Li Auto Inc. (LI) Q4 2021 Earnings Call Transcript

Li Auto Inc. (LI 6.69%)
Q4 2021 Earnings Call
Feb 25, 2022, 7:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello ladies and gentlemen, thank you for standing by for Li Auto's fourth quarter and full year 2021 earnings conference call. [Operator instructions] Today's conference call is being recorded. I'll now turn the call over to your host, Janet Chang, investor relations director of Li Auto. Please go ahead, Janet.

Janet Chang -- Director of Investor Relations

Thank you, Amber. Good evening, and good morning, everyone. Welcome to Li Auto's fourth quarter and full year 2021 earnings conference call. The company's financial and operating results were published in the press release earlier today and were posted on the company's IR website.

On today's call, we have our president, Mr. Kevin Yanan Shen; and our CFO, Mr. Johnny Tie Li, to begin with prepared remarks; our founder and CEO, Mr. Xiang Li will join for the Q&A discussion.

Before I continue, please be reminded that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today.

Further information regarding risks and uncertainties is included in certain filings of the company with the U.S. Securities and Exchange Commission and announcements published on the website of the Hong Kong Stock Exchange and the company. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that Li Auto's earnings press release and this conference call includes discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures.

Please refer to Li Auto's press release, interim results announcement, and the fourth quarter and full-year 2021 results announcement, which contain a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our President. Please go ahead, Kevin.

Kevin Yanan Shen -- President

Thank you, Janet. Hello, everyone. And thank you for joining our call today. 2021 was a pivotal year for new energy vehicle sales in China.

During this year, China's auto industry witnessed the notebook substitution of EVs for ICE, internal combustion engine vehicles, evidenced by Ev's rapid growth, in contrast to the sluggish sales trend of ICE vehicles. This led to growing penetration of EVs in overall passenger vehicle sales. According to China Passenger Car Association, in 2021, the retail sales of new energy passenger vehicles increased by 169% year over year to nearly 3 million. Well, ICE vehicle retail sales decreased by 5.6%.

The penetration rate for retail sales of new energy passenger vehicles rose substantially to 20.8% in the fourth quarter of 2021 versus 12.6% and 5.8% for the first nine months of 2021 and the full year of 2020. With mobility transformation trend pointing to increase the smart electric vehicle use, we are proud to forge ahead as a pioneer. As an industry leader, we are ready to serve more families with continuing product and technological innovations. We achieved deliveries of 35,221 units in the fourth quarter of 2021 up 143.5% year over year.

Driving total revenue to RMB10.6 billion or $1.7 billion growing 156.1% year over year. The robust fourth quarter performance took our full year deliveries to 90,491 up 177.4% year over year, and the total revenues to RMB27 billion or $4.1 billion, up 185.6% year over year. Li ONE was the first domestic branded premium model priced above RMB300,000 in China to achieve the 10,000 monthly deliveries. In January 2022, we have delivered over 10,000 Li ONEs for the third consecutive month, achieving a new record.

We believe this is another milestone for Li ONE to qualify as a blockbuster model and will be a benchmark for all our future models. We are excited to Li ONE weekend, the premium passenger vehicle market in China, targeting family users and emerge as one of the best prices. We attribute our vehicle success to our outstanding product definition capabilities. The extended range six-seater SUV has gone from being questioned to mainstream.

While our full screen full vehicle interactive voice system has set a new industry benchmark. This further proof our user's recognition of Li ONE pioneering and energy replenishment solution us adopting battery power for urban commuting, and the recharge with range extender during long distance traveling. And highlights our users endorsement of the brand new in-vehicle driving and riding experience Li ONE offers in this autonomous era. Our product definition capability are built on the shared vision in our organization and a solid foundation of comprehensive capability including technological strengths, performed consumer insights, and systematic execution.

And we are confident, we can apply this to our future models and continue to provide our users with solution beyond what they have demanded. We aim to grow our model lineup significantly in the coming years. Well, advancing our R&D efforts as product provides the competitiveness mode for business and technology for the most of our products. Well, production and the delivery improved.

