Summary of Key Points
In the first half of 2026, the domestic automobile manufacturing sector faced a difficult situation where it was exploited on both ends: it had to pay “intelligence taxes” to intelligent driving suppliers and “battery taxes” to battery/lithium mine suppliers. The average profit margin plummeted to just 1.5%, the lowest in nearly a decade, with many car companies reporting losses (four companies anticipating losses of over 9 billion yuan each), while the upstream lithium mining companies all made profits. To regain their bargaining power, car companies have begun to develop their own battery and intelligent driving technologies. Policy changes (such as the reinstatement of the battery consumption tax) are also pushing for the integration of the industry chain. However, the short-term imbalance in profits is unlikely to change, and in the medium to long term, the industry will see a rapid consolidation. Leading companies may be able to redistribute profits through vertical integration.
I. Car Companies Losing Profits Heavily: Average Profit Margin at 1.5%, Four Companies Anticipating Losses of Over 9 Billion Yuan
The first half of 2026 was particularly tough for car manufacturers, with their profit margins falling to a record low of 1.5%. According to data from the China Association of Automobile Manufacturers:
- Widening Losses: Seres reported a profit of 754 million yuan in the first quarter but then lost over 2 billion yuan in the second quarter, anticipating a loss of 1.5-1.8 billion yuan for the whole half-year. GAC Group anticipates a loss of 4.06-4.57 billion yuan, with a significant increase in losses compared to last year. BAIC BluePark and Jianghuai Automobile also expect losses of 1.77-1.97 billion yuan and 740 million yuan respectively, totaling over 9 billion yuan in expected losses.
- Even Profitable Companies Seeing Declines: Great Wall and Changan Automobiles have seen their profits halved. Great Wall’s net profit decreased by 59%-63% year-on-year, and Changan’s by 58%-68%, due to factors such as rising raw material costs and exchange rate fluctuations.
- Price Wars Contributing to Losses: Despite calls from three departments to avoid unregulated price wars, industry revenue grew by 1.4% from January to May, but costs increased by 2.3%, resulting in a 20% drop in profit margins to a historic low of 3.4%. Car companies are reluctant to raise prices to maintain market share and thus bear the additional costs.
II. Upstream Companies Profiting Handsomely: Lithium Mine Companies All Profit, with Battery Company Profits Exceeding Those of 13 Car Companies Combined
In contrast to the struggling car companies, upstream players are reaping huge profits:
- Lithium Mine Companies’ Surging Profits: More than a dozen lithium mine-related stocks saw significant increases in performance, with net profit growth ranging from doubling to over 20 times. This is due to the skyrocketing price of lithium carbonate, which averaged 163,400 yuan per ton in the first half of 2026, a 132% increase from the same period last year.
- Battery Costs Crushing Car Manufacturers: A 10,000-yuan increase in the price of lithium carbonate adds 300 yuan to the cost of each vehicle. In the first half of the year, this led to an additional cost of 2,700 yuan per vehicle. Additionally, the cost of storage chips rose from 20 yuan to 100 yuan, increasing the cost of NIO’s ES8 by 15,000-20,000 yuan.
- Powerful Profitability of Battery Companies: A leading battery company’s net profit in 2025 was 72.2 billion yuan, exceeding the combined profits of 13 A-share car companies. Cui Dongshu stated, “Car companies are basically running out of money; their profits have been significantly squeezed by battery companies.”
III. Car Companies Counterattacking: Developing Their Own Batteries and Intelligent Driving Technologies to Regain Pricing Power
To escape the situation of being exploited on both ends, car companies are transitioning from being mere assemblers to full-chain players:
- Battery Sector: Besides BYD, several companies such as Geely, Chery, NIO, and Li Auto have invested in battery development, with some already mass-producing batteries. An Conghui, CEO of Jikr, said, “To compete in the electric vehicle market, companies must master core battery technologies.”
- Intelligent Driving Sector: Changan Automobile has developed its own “Tianshu Linghang” intelligent driving system, which can save 20,000 yuan per vehicle by replacing external solutions. NIO has developed its own “Shenji NX9031” chip, which replaces four NVIDIA Orin chips, saving hundreds of millions of dollars. Seres is also increasing investment in intelligent driving to avoid being merely a car manufacturer.
- Strategy: Car companies believe that without controlling core battery and intelligent driving technologies, they will be at the mercy of suppliers. An executive noted, “We need to control costs and efficiency by investing in these areas.”
IV. Policy Changes Accelerating Integration: Reinstatement of the Battery Consumption Tax
Starting September 1, 2026, a consumption tax on battery products will be reinstated (it had been exempted for ten years). This means that:
- Self-producing Batteries Becomes More Economical: Cui Dongshu explained that car companies producing one million vehicles per year would spend hundreds of millions more in consumption taxes if they purchased batteries externally. By producing batteries in-house, they can avoid or offset these costs, which directly encourages them to move upstream in the supply chain.
- Accelerating Industry Chain Integration: An executive believes that with liquid battery technology becoming more standardized and barriers decreasing, this policy provides an opportunity for companies to break the current profit imbalance by investing in the battery sector.
V. Future Trends: Major Industry Consolidation, Expected Profit Balances in the Medium to Long Term
There is a consensus within the industry that low profits are unsustainable, and the market will see rapid consolidation:
- Short-term (1-2 years): Excess capacity and price competition will continue, leading to the elimination of smaller car companies, with the market focusing on vertically integrated leaders.
- Medium to Long-term (3-5 years): New lithium mine capacities will be brought online globally, reducing raw material prices. Car companies developing their own intelligent driving chips will compress supplier profits. With policy regulation, excessive upstream profits will shrink, and profit distribution will become more balanced (although upstream players will still earn more than car manufacturers).
- Changing Competitive Landscape: The focus will shift from “selling cars through marketing” to “competing on the entire value chain—mining, chips, integrated manufacturing.” OTA subscriptions and intelligent driving services will become new sources of revenue for car companies.
However, only those who truly master core technologies and control the entire industry chain will emerge victorious in this consolidation process. After all, “you can never be the leader if you just assemble cars.”
(The text is written in plain language to make it easy for non-experts to understand the challenges faced by car manufacturers, the substantial profits of upstream companies, and the future direction of the industry.)