Leapmotor has truly established the "Uniqlo of the automotive industry" model.

It is reported that Leapmotor Chairman Zhu Jiangming has repeatedly mentioned the development orientation of the "Uniqlo of the automotive industry" and advocated demystifying the automobile. "Ultimately, cars will simply be durable consumer goods and transportation tools. Approaching the industry from the perspective of cars as transportation tools may confer greater advantages. Our brand positioning is to provide users with higher-configured, better-quality products that are good but affordable."

Multiple "report cards" have indeed demonstrated the feasibility of this model. Recently, Leapmotor disclosed its mid-year report, revealing that in the first half of 2024, the brand delivered 86,696 vehicles, an increase of 94.8% year-on-year, which also drove revenue growth of 52.2% year-on-year to RMB 8.85 billion, ranking among the forefront of new forces in terms of growth.

In addition, according to the latest data, Leapmotor delivered 30,305 vehicles in August, an increase of 113.5% year-on-year and 37.1% month-on-month. Clearly, Leapmotor is breaking through the ranks as a dark horse.

However, given the intense industry competition, it may be even more necessary for Leapmotor to continuously enhance market confidence and demonstrate its long-term growth value.

The "Uniqlo of the automotive industry" under rational consumption

Why has Leapmotor's "Uniqlo of the automotive industry" model been successful? It is simply because the product layout aligns with consumer market demand.

As everyone knows, the current younger generation has become the main consumer force for new energy vehicles, accounting for more than 70% of the market, especially those born after 1995. According to the National Information Center, over the next eight to nine years, out of every 100 people buying cars, approximately 40% will be post-1995 individuals.

In the consumption patterns of this demographic, the mindset of "getting a better experience for less money" often prevails. According to Autohome's Reputation Channel, practical factors such as cost-effectiveness, high configuration, and adequate space are popular topics of concern for these users.

These related needs have also created a vast niche market. In February of this year, the largest price segment in the new energy passenger car market was RMB 150,000-200,000, accounting for 24.6% of the market share; followed by RMB 350,000-400,000, accounting for 16.9%; and RMB 300,000-350,000, accounting for 12.3%.

Focusing on Leapmotor, its products are primarily priced within the RMB 150,000-200,000 range. Zhu Jiangming once stated, "Our C series models are all concentrated in the price range centered around RMB 150,000. We hope to deepen our presence in this price bracket with the C series, first occupying a significant market share in this segment and achieving monthly sales of over 30,000 vehicles. Only in this way can we be more focused."

Taking the C16 as an example, it is reportedly Leapmotor's first medium-to-large six-seater SUV, with all models equipped with Qualcomm's SA8295P chip. The high-end intelligent driving version is equipped with lidar and Orin-X chips, offering four major advantages: high performance, efficiency, intelligence, and durability; the launch price ranges from RMB 155,800 to 185,800, while other brands in the same segment generally price their products above RMB 250,000 on average.

Due to its outstanding quality-to-price ratio, financial reports indicate that the C16 was an instant hit upon its launch, with cumulative bookings exceeding 10,000 vehicles in its first month; in August of this year, sales of this model exceeded 8,000 units.

It is worth mentioning that to implement such a product strategy and achieve sustainable operations, manufacturers need a methodology to control costs from the source. In this regard, Leapmotor is anchored on full-stack in-house research and development.

According to Zhu Jiangming, 60% of the brand's components are self-researched and manufactured, and the component commonality rate for C series products reaches 88%. The benefits of this full-stack in-house research and development model are evident. On the one hand, it reduces intermediate supplier links and allows for reasonable cost control, thereby enabling cost savings to be passed on to customers; on the other hand, having control over the supply chain means faster product iterations can be achieved.

It is reported that Leapmotor's full-stack in-house research and development technology architecture has been upgraded from LEAP 1.0 to LEAP 3.0, integrating the latest technological achievements in six key areas: electronics and electrical systems, batteries, electric drives, intelligent cockpits, intelligent driving, and vehicle architecture. Meanwhile, related R&D expenses are quite significant. According to financial reports, Leapmotor's R&D expenses for the first half of this year were RMB 1.221 billion, an increase of 48.4% over the same period in 2023.

This has also impacted the company's profit level to some extent. Financial reports show that the company incurred a loss of approximately RMB 2.212 billion in the first half of the year. Of course, the role of market competition cannot be overlooked.

Specifically, the current expansion rate of the new energy vehicle market has shown signs of slowing down. According to the China Passenger Car Association (CPCA), in the first seven months of this year, cumulative sales of new energy vehicles reached nearly 4.99 million, an increase of 33.7% year-on-year, compared to an increase of 36.2% in the same period last year, 90% in 2022, and over 160% in 2021.