As most of our chief supply chain partners resumed normal operations challenges to the overall LED supply chain will likely become long lasting, affecting chips, batteries, and potential other auto parts given the accelerating development of the smart electric vehicle industry. Going forward, together with our supply chain partners, we will continue to work on multiple measures such as advanced planning and diversify the supply chain to mitigate supply chain risk. In light of the ongoing industry wide semiconductor shortage, we expect the total deliveries in the first quarter of 2022 to be between 30,000 to 32,000 vehicles. Turning to the financial side, we maintained strong performance with a robust and the steady gross margin of 22.4% in the fourth quarter, growing 4.9% over -- year over year.

This was present by our strong vehicle sales performance and consistently effective cost management measurements. Even as we accelerated the pace of R&D spending to 11.6% of revenue, and grew our sales network by adding 53 retail stores in the fourth quarter. We achieved the profitability as well as a record-breaking RMB3.8 billion operating cash flow, which is a significant reflection of our operating team excellency. In 2021, we significantly expanded our direct sales and servicing network, almost quadrupling our number of retail stores to 206 in 102 cities from 52 in 41 cities as of the end of 2020.

By the end of January, we had 220 retail stores in 105 cities, as well as 276 servicing centers, and Li AUTO authorized body and paint shops operating in 204 cities. We aim to provide our users with more convenient, efficient, and pleasant purchasing and user experience by strengthening our online operations as well as continually adding physical platforms close to our users. We plan to further enlarge our foot point and target reaching 400 retail stores by the end of this year to meet the growing market demand for NEV national wide supported by consumers rising NEV adoption and our upcoming new model launches in 2022 and award. Moving to our product optimization and R&D efforts.

In December 2021, we released the OTA 3.0 update to all our Li ONE users, further enhancing the in-car experience for both drivers and passengers. This upgrade include the Navigation on ADAS and Automatic Emergency Braking AEB features, making us the third automotive OEM globally to develop its own full stack NOA capability. As of January 31, 2021, we have provided NOA to more than 70,000 family users. And during the Spring Festival holiday, we accumulated over 2 million kilometers of NOA mileage with an ADAS-equipped user base at the leading scale in China.

We will continue to increase the R&D of ADAS-related technology, and we believe we are well-positioned to push the boundaries of assisted driving technologies. The upgraded AEB with vision perception and everything enables Li ONE to identify roadworks and highway traffic accident sites, and prompt users in advance to avoid major accidents. Li ONE was awarded 2021 Car of the Year by Li Xiang Tong Xue our rebound auto information platform in China, due to its outstanding AEB performance exhibited in the C-NCAP AEB test, known as the most strict vehicle testing in China by automotive professionals. During the test Li ONE was the only assessed model in the final run, capable of accurately identifying crossing vehicles and two-wheelers.

This further reflects our full-stack sales development capabilities. The OTA 3.0 update also included an upgraded version of the Li ONE smart in-car voice assistant. Li Xiang Tong Xue, which now recognize this and executes more voice instructions for in-car entertainment, navigation, and the vehicle setting. We will continue to conduct R&D to develop safer car with smarter product features that can be helpful for all members of the family.

Young and old, as we remain steadfast in our commitment to creating homes on the move that bring happiness to the entire family. We are also happy to share that we have been added to the Hang Seng Tech Index under the indexes newly added category of autonomous technology. The inclusion will take effect on March 7 this year. We have also been included in the Hang Seng Composite Large Cap Index since August 2021.

As a technology leader in smart mobility, our addition to the Hang Seng Tech Index endorses the strength of our full stack self-developed ADAS and smart cabin technologies, as well as recognizes our capability to create value for our investors. We look forward to bringing more families, our Li ONE premium experience that offers safer, simpler driving with all the amenities, and technology people want in a premium vehicle. In the second quarter of 2022, we will unveil our next mass produced vehicle model. A full-size premium extended-range electric SUV.

