(Yicai) Nov. 28 -- Chinese carmaker Li Auto slipped into the red for the first time in almost three years in the third quarter, mainly as a result of supply chain bottlenecks and costs related to the mass recall of its Li Mega multi-purpose vehicles.

The net loss was CNY624.4 million (USD87.7 million) in the three months ended Sept. 30, compared with a net profit of CNY2.8 billion a year ago, the Beijing-based firm’s earnings report showed on Nov. 26. Gross margin narrowed to 16.3 percent from 21.5 percent.

Revenue fell 36 percent to CNY27.4 billion (USD3.8 billion), as vehicle sales plunged 37 percent to CNY25.9 billion. Li Auto delivered 93,211 vehicles in the period, down 39 percent.

Chief Financial Officer Johnny Li attributed the margin squeeze to the estimated cost of the Li Mega recall and higher production costs per car because of lower output. Gross margin would have been 20.4 percent, if the recall cost were factored out, he said on the firm’s earnings conference call.

At the beginning of the month, the market regulator ordered a recall of more than 11,400 Li Mega vehicles, nearly half of those the electric vehicle startup has delivered, after coolant-corrosion problems were found that could lead to battery fires. The move followed a blaze involving one of the vehicles in Shanghai.

Describing the quarterly earnings as "mixed," founder and Chief Executive Li Xiang unveiled a major strategic reset for the company's second decade. He said that the professional management model more suited to mature firms such as Apple or BMW is mismatched with the fast changes driven by the artificial intelligence era.

Li Auto will immediately revert to an entrepreneurial model, he said, citing Nvidia and Tesla as examples.

Li also criticized what he called the industry’s ongoing “parameter wars” -- competing over range and vehicle size -- as wasteful. Instead, he said Li Auto will anchor its long-term strategy in embodied AI, aiming to turn its cars into intelligent robots.

“Only if we choose embodied AI can we really change the life of our users," he pointed out, adding that the firm's self-developed M100 chip and new AI system will begin mass production next year.

Li Auto is navigating a difficult shift from an extended-range EV lineup to full battery EVs. President Ma Donghui acknowledged supply chain constraints for the Li i6 and Li i8 BEVs.

The i6 will adopt a "dual supplier strategy" for batteries starting this month, according to Ma. Its monthly production capacity should stabilize at 20,000 early next year.

Addressing the impending phasing out of China’s purchase tax incentives for new energy vehicles, Ma expects a "pull forward effect" late this year, followed by a dip in the first quarter of next year. To offset this, Li Auto will introduce a new “peace-of-mind” buying scheme covering tax differences for orders placed before year-end.

For this quarter, Li Auto expects to deliver between 100,000 and 110,000 vehicles and achieve revenue of CNY26.5 billion to CNY29.2 billion.

Despite the third-quarter loss, Li Auto maintains a strong cash position, with CNY98.9 billion in reserve, which will underpin its heavy investment in embodied AI and autonomous driving technologies, according to its management team.

Editor: Futura Costaglione