Source: Late Auto
Author: Zhao Yu

In November last year, we first introduced plans to enter Middle Eastern markets such as Saudi Arabia and the United Arab Emirates in 2024, initially transporting domestically produced vehicles directly to overseas markets for sale, and long-term plans to establish a network of direct sales stores and complete vehicle factories overseas. $Li Auto (LI.US)$ However, according to our understanding, the overseas expansion pace of Li Auto Inc. has significantly slowed down compared to the plan one year ago.

An informed source told us that Li Auto's management believes that overseas expansion requires more thorough preparation, such as hoping that the overseas models are designed exclusively for local consumers, with certain differences from the models available in the domestic market.

An informed source told us that Li Auto's management believes that overseas expansion requires more thorough preparation, such as hoping that the overseas models are designed exclusively for local consumers, with certain differences from the models available in the domestic market.

"li auto inc will not simply translate the LiDAR system language from Chinese to English, but will differentiate in terms of vehicle appearance, smart driving functions, and other configurations, and then push the product to overseas markets with a suitable brand." The individual said.

The complexity of the Middle Eastern market has exceeded the initial estimates of li auto inc. Another person close to li auto inc's overseas team analyzed to us that the reason for the slowdown in li auto inc's overseas expansion is not due to new negative factors, but rather because the timing is not yet mature.

"The Middle East is located at the crossroads of Europe, Asia, and Africa, with a very complex history, so nothing can be oversimplified." He said, and he also cited the recent distancing of the UAE's ai and cloud computing company, G42, from China and getting closer to the USA as an example, indicating that Middle Eastern countries are indeed friendly to China, but not exclusively, as Europe and America have always had a strong influence on the Middle East.

According to our understanding, the management of li auto inc believes that it is difficult for emerging Chinese car companies to enter the main markets of the USA and Western Europe in the short term. China, the USA, and Western Europe collectively occupy 85%-90% of the global luxury car market share. As a high-priced car brand, the strategic significance of li auto inc entering other countries or regions' automobile markets is not significant.

We have yet to receive a response from li auto inc officials regarding the information above as of the time of publication.

The Middle Eastern market is not as good as imagined.

During the earnings conference for the fourth quarter of 2020, Li Xiang, Chairman and CEO of li auto inc, stated that the overseas market is a market that li auto inc will inevitably enter.

The actual overseas actions of li auto inc can be traced back to three years ago. An informed source told us that in the second half of 2021, li auto inc was already preparing to enter the US market and had set up a team of about 30 people for this purpose. At that time, this team was mainly responsible for overseas market promotion, brand strategy, strategic analysis, data analysis, and more.

At the beginning of 2022, due to the suspension of going abroad, some members of the team were reassigned to domestic business, while some members resigned.

In 2023, Li Auto Inc. once again put going abroad on the agenda. In May of that year, Li Auto Inc.'s Senior Vice President Fan Haoyu said at a presentation in Silicon Valley, USA: "Going abroad is a topic that our company's (management) discusses several times a year... We need to go abroad before achieving a 30% market share in China, because if we wait until reaching 30% market share domestically to start this, it will be a bit late."

In February of this year, at Li Auto Inc.'s Q4 2023 earnings conference, Zou Liangjun reiterated the importance of overseas markets for Li Auto Inc., and is accelerating the progress of exploring overseas markets.

He also mentioned that Li Auto Inc. hopes to operate its own stores overseas, and has initiated the recruitment of local sales and service teams in Dubai. In the first half of 2024, Li Auto Inc. plans to establish dedicated after-sales service networks in Central Asia and the Middle East; in the fourth quarter, Li Auto Inc. will start overseas deliveries, first introducing the Li Auto Inc. L9 and L7 models locally.

In May of this year, at the Q1 2024 earnings conference, Zou Liangjun confirmed that Li Auto Inc.'s overseas expansion has slowed down, and the sales model has also changed from fully direct-sales to partially cooperating with dealers.

According to our understanding, there are multiple reasons why Li Auto Inc. has temporarily delayed its expansion into the Middle East.

Firstly, the new energy vehicle market in the Middle East is still in its early stages of development, and the current market size is relatively small.