Deliveries of this model will start in the third quarter of this year. In 2023, we plan to launch two BEV models that support ultrafast charging. By then, our ultrahigh voltage charging solution will be readily available to our users, effectively shortening the charging time and addressing mileage anxiety. As we remain committed to developing new models, autonomous driving, smart cockpit, and others.

Our R&D expense for 2021 tripled year over year to RMB3.3 billion or US$515.7 million accounting for 12.2% of revenue. We will continue to expedite our R&D -- excuse me, R&D progress with the support of our extending R&D team, which is comprised of more than 3,400 personnel as of the end of 2021, representing 139.8% year-over-year growth, we target to maintain our R&D investments at the level of 10% of revenue and above going forward. Turning to our production capacity, we're expanding our capacity at the Changzhou factory and constructing our Beijing manufacturing base. Once the expansion and construction are completed, the design production capacity at these two manufacturing sites will reach 500,000 units annually in 2023, and around the 750,000 with double shift.

Meanwhile, we are excited to share that in December 2021, we entered into a Strategic Cooperation Framework with the Chongqing municipal government for establishing our new manufacturing base. We will make relevant disclosure of the Chongqing manufacturing base when appropriate. We enhance the production capacity together with our enriched product line will position us well to capture an increasing share of the booming EV market, laying a solid foundation for our strong growth in the years to come. With the launch of our second major vehicle just around the corner and continued strength in order for our Li, we expect 2022 will be another pivotal year of growth for Li, for Li Auto.

Our pioneering spirit tells us to keep pushing the boundaries of what is possible and that's what we are doing. The market is right for advancement, and we are in the right place at the right time with the right strategy, the right skill sets, the right business model, and the right vehicle to drive us to the next destination. In 2022, we expect that the EV market to see its greatest number of drivers yet. And we are all ready for it.

Now, I will turn this call over to our CFO, Mr. Tie Li to review our financial performance in the fourth quarter.

Johnny Tie Li -- Chief Financial Officer

Thank you, Kevin. Hello, everyone. I will now walk you through some of our financial results for the fourth quarter of 2021. Due to time constraints, I will address financial highlights here and encourage you to refer to our earnings press release for further details.

Total revenues in the fourth quarter of 2021 were RMB10.62 billion or $1.67 billion, representing an increase of 156.1% from RMB4.15 billion in the fourth quarter of 2020 and the increase of 36.6% from RMB7.78 billion in the third quarter of 2021. This included RMB10.38 billion, or $1.63 billion from vehicle sales which increased 155.7% year over year, and 40.5% quarter over quarter. The increase over the fourth quarter of 2020 and the third quarter of 2021 was mainly due to the increase of vehicle deliveries in the fourth quarter. Revenues from other sales and services were RMB244.7 million, or $38.4 million in the fourth quarter of 2021 representing an increase of 174.5% year over year, and a decrease of 37.1% quarter over quarter.

The year-over-year increase in revenue from other sales and services was mainly attributable to increased sales of charging stalls, accessories, and services in line with higher accumulated vehicle sales. The decrease in revenue from other sales and services over the third quarter of 2021 was due to the sales of automotive regulatory credits in the third quarter, which didn't recur in the fourth quarter. Cost of sales in the fourth quarter of 2021 was RMB8.24 billion, or $1.29 billion, representing an increase of 140.8% year over year, and an increase of 38.2% quarter over quarter. Gross profits in the fourth quarter of 2021 was RMB2.38 billion, or $373.5 million growing 228.5% compared with the fourth quarter of 2020 and 31.3% compared with the third quarter of 2021.

Vehicle margin in the fourth quarter 2021 was 22.3%, compared with 17.1% in the fourth quarter of 2020 and 21.1% in the third quarter of 2021. The increase in vehicle margin over the fourth quarter of 2020 was primarily driven by higher average selling price attributable to the increase of vehicle deliveries of our 2021 Li ONE since its release in May. Our gross margin in the fourth quarter of 2021 was 22.4%, compared with 17.5% in the fourth quarter of 2020 and 23.3% in the third quarter of 2021. Operating expenses in the fourth quarter of 2021 were RMB2.36 billion or $369.7 million, representing an increase of 193.2% year over year, and an increase of 23.4% quarter over quarter.