Against this backdrop, the normalization of "price wars" is evident, with major manufacturers hoping to launch products with a high quality-to-price ratio to stimulate market demand and drive sales growth. As BloombergNEF Intelligent Mobility Analyst Lv Jinghong stated, "The average price reduction for domestic new energy vehicles has increased from RMB 6,700 in the first quarter of last year to RMB 16,000 in the first quarter of this year, with two-thirds of new energy vehicles on the market priced below similar gasoline-powered vehicles."

For Leapmotor, facing the intense market competition, how can it open up greater profitability while adhering to its quality-to-price ratio strategy?

Leapmotor's "Lightweight International Expansion"

Zhu Jiangming has publicly stated that Leapmotor aims to achieve sales targets of 250,000 to 300,000 vehicles in 2024. However, focusing solely on the domestic market would obviously be difficult to achieve a larger sales scale. According to CPCA data, in July of this year, retail sales of passenger cars nationwide reached 1.72 million units. Among them, new energy vehicle retail sales were 880,000 units, with a penetration rate of 51.1%. It can be foreseen that as the market approaches saturation, the market share available to relevant manufacturers will continue to shrink.

In this context, expanding into global markets has become a necessary move for automakers. According to some data, there is still considerable room for expansion overseas. Clean Technica data shows that global sales of new energy vehicles hit a record high in 2023, exceeding 13 million units, an increase of 35.7% year-on-year, but accounting for only 16% of the overall market share (with pure electric vehicles accounting for 11%), and emerging markets such as Vietnam and Thailand are still in their cultivation stage.

Due to the vast overseas prospects, China's new energy vehicle industry is continuing to accelerate its overseas expansion. According to the "China Automotive Export Market Analysis for January-July 2024" released by Cui Dongshu, Secretary-General of the CPCA, China exported 1.17 million new energy vehicles from January to July 2024, an increase of 25% year-on-year.

It is reported that new energy vehicle enterprises are increasingly inclined to invest and build factories overseas. For example, BYD is preparing to build factories in Turkey and Cambodia, and its factories in Uzbekistan and Thailand began production in the first half of the year; in addition, Great Wall Motor, Nezha, and GAC Aion have also made moves to build factories overseas.

The reasons behind this are relatively clear. Firstly, considering the differences in consumer markets, by developing and selling products tailored to local needs, automakers can better meet the demands of local consumers and thereby expand their market share. Secondly, to control operating costs, modes such as complete vehicle exports incur high transportation and tariff expenses, which can significantly increase the burden on automakers' overseas expansion. Establishing production bases overseas, on the other hand, shortens the supply chain and provides greater flexibility in automakers' export operations.

However, returning to Leapmotor, it has chosen a path of "lightweight international expansion," one manifestation of which is the establishment of joint ventures. For example, this year, Leapmotor has partnered with Stellantis, the world's fourth-largest automotive group, to establish Leapmotor International, a joint venture.

Regarding this, Carlos Tavares, CEO of Stellantis, stated, "The mission of Leapmotor International is to sell Leapmotor-branded vehicles in overseas markets outside of China. From September this year, the joint venture will sell the Leapmotor T03 and C10 electric vehicle models through 200 dealerships in nine European countries; starting from the fourth quarter of this year, it will enter the Indian, Asia-Pacific, Middle East and Africa, and South American markets. Over the next three years, Leapmotor International will launch at least one new model each year."

Specifically, the advantages of this asset-light model are also prominent.

In the process of expanding into overseas markets, automakers need to invest significantly in building production bases and sales channels, which can impose considerable cost pressures and easily lead to homogenization in the overseas expansion of domestic automakers. In this context, automakers leveraging overseas local enterprises' sales networks, after-sales service systems, and other business resources for overseas expansion is undoubtedly more stable and effective. As sales volumes continue to expand, the profit growth curve is also expected to truly take shape.

Based on this, analysts at Changjiang Securities have expressed positive outlooks for Leapmotor's future development, stating, "From 2024 to 2026, Leapmotor's sales will reach 250,000, 400,000, and 480,000 vehicles, respectively, and high unit profits from overseas sales will contribute significantly to the company's profits."

On the whole, Leapmotor currently holds multiple aces, whether it's the "Uniqlo model" based on cost pricing or the asset-light path of overseas expansion, both of which are indispensable elements for long-term growth. However, what will ultimately guide it further is its tangible product strength.

Source: HKG Stock Research