China’s Electric Vehicle Market Faces Uncertain Outlook Amidst Slowing Sales and Shifting Subsidies
The end of 2025 saw a significant slowdown in sales for China’s electric vehicle (EV) sector, casting a shadow of uncertainty over the market for the coming year. A weaker-than-anticipated year-end rush, coupled with declining deliveries from major manufacturers, is fueling concerns of a renewed price war. Industry insiders suggest that manufacturers, particularly those offering more affordable models, will face immense pressure to implement further price reductions as a revised trade-in subsidy mechanism takes effect.
The prevailing bleak outlook might also compel authorities to intervene and curb the escalating discount war. This is largely due to the precarious financial situation of many EV assemblers, with few currently able to report profitability.
“As deliveries failed to live up to expectations, all major players would have to slash prices of their vehicles to reduce their inventories at the beginning of 2026,” observed Zhao Zhen, a sales director at Shanghai dealer Wan Zhuo Auto. “Competition is getting fiercer this year because of weaker demand for new cars.”
Key Players Report Declining Deliveries
The sales figures for December 2025 painted a concerning picture for some of the industry’s leading companies. BYD, the world’s largest EV manufacturer, reported 420,398 deliveries in December, marking an 18.3 per cent decrease compared to the previous year. This decline represented the fourth consecutive month of falling sales for the company.
Li Auto, a prominent player in the premium EV segment, delivered 44,246 units to customers in December, a significant drop of 24.4 per cent from the same period in 2024. It is noteworthy that both BYD and Li Auto are among the select few carmakers in mainland China that have managed to maintain profitability.
Missed Expectations and Shifting Incentives
Industry analysts and manufacturers had anticipated a substantial surge in EV deliveries in December. The expectation was that consumers would rush to make purchases before Beijing’s planned phasing out of tax incentives and the reduction of subsidies in 2026. However, the preliminary sales results revealed that actual sales fell far short of these optimistic forecasts.
According to data from the China Passenger Car Association, sales of pure electric and plug-in hybrid vehicles reached 1.19 million units between December 1 and December 28, representing a modest 5 per cent increase year-on-year. This figure starkly contrasted with analyst forecasts that predicted year-on-year growth for December to exceed 30 per cent. For context, in December 2024, EV deliveries had climbed by a robust 32.2 per cent, reaching 1.46 million vehicles.
The Impact of Evolving Government Policies
Two significant policy shifts by the Chinese government are expected to influence the market dynamics:
- Vehicle Purchase Tax Adjustment: Mainland Chinese buyers had been exempt from a 10 per cent vehicle purchase tax on eligible green car purchases through December 31, 2025, as part of Beijing’s broader initiative to reduce emissions. From January 1, 2026, this tax has been set at 5 per cent, scheduled to remain in effect until the end of 2027, before reverting to 10 per cent in 2028.
- Revised Trade-in Subsidy Program: The government also announced the renewal of its trade-in subsidy program. The updated scheme allows buyers who are replacing their existing petrol or electric vehicles with new cars to receive a cash subsidy of up to 20,000 yuan (approximately US$2,858) per unit.
Under the revised program, EV buyers opting for replacement vehicles are eligible for a subsidy equivalent to 12 per cent of the new car’s price, with a cap of 20,000 yuan. This was detailed in a circular jointly issued by the National Development and Reform Commission and the Ministry of Finance. Buyers of new petrol-powered vehicles, on the other hand, can receive a 10 per cent subsidy, capped at 15,000 yuan.
This represents a notable shift from the previous two years, where the program offered flat subsidies of 20,000 yuan for EV purchases and 15,000 yuan for petrol cars, contingent upon consumers selling or scrapping their used vehicles. The transition to a percentage-based subsidy means that buyers of more affordable vehicle models are likely to receive less financial support compared to the previous year.
Pressure on Lower-Priced Manufacturers and Future Forecasts
Analysts believe this revised subsidy mechanism will disproportionately affect manufacturers of lower-priced vehicles. Wang Bin, an analyst at Deutsche Bank, noted in a research report that companies such as BYD, Leapmotor, and Geely could face increased pressure.
In 2025, BYD, the dominant player in China’s EV market, delivered 4.6 million vehicles, an increase of 7.7 per cent year-on-year. However, this represented its slowest growth rate since 2020. Looking ahead, Deutsche Bank has estimated that mainland passenger car sales could experience a 5 per cent contraction in 2026. Similarly, JPMorgan forecasts a potential decline of 3 to 5 per cent in deliveries by Chinese automotive groups for the current year.
The Inevitability of Price Competition and Industry Consolidation
Industry experts anticipate that a new wave of price competition is almost inevitable. “A new round of price competition looks inevitable as carmakers, especially EV builders, try to defend market share,” stated Eric Han, a senior manager at Shanghai consultancy Suolei. “Assemblers and dealers will watch the government’s stance closely as they consider further price cuts.”
Beijing has previously expressed concerns about the repercussions of an EV price war and had indicated in late May that it would penalize manufacturers that initiated aggressive discounting practices. This warning had led major companies to temper their steep price cuts and loan concessions.
Despite these efforts, analysts foresee an acceleration of industry consolidation. It is projected that approximately 50 loss-making EV manufacturers on the mainland could be compelled to scale back operations or exit the market within the next five years. This trend is attributed to persistent overcapacity and a gradual reduction in government support.
Stephen Dyer, Greater China co-leader and head of Asia automotive practice at AlixPartners, commented in July that only about 15 Chinese EV brands, representing roughly 10 per cent of the total, are likely to achieve profitability over the next five years. This is due to the sustained price competition that continues to erode profit margins across the sector.