Research and development expenses in the fourth quarter of 2021 were RMB1.23 billion or $193 million representing an increase of 228.7% year over year and the increase of 38.4% quarter over quarter. The increase in research and development expenses over the first quarter of 2022 and the third quarter of 2021 was primarily driven by increased employee compensation as a result of growing number of research and development staff as well as increased costs associated with new product developments. Selling, general and administrative expenses in the fourth quarter of 2021 were RMB1.13 billion or $176.7 million representing an increase of 162.2% year over year and the increase of 10.2% quarter over quarter. The increase over the first quarter of 2020 was primarily driven by increased employee compensation as a growing -- as a result of growing number of staff as well as increased marketing and promotion activities.

And rental expenses associated with the expansion of the company's distribution network, income from operations in the fourth quarter of 2021 was RMB24.1 million or $3.8 million, compared with RMB78.9 million loss from operations in the fourth quarter of 2020 and RMB97.8 million loss from our operations in the third quarter of 2021. Net income in the fourth quarter of 2021 was RMB295.5 million or $46.4 million, compared with RMB107.5 million net income in the fourth quarter of 2020 and RMB21.5 million net loss in the third quarter of 2021. And now turning to our balance sheet and cash flow. Our cash and cash equivalents, restricted cash, term deposits, and short-term investments totaled RMB50.16 billion or $7.87 billion as of December 31st, 2021.

Operating cash flow in the fourth quarter of 2021 was RMB3.84 billion, or $602.1 million. Free cash flow was RMB1.62 billion, or $253.5 million in the fourth quarter of 2021. As of December 31st, 2021, we had a total of 11,901 employees. For more of our 2021 full year financial results, please refer to our earnings release for further detail and now for our business outlook.

For the first quarter of 2022, the company expects the delivery to be between 30,000 and 32,000 vehicles representing an increase of 138.5% to 154.4% from the first quarter of 2021. The company also expects the first quarter total revenues to between RMB8.84 billion and RMB9.43 billion or $1.39 billion and $1.48 billion, representing an increase of 147.2% to 163.7% from the first quarter of 2021. This business outlook reflects the company's current and the preliminary viewpoints of business situation and market conditions, including the ongoing industrywide semiconductor shortage, which are all subject to change. I will now turn the call over to the operator to start our Q&A session.

Thank you.

Questions & Answers:

Operator

Thank you. [Operator instructions]. Our first question comes from the line of Fei Fang from Goldman Sachs. Please ask your question.

Fei Fang -- Goldman Sachs -- Analyst

Great. Thanks. Let me ask my questions in Chinese first and I'll translate into English. [Foreign language] Now let me just quickly translate it into English.

The Chinese new energy vehicle industry has various product launches in the past 12 months. Some are successful, some didn't really quite work out. So what have you learned from the industry and what do you think are the critical factors for products that succeed? The second question is on manufacturing capacity in store openings the 750 to 1000 units production capacity by the end of 2023. 400 stores by the end of this year is our ambitious target.

There's a large numbers from where you are right now that doesn't mean that you are ready to scale up new products after unveiling those in the rest of the year? Thank you.

Xiang Li -- Founder and Chief Executive Officer

[Foreign language]

Unknown speaker

First of all, this is Li Xiang. I'm translating for Li Xiang. I would like to answer this question as a product manager myself. In fact, in the industry, there's a very established product logic.

We start with the users, the users care about two things, the first of all is their own needs. And there are three levels of needs, starting with the first level, which is their superficial needs. And then going down further, there's the hidden needs. And eventually, their needs that the users don't even know themselves.

