Intro: Weak demand and rising costs challenge China’s electric vehicle industry.
Beijing
The long-term profit outlook for Chinese electric vehicle (EV) manufacturers is coming under mounting pressure as slowing consumer demand and rising operational costs weigh heavily on the sector.
After several years of rapid expansion, investors are increasingly questioning whether the growth momentum can be sustained in what is now a crowded and more competitive market.
Sales data toward the end of 2025 underscored the slowdown in the world’s largest EV market. Overall electric vehicle sales in China failed to rebound from a prolonged slump, signaling cooling demand even as automakers continue to launch new models at an aggressive pace. Among the worst affected was Li Auto, which reported a sharp decline in deliveries. In November 2025, the company delivered just over 33,000 vehicles, marking a nearly 32 per cent drop compared to the same month a year earlier. The decline raised concerns about weakening demand, even for established domestic brands.
A recent report by The New York Times highlighted deeper structural challenges facing China’s EV industry. Intense price competition has squeezed profit margins across the sector, while government subsidies that once fueled explosive growth are gradually being scaled back. Without the cushion of generous state support, companies are now confronting the true costs of operating in a saturated marketplace.
Faster production cycles have added to the pressure. New models are introduced so frequently that no single automaker can maintain a technological or design advantage for long. This dynamic has made it harder for firms to differentiate themselves and command premium pricing.
China’s largest EV maker, BYD, reflects many of these challenges. The company’s extraordinary growth was partly driven by years of strong government backing. However, experts suggest that the market is nearing saturation in major urban centers where charging infrastructure is well developed. According to John Paul MacDuffie of the Wharton School, many Chinese carmakers may have already reached most consumers for whom owning an EV is practical.
In smaller towns and rural regions, limited charging infrastructure continues to restrict adoption. As a result, companies must now focus on building brand loyalty and encouraging repeat purchases—an area where traditional automakers have decades of experience.
BOX
Key factors driving profit pressures
* Weakened demand & overcapacity: The market has hit a slowdown, particularly with weakened consumer demand in smaller, rural areas, resulting in a potential industry sales drop.
* Declining subsidies & tax hikes: From January 1, 2026, the full purchase tax exemption for New Energy Vehicles (NEVs) was halved, reducing incentives, while government, a 20,000 yuan trade-in subsidy, saw uncertainty.
* Intense price wars & regulation: Despite fierce competition prompting a price war, the State Administration for Market Regulation (SAMR) banned manufacturers from selling vehicles below cost in February 2026 to stabilize the market.
* Manufacturer distress: Only a few, such as BYD, remain strongly profitable, while roughly 50 unprofitable firms are forced to restructure or shut down.