Most Middle Eastern countries are major producers of oil, with low oil prices, which to a certain extent hinders the popularity of electric vehicles in the region. Even in the UAE with the highest penetration rate, the current new energy penetration rate is only about 3%, far below the global average of 20%.

According to the data from the automotive market research institution Mordor Intelligence, the market size of new energy vehicles in the Middle East is approximately $2.7 billion in 2023. This figure is equivalent to one percent of the size of the new energy vehicle market in China during the same period.

Secondly, the management of Li Auto Inc. is quite satisfied with the new car sales brought by parallel exports, so there is no rush to go overseas.

In the past two years, Li Auto Inc.'s L series models were mainly sold to overseas markets through parallel exports. In July of last year, Li Xiang once posted on Weibo saying: "Two weeks before July, over 200 cars were privately parallel exported, and after a detailed investigation, it was found that the main exports were to Central Asia and the Middle East." He also replied to netizen comments, stating, "We have no right to restrict the demand for private parallel exports."

The parallel export of cars refers to traders transporting domestically produced cars to overseas countries or regions for sale, profiting from the price difference. However, because traders are not authorized by the car brands, overseas consumers lack guarantees in terms of vehicle maintenance and care.

As far as we know, in 2023, Li Auto Inc. sold around 0.03 million cars through parallel exports in overseas markets, accounting for approximately 10% of the total sales. This year, it is expected that the new cars exported to overseas markets by Li Auto Inc. through parallel exports will also account for around 10% of the total annual sales.

Lastly, the intense competition in the domestic market has also to a certain extent affected Li Auto Inc.'s decision to go overseas.

In the first two quarters of this year, Li Auto Inc. held shares of the new energy market in China priced above 0.2 million yuan at 13.6% and 14.4% respectively, lower than the 16% in the fourth quarter of last year. A source close to Li Auto Inc.'s sales system told us that the Li Auto Inc. management believes that in the tighter macroeconomic environment and intensified market competition, Li Auto Inc. needs to focus resources and primarily target the domestic market.

Exporting and going overseas are two different matters, the latter being more long-term and challenging.

The Chinese auto sales are showing a "mixed situation of internal cooling and external heat". According to the statistics from the China Association of Automobile Manufacturers, from January to September this year, domestic auto sales reached 17.259 million vehicles, a decrease of 2.4% year-on-year; while auto exports reached 4.312 million vehicles, an increase of 27.3% year-on-year.

In the current situation of sustained price wars and increasing competitive pressure in the domestic auto market, many independent brand car companies are accelerating their overseas expansion. For example, Chery exported 0.829 million vehicles in the first three quarters of this year, surpassing SAIC to rank first among Chinese car companies; BYD exported 0.302 million vehicles in the same period, with a year-on-year growth of 96.3%.

In 2023, China has surpassed Japan to become the country with the highest annual automobile export volume. However, according to the compilation by World's Top Exports, China ranks third in terms of the value of car exports priced in US dollars (77.7 billion USD), lagging behind Germany (177.2 billion USD) and Japan (110.9 billion USD). Moreover, while the overall trend of automobile exports is positive, Chinese car companies are also facing higher policy barriers.

On October 4, the European Commission announced that it had passed a vote on imposing anti-subsidy tariffs on imported electric cars from China. The final results and specific measures of the anti-subsidy investigation will be released before October 30. Earlier on May 14, the US government announced a 100% tariff on imported electric cars from China. The original US automobile tariff rate was 2.5%, but after the additional tariff was implemented, Chinese car companies are facing a total US tariff rate of 102.5%.

An individual who serves several independent Chinese brand car companies informed us that the automobile industry is a cornerstone industry in Europe. In addition to tariffs, domestic car companies are also observing whether there will be other restrictive policies from Europe and the United States in the future.

On October 5, at a conference held in Berlin, Germany, the Co-President of Xiaopeng Motors, Gu Hongdi, mentioned that Xiaopeng is actively evaluating the feasibility of establishing local factories in Europe. BYD is preparing to use more European suppliers and assemble battery packs in its factories in Hungary and Turkey. Chery, Zeekr, and other brands also have similar plans.

Currently, the official website of Li Auto mainly recruits overseas positions such as overseas service center managers, senior maintenance experts for overseas teams, with work locations primarily in Almaty, the largest city in Kazakhstan.

Editor/Jeffy