The first of all, we need to understand these needs very well. And the second point is the price point that they're willing to buy our products at. And with these things, we can basically draw a circle. And as a product manager, our goal is to build products that will overlap as much as possible with this circle of user needs.

And the product really focuses on five different things. The first one is product performance, we need to deliver a product that performs well on many different levels. And secondly, is safety and security. Third is quality.

Fourth is price. And fifth is supply, especially in an industry that's been growing so rapidly. Supply is especially important, as has been seen in the industry in the past few years. So overall, if we can build a product that can balance these five factors and match with the circle of user needs, then the bigger the overlap, the greater the sales.

And on the contrary, if the overlap is very small, no matter what the vision is, from the company standpoint, sales will always suffer. So we believe a good product, a good product performance is never a coincidence. It's based on very established and solid product capabilities of the company. Thank you.

Kevin Yanan Shen -- President

Fei Fang, this is Kevin, let me take the second question about our preparation for the coming years. Actually, we have a very strong confidence in our new products that we're going to launch in this year and next year. Therefore, we are very, very aggressive in terms of getting our capacity prepared. Right now, from the sales side, we -- as mentioned, we have a 400 store plan by end of this year.

We'll have more on next year. And also not only a store, but also human resources of the sales force, we are also preparing. From the capacity perspective actually, not only our own capacity, we are working with our supply chain partners to adding capacity in their factories also, and also as we should all know that the ICE supply is constrained. So, therefore, we already started to secure upstream ICE resources by giving advanced planning to our supply chain partners.

Thank you.

Operator

Thank you for your question. Our next question comes from Tim Hsiao from Morgan Stanley. Please ask your question.

Tim Hsiao -- Morgan Stanley -- Analyst

[Foreign language] So just two quick questions. The first question is about our ecosystem strategy. We noticed several start-up peers start we're planning to expand the operation go up into non-vehicle business. For example like smartphone manufacturing, we're buying vehicles in order to broaden and enhance the user ecosystem of the smart TV.

So from Li Auto's perspective, how should we think about the company's ecosystem development? And my second question is about the cost management because we expect the general inflation or price hikes of the batteries and other team materials to continue this year. So how should we wage the potential impact or any qualitative information we can take as a reference of, we'll assess the potential impact? Thank you.

Xiang Li -- Founder and Chief Executive Officer

[Foreign language]

Unknown speaker

As the founder of the company, we have been focused from day one on the smart electric vehicle market. And we believe that we've just finished our zero to one stage. And there's still way too many things for us to focus on, then to expand into other sectors. So there are many things that we can do on the product application technology and system levels that I believe will take the next five to 10 years for us to complete.

And we will very -- be very focused on this market going forward for at least the next 10 years. And we believe that in 10 years, we can reach the level of where Apple is in smartphones and smart devices. So that's our overall strategy. And then speaking about space, in-car space, there are so many things to do.

We're not talking about expanding into other types of space. Because we believe that even for the space in car, there's still many things to do. One of the opportunities is, the experience is for activities where the experience is still not as perfect in other space, we believe there's an opportunity to move them into cars. And because of our integration capabilities, and because we can fully control many of the hardware and software, we can provide much better experience and they are the way it is elsewhere, including content and hardware.

These are all big opportunities to tackle that we will continue to focus on in the foreseeable future.

Kevin Yanan Shen -- President

Tim, this is Kevin, let me take the second question about the cost challenge. In fact, when we plan for this year's financial budget, actually we already took into consideration of the potential cost increase, especially as we should all know that the battery is going to the cost will increase. Yes, on the other hand, but actually with the volume substantially increased this year. Also, we will achieve more economy of scale.

So, therefore, overall, we are -- although we have many challenges, but we are still targeting to achieve a higher margin gross margin than last year.

Operator

Thank you. Our next question comes from Bin Wang from Credit Suisse. Please ask your question.

Bin Wang -- Credit Suisse -- Analyst

[Foreign language] Actually, I've got several small. Question number one is about you just mentioned in March 7, you actually got electrical for a handset technology impacts. That means you can be eligible for the Shenzhen Hong Kong stock connect to get a source for money? That's number one. And number two is about only the credit, you're actually looking around RMB200 million revenue for the credit in the '21.

