Summary of Key Points
Starting from September 1, 2026, China will end a 11-year exemption policy on the consumption tax for lithium batteries and reinstate a tax rate of 2%-4%. Although this policy may not have a significant overall impact on the lithium battery industry, since over 70% of lithium batteries are used in new energy vehicles, it will directly increase the costs for battery manufacturers and automakers, accelerating industry consolidation. Leading companies will be able to withstand the pressure due to their scale and technological advantages, while smaller and mid-tier firms face the risk of being eliminated. Automakers that rely on purchased batteries will see a sharp rise in costs, making self-developed batteries essential. The policy also encourages the industry to shift from low-price competition to technological advancement by exempting new types of batteries such as sodium and solid-state batteries.
Detailed Explanation
1. The 11-year exemption on lithium battery taxes comes to an end; the policy shifts from support to regulation
The exemption began in 2015 to help China's lithium battery industry grow—initially, domestic production capacity was only 47 GWh, accounting for 50% of global output, with consumer electronics being the main market. After 11 years, in 2025, China's lithium battery shipments reached 1875 GWh (a 39-fold increase), and power batteries accounted for 70% of the global market share, making it a trillion-dollar industry. The reinstatement of taxes is necessary as the industry has matured and is now ready to contribute to the tax revenue. Additionally, it aims to equalize the tax burdens between new energy and traditional fuel vehicles.
Notably, the policy continues to exempt new technologies like sodium and solid-state batteries, giving companies a choice: either upgrade their technology to avoid taxes or face increased costs and potential elimination.
2. Impact on battery manufacturers
The consumption tax on lithium batteries affects different companies differently:
- Leading companies (such as CATL and BYD): With a gross margin of 23.8%, they can pass on the 2%-4% tax increase to automakers by raising battery prices, thus being minimally affected.
- Smaller and mid-tier companies: With lower gross margins, they cannot afford to pass on the cost increases, which will directly erode their profits. Some smaller manufacturers, particularly those that cut corners during high lithium carbonate prices (around 600,000 RMB per ton in 2022), may experience a decline in quality and efficiency, leading to their elimination.
The end result will be a more concentrated battery industry with stronger leading companies and the removal of less efficient production capacity.
3. Impact on automakers
Battery costs account for about 25% of the total cost of a vehicle, so the increased tax is significant:
- For a typical 60 kWh battery pack, the 4% tax increase results in a cost increase of 960 RMB. With retail profit margins of only 3.4%, this extra cost could lead to losses for some low-priced cars.
- There is an loophole in the policy that allows companies producing their own batteries to be exempt from the tax, so manufacturers with complete supply chains (like BYD) are not affected. However, new entrants or those that rely on purchased batteries must either raise prices and lose customers or develop their own batteries (for example, Li Auto's partnership with Xiwangda and GAC's establishment of Yinpai Battery).
In the short term, there may be a rush to stock up on exempted batteries in August 2026. However, in the long run, automakers must develop their own battery technology to survive.
4. Accelerated industry consolidation
The policy will lead to two main trends:
- Elimination of weaker companies: Low-price car manufacturers and smaller battery factories that cannot afford the increased costs may go out of business.
- Technological advancement: Automakers and battery manufacturers will invest more in new battery technologies (sodium and solid-state batteries) as they are exempt from taxes, providing a competitive advantage.
Companies like Chery (with its Rhinoceros Battery) and Geely (integrating its battery business into the Shield Golden Brick initiative) are already making strategic moves. In the future, the new energy vehicle industry will be dominated by those with stronger technologies, not by lower prices.
5. The broader purpose of the policy
The reinstatement of the tax is to make the industry more sustainable:
- It aims to reduce the reliance on low-price competition and promote technological innovation.
- It equalizes the tax burden between new energy and fuel vehicles, creating a fairer competitive environment.
- By encouraging self-developed batteries, automakers can retain more of the profit margin, improving the overall profitability of the industry.
In summary, the reinstatement of the lithium battery consumption tax is not a fatal blow but a catalyst for industry transformation. It will accelerate the elimination of inefficient production and drive technological innovation, leading to higher-quality growth in the new energy vehicle sector. For consumers, this may result in more reliable and advanced vehicles at potentially lower prices, as automakers pass on some of the increased costs.