flow turned positive for the first time and reached 150 million yuan (＄20.6 million).

In this regard, Maggie Jing explained during the conference call that the optimization of Leapmotor’s gross profit margin is partly due to product structure optimization and also benefits from cost control. According to Maggie Jing, in the first half of the year, Leapmotor reduced its production costs by 15%. This reduction includes not only battery cost reductions that are enjoyed by the industry as a whole and a 3%-5% decrease in overall supply chain costs but also other internal cost reductions.

Firstly, this year, due to the expansion and capacity improvement of the Jinhua factory, Leapmotor’s manufacturing costs have significantly decreased compared to last year. At the same time, Leapmotor has further increased its efforts in vertical integration of the supply chain, reducing supply chain links and minimizing material requirements. According to Maggie Jing’s statement, currently, including electronic and electrical architecture, self-developed components by Leapmotor account for more than 30% of the total vehicle BOM cost.

On July 31st, Leapmotor unveiled its self-developed next-generation integrated electronic and electrical architecture called “Four-Leaf Clover”. According to Zhou Xuning, the head of Leapmotor’s electronic and electrical module, besides enhancing vehicle performance, the “Four-Leaf Clover” architecture will significantly reduce the cost of new vehicles. Under this architecture, the number of controllers in the new vehicle will be reduced from 42 to 28, and the overall wiring harness can be shortened from 1800 meters to 1500 meters.

More importantly, the “Four-Leaf Clover” architecture has achieved deep integration of software and hardware, not only realizing decoupling between software and hardware but also achieving decoupling and iterative development in software layers. Currently, the generalization rate of this architecture has exceeded 90%, while Tesla’s generalization rate is only 75%. According to the plan, the ‘Four-Leaf Clover’ architecture will be applied to the upcoming LYNK & CO B-series models, with the first model B11 making its debut at the Munich Motor Show in September this year.

In addition, in order to further reduce costs, Leapmotor has made reductions in the updated models since March of this year. For example, taking the entry-level model of the 2023 C11 electric version as an example, not only has the battery capacity been reduced by 7 degrees, but also the battery type has changed from ternary lithium batteries to lithium iron phosphate batteries. In addition, the number of sensors related to intelligent driving has been reduced from 28 to 10, and previously standard panoramic sunroofs in high-end models have become optional.

According to Wu Qiang, the co-president of Leapmotor, an A-class car that will be launched around the end of 2024 will reduce some unnecessary configurations without affecting user perception. In addition, internal cost reduction measures have been steadily implemented in business operations. These factors combined will drive up gross profit margin. According to the plan, Leapmotor hopes that the future models’ gross profit margin can reach or exceed the industry average level of 25%.

“Currently, our main focus is still on seizing the market, so the overall gross profit margin of the vehicles will be set slightly lower,” Maggie Jing further added. Currently, the sedan market where C11 is located has lower sales compared to the SUV market where C11 is positioned. However, Leapmotor will launch a range-extended version of C01 in September or October. It is expected that with the boost from the range-extended version of C01, every model in Leapmotor’s C series will achieve positive gross profit margin in the second half of this year.

However, the management of Leapmotor also emphasized that it is very difficult for the T03 to achieve positive gross profit below 100,000 yuan (approximatly ＄13723). In the next step, Leapmotor will gradually control the sales volume of T03 in China and export it to overseas markets such as Europe. According to Maggie Jing’s introduction, currently, T03 has obtained small-scale certification in Europe and is being sold in four or five countries there. Next year, this model is expected to obtain large-scale certification in Europe.

At the beginning of this year, Leapmotor announced its goal to achieve overall gross profit positive. Regarding this, Maggie Jing stated at the performance meeting that achieving gross profit positive is still Leapmotor’s main objective for this year. “Before our company went public, we implemented an incentive plan internally, which corresponds to two targets: achieving a positive gross profit margin by 2024 and achieving breakeven by 2025. If these two targets are not met, team options will become invalid.”

The problem is that the price competition in the car market has also brought great uncertainty to Leapmotor. In response to this, Maggie Jing said that the price fluctuations in the market have been very obvious in July and August, and it is expected that the price war will continue in the second half of the year. Leapmotor has already made preparations for this. Currently, reducing prices for high-end models of the C series does not significantly affect the improvement of subsequent gross profit margins, and there is still room for further price reductions for Leapmotor.

In this situation, Leapmotor has also relaxed its target for gross profit margin. At this performance meeting, Leapmotor has adjusted the criteria for achieving positive gross profit from an annual basis to a monthly basis by the end of the year. In addition, Wu Qiang gave the market a preventive injection during the meeting. He stated that even if gross profit margins turn positive in the domestic market in the near future, it may only be at single-digit levels, and therefore future profit growth will still need to come from overseas markets.

According to Maggie Jing’s introduction, Leapmotor mainly focuses on three overseas markets: Europe, Southeast Asia, and the Middle East. The gross profit margin in these overseas markets is significantly higher than that in the domestic market. However, it will not be until the middle of next year that the overseas market starts to pick up. In addition to vehicle sales, Leapmotor is also seeking technological cooperation abroad. Its strength in the 100,000-level vehicle segment has been recognized by the industry and there are potential opportunities for collaboration.

Previously, the founder of Leapmotor, Zhu Jiangming, also stated that based on the synergies and cost advantages brought by independent research and development in all areas, in the future, Leapmotor will not only be a vehicle manufacturer but also a technology solution provider. Up to now, Leapmotor has launched four cooperation models ranging from components to integration. In addition to the Jetta brand under Volkswagen Group, recently there have been reports that Leapmotor is also in contact with Stellantis.

Regarding the rumors of collaboration, Maggie Jing did not directly respond during the performance meeting. She stated, “We will not comment or confirm on specific matters, but potential collaboration opportunities have always existed. We will actively seek such collaborations for our benefit. On one hand, it can expand our business volume and generate direct income. On the other hand, it can increase brand influence and help launch high-end car models.”

According to the plan, in the second half of this year, Leapmotor will launch the C01 extended-range version and its first B-class car, the B11. Among them, the B11 is the first model built on a four-leaf clover architecture and is also the first strategic model aimed at globalization. The estimated delivery time is in the first half of next year. In addition, Leapmotor will also launch two new cars next year and a total of seven models by 2025. All new cars will fall within the price range of 150,000 to 250,000 yuan (＄20,584-＄34,307).

Reflected in the financials, in the first half of this year, Leapmotor’s research and development expenses increased by 56% to 820 million yuan (＄113 million) compared to the same period last year. Including research and development, Leapmotor’s overall expenditure increased by 65% to 2.04 billion yuan (＄280 million), with a corresponding total expense ratio of 35%. In response to this, Maggie Jing stated that Leapmotor’s research and development investment is relatively balanced, with over 400 million yuan (＄55 million) spent in both Q1 and Q2. It is expected that the total expense ratio for the second half of the year will be on par with the first half, leading to further narrowing of losses.

It is worth noting that Leapmotor has slowed down its retail system expansion plan. At the beginning of this year, Leapmotor had 582 stores, and the official channel expansion plan was set at 800 stores. However, in the first half of this year, the number of Leapmotor stores decreased by more than 20. During this performance meeting, Maggie Jing also admitted that Leapmotor will no longer add new stores this year but instead focus on improving single-store sales capabilities from an operational perspective.

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