So I guess was the proper amount in the '22, because you got almost more than 1% to 2% growth in '21 that is the most also help for margin and profit. And that's why they got a last minute to secure its bidding. Can you explain what's the reason behind the secure bidding? Thank you.

Johnny Tie Li -- Chief Financial Officer

Yeah. This is Johnny. Thank you, Bin Wang. And first of all for the connect.

According to the latest press release by our index, we have been included in the large-cap index, and also to be included in the connect, we need to meet a relevant requirements on market cap and the transaction volume. And we expect to be included in the connect in middle March after we are listed for six months and plus 20 transaction days. It will be around that. And for the EV credit.

For 2021, we have over about two to three times of our EV scores compared with 2022. That you called from the sales volume, but as everyone may aware, the per score price will be lower than last year. So we are still negotiating with the potential payer of those EV costs. Yes.

Hopefully, that will come up around the third quarter that's like last year, yes. And for the second question, I think we can just refer to the press release. Thank you.

Bin Wang -- Credit Suisse -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Ming-Hsun Lee from Bank of America. Please ask your question.

Ming-Hsun Lee -- Bank of America Merrill Lynch -- Analyst

[Foreign language] Yes. So, I have two questions. The first question is how do you see the supply chain management and also the chips at high situation in 2022? And the second question is you just OTA a last year and how do you think -- what is the most important function for next step for you to offer to your customers to enhance the user experience?

Kevin Yanan Shen -- President

Hi, Lee. This is Kevin, let me take the first question. In fact, we are also impacted by the Bosch supply this month and also last month. Not only the ICE shortage from SC but also the COVID-19 hit.

So going forward in the coming months actually we see the situation will getting improved by the fewer supply will be very tight. So we'll continue to do what we have been doing. First, qualify more supplies. Second, give the vast extend into our supply chain partners.

Third, basically to increase our own production flexibility so that whenever the supply is available we can very quickly turn into final product to deliver to our customer. Yes, second question?

Xiang Li -- Founder and Chief Executive Officer

[Foreign language]

Unknown speaker

Since we started delivering NOE feature on our 2021 model year on Li ONE, we completed the full feature deliver release on the model by the end of last year. And our goal has always been to deliver good experience for the customers. And there's actually large amounts of work for us to deliver this good experience including adapting HD map and continue to fine-tune. So we will continue this work to continue to improve -- make improvements and safety.

And our goal is to increase safety standards across the entire driving experience, not just when the car is in NOA mode. So which is the reason why we started to develop many of the technologies in-house. And our ultimate goal is to increase safety by decreasing accidents by 80% across the entire lifecycle of our vehicles, which is why we make the feature standard and continue to iterate the feature over time. So the above is about the current solution on our Li ONE which runs on two horizons J3 chips.

And speaking of X01, which will be launched this year, there will be significant improvements not only in sensors but also in computing power and safety redundancies. It will bring the safety of entire vehicle over the lifecycle to a whole new level. And it will make the drivers in their family safe not only when the car is in NOA mode, but also when the drivers driving themselves.

Operator

Great. Thank you. Our next question comes from Paul Gong from UBS. Please ask your question.

Paul Gong -- UBS -- Analyst

[Foreign language] So two questions, the first question is regarding the future differentiation. Right now the several EV start-ups all have the uniqueness. How do you think going forward when everyone is working on the Autonomous driving, everyone is going to use LiDAR, everyone is going to produce BEV as well. So what would be the key competitiveness, is it further innovation? Is that revolution of the technology or is it more focused on the efficiency of the operation, the second question is regarding the globalization.

We have observed that some peers has already expanded to European markets, how you also think of the globalization, both in the near-term plan as well as in the long run?

Xiang Li -- Founder and Chief Executive Officer

[Foreign language]

Unknown speaker

By the end of 2021, we've pretty much validated ourselves and finished the completed the zero to one stage as a company, we've been focusing on, we've been validating ourselves in the family youth buyers' market, and pretty much established the industry ceiling as the number one seller in the medium to large size SUV market. And our key recipe for this success is our focus on the family market, our efficiency, our R&D capabilities, and our software R&D capabilities. This is validated through sales and having while having a very low SG&A expense level. And in the next couple years, while we completed our one to 10 stages, as many of you are well aware of 2025 goals in volume and margins.

And so to reach this goal, we will continue to play to our strengths, which is two things, one is we will -- we understand the family market very well and we will expand our product line across the 200,000 to 500,000 price range by providing our products to more families in more segments and markets. The second one is our efficiency and R&D capabilities. As you can see, our R&D and new store opening pace has been on par with many of our competitors. But in the meantime, we're still delivering very healthy and profitable financial results.

In the meantime, which we admit we have many weaknesses, which is what we will be working on over the next few years. First of all is R&D, we actually have already made many improvements, we brought in our autonomous driving and voice recognition in-house by building a very strong talented team. In meantime, we've established our new capabilities in zonal controllers, like E-architecture, all of these are brought in-house today. So we believe that we will continue to build these R&D capabilities in the technical area.

In the meantime, the other weakness has been supply or area we want to work on is supply given the growth in the market, we'll be working on supply and as well as manufacturing capabilities. And finally, on the topic of intelligent technologies, we believe that there's no shortcut in the market. One thing we've observed with intelligent technology is that it has three characteristics. First of all, users have no particular feeling of the technology when they buy the product.

And secondly, if that experience is bad after they buy the product, they will very easily give up the product and lose all their confidence. And thirdly, if the product is actually good, they will very quickly find out that they cannot live without the product. So to make sure that we can deliver competitive products in the Intelligent technology area, we will focus on three capabilities which we have, we believe the company is very well established. And first of all is the product capability.

It's very important to understand the user needs and continue to deliver products that will exceed their needs. And second one is software and AI capabilities, which ultimately is the competition on talent, the bench of talent. We believe the most successful companies are the ones that can attract the best talents are the ones where the best talents will like most prefer to work in. And third one is face system capability.

And more specifically, the ability to develop operating systems, and we believe with these three abilities, we will be able to maintain our core competency in both autonomous driving and intelligent cockpit. Thank you.

Kevin Yanan Shen -- President

Paul, let me take the second question about the globalization. So basically, for our long-term strategy, we believe will ultimately compete in the global market, that's for sure. And for the very near future, very near-term, we want to focus on the China market now. And as I mentioned several times, we already have a dedicated team for the globalization strategy.

We are doing three things. First, to identify the potential market for our product, second to analyze what we're doing the right product mix for this product, and the third, how to develop a model so that we can achieve meaningful market share when we enter this market. So right now this team dedicated team is still developing the overall strategy. Thank you, Paul.

Operator

Thank you. Our next question comes from Yingbo Xu from CITIC. Please ask your questions.

Yingbo Xu -- CITIC Securities -- Analyst

[Foreign language] I have two questions about the product. One is about we see the penetration rate goes higher than similar like that, or 20%. And that means more consumers understand more about electronic vehicles, vehicles. What kind of change would that take for the users and also we know that could you please give us more color about Li X01 and then second question is about the BEV product that will be launched next year.

We think that's from EREV to BEV is a huge change. Could you please give us some description of stages of this new product? Thank you.

Xiang Li -- Founder and Chief Executive Officer

[Foreign language]

Unknown speaker

First of all, on the first question, as we reach higher penetration, new energy vehicle market is actually good news for the company, the same product methodology will continue to apply. And as I said earlier, we have deserved our users, there are three levels of demand, the first level are the explicit demand, the second level are the implicit demand, many, which are their pain points. And the third level demands that they don't even know exists. The way we observe these demands is that we analyze and observe the users on rational and emotional levels and understand what they want, and build products that will exceed their needs.

And talk about the X01, our core theme has been two things, one thing is to upgrade things that users really wanted on the one and wanting to ask to their Li ONE product. And secondly, we're delivering on new demand that are not yet or not yet met in the market today. These are things that users do not even realize that they want, but the moment that they see their products, they'll realize this is what I actually wanted. So the methodology will continue to remain the way it is, although the user needs are changing, and we will continue to follow that very closely.

So these are some comments on our next new vehicle on our range-extended vehicle -- range-extended vehicle platform. Next, I'll make a few comments on the electric vehicle market, electric vehicle product. So the electric vehicle we will focus on three different things. First of all is 4C charging capability.

And this most important component will be the battery, we've actually spent a lot of efforts to co-develop a battery with our key supplier because the entire architecture and cell and charging capability, heat management system will all be different. So we've done intensive, extensive work in this area to ensure that the mass production of this battery will be successful. The second component of our high voltage platform is the 850 volt EV platform, which includes many different things ranging from electric motors, integrating PCBC of rising voltage, lowering voltage, heat management, battery management system, all these things have never been provided before as a company and the third thing is a 400-kilowatt charging station and charging poles. We've done a lot of work to develop these charging poles to ensure that we can provide seamless experience for our users which connects the battery, the vehicle platform, and the charging station.

With these products, we will be able to charge the cars in 10 minutes and deliver 400 kilometers of range.

Operator

Great. Thank you. Our next question comes from Jiong Shao from Barclays. Please ask your question.

Jiong Shao -- Barclays -- Analyst

[Foreign language] Thank you management for taking my questions. My question is really about strategic positioning and product positioning. Management talked about the focus on having the best product for the family use. Is the family sort of use case still the focus remained the focus for the new products, including the BEV products.

If it is, would that be enough for the sort of longer-term sustainable growth and strategic positioning for the company? Thank you.

Xiang Li -- Founder and Chief Executive Officer

[Foreign language]

Unknown speaker

So the answer is yes. We will continue to focus on this market because we pretty much only validate ourselves at one particular price point in this market. But if you look at the entire market, we define the Li ONE product in 2016, the market size is only about two million units annually. And last year, the market has grown to six million, and we expect that by 2025, the market size will reach 10 million units per year.

So this is a very healthy market for three reasons. One is it has very big growth as we talked about earlier. And second one is that there's enough or bill of materials in the market for us to deliver good experience for the users. And thirdly, it can still deliver very healthy gross margin for us as a company.

So we believe this is a very attractive market that we'll continue to focus on. So far, we've only really taken a very small scoop from the market accounting for about 2% market share in the market. Here we're talking about all passenger vehicle market, not just NEV because we believe Li ONE not only competes with new energy vehicles, but we have the potential to replace all existing passenger vehicles above RMB200,000 price points. So there's still much work to do and our goal is to eventually reach at least 20% of the market, which is the time by which we will have finished our one to 10 stage as a company.

Operator

Great. Thank you. So as we reached the end of our conference call, I would like to turn the call back to the company for closing remarks. Ms.

Janet Chang, please go ahead.

Janet Chang -- Director of Investor Relations

Thank you once again for joining with us today. If you have any further questions, please feel free to contact Li Auto's investor relations team. Then that's all for today. Hope you have a great weekend.

Operator

[Operator signoff]

Duration: 82 minutes

Call participants:

Janet Chang -- Director of Investor Relations

Kevin Yanan Shen -- President

Johnny Tie Li -- Chief Financial Officer

Fei Fang -- Goldman Sachs -- Analyst

Xiang Li -- Founder and Chief Executive Officer

Unknown speaker

Tim Hsiao -- Morgan Stanley -- Analyst

Bin Wang -- Credit Suisse -- Analyst

Ming-Hsun Lee -- Bank of America Merrill Lynch -- Analyst

Paul Gong -- UBS -- Analyst

Yingbo Xu -- CITIC Securities -- Analyst

Jiong Shao -- Barclays -- Analyst

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