Summary of Key Points
The Chinese automotive market in the first half of 2026 was “lively but unprofitable”: Revenue increased by 1.8%, yet profits decreased by 20%, with the overall industry profit margin dropping to just 3.8% (compared to 9% in 2014). The situation for vehicle manufacturers was even worse, with a profit margin of only 1.5%. The main reasons for this are the “double squeeze” from both upstream and downstream factors: soaring costs in supply chains for batteries, chips, and non-ferrous metals. Leading companies like CATL (Contemporary Amperex Technology Co., Ltd.) are reaping huge profits but pass on the increased costs to automakers. On the downstream side, sales volumes declined (20% for narrow-sense passenger vehicles), and policies have changed (electric hybrid vehicles are now subject to vehicle and ship taxes), leading consumers to be cautious. Automakers, in order to maintain sales, are reluctant to raise prices and thus suffer from reduced gross margins.
Detailed Analysis
1. Automotive Market: Increased Revenue but Not Profits
The automotive industry’s revenue for the first half of the year was 5.19 trillion yuan (an increase of 1.8%), but profits were only 195.4 billion yuan (a decrease of 20%), resulting in a profit margin of 3.8%. This is significantly lower than the average of 6.5% for downstream companies and far worse than the “golden age” of 9% in 2014. Breaking down the data by month, the profit margin was only 3.7% in March and April. Although it surged to 5.2% in June due to a surge in exports of luxury vehicles, it still fell short of past levels. The situation for vehicle manufacturers is particularly dire: industry data shows that their profit margin was merely 1.5%, meaning they earn only 15,000 yuan from selling a car worth 1 million yuan. Specifically, companies like Seres suffered losses of 1.5-1.8 billion yuan, while Great Wall and Changan saw profits drop by more than 50%. Many automakers have gone from profitability to loss.
2. Upstream Companies Profit Profusely, While Automakers Suffer
Where did all the profits go? Most of them were taken by upstream suppliers. For example, CATL, a leading manufacturer of power batteries, had revenue of 276.9 billion yuan (an increase of 54.8%) and profits of 43.2 billion yuan (an increase of 41.98%), in stark contrast to the struggling automakers. Power batteries account for 30-40% of the cost of new energy vehicles, and CATL and BYD (BYD Co., Ltd.) hold a 57% market share, giving them strong bargaining power. The rising costs of raw materials such as lithium carbonate are directly passed on to automakers. Not only batteries but also chips and non-ferrous metals have seen price increases: the manufacturing sector for computer communication equipment grew by 91%, and non-ferrous metal smelting by 96%. Automakers are in a difficult position; Xpeng stated that most of their profits go to lithium carbonate suppliers, while Li Auto (Li Auto Inc.) reported a cost increase of 14,000 yuan per vehicle but could not raise prices. Li Bin (the CEO of Li Auto) mentioned that a 10,000-yuan increase in production costs would result in a 15,000-yuan decrease in the vehicle’s selling price.
3. Weak Downstream Market
Sales volumes on the downstream side have declined, and consumer sentiment is cautious due to policy changes. The sales of narrow-sense passenger vehicles fell by 20.2% in the first half of the year, and new energy vehicle sales decreased by 14%. There are several reasons for this: the relaxation of supportive policies and the upcoming requirement to pay vehicle and ship taxes on electric hybrid vehicles starting in 2027. To maintain sales, automakers are forced to keep prices unchanged or even cut them, further squeezing their gross margins. For instance, despite a 14,000-yuan increase in production costs for the Li Auto L6, its selling price remained at 249,800 yuan, meaning the company had to bear the additional cost.
4. Seeking a Way Out: Automakers Manufacturing Batteries and Expanding Overseas
How can automakers turn things around? Cui Dongshu, Secretary-General of the China Association of Automobile Manufacturers (CAAM), suggests that they should start manufacturing their own batteries. Since batteries account for a significant portion of costs, not owning battery production means losing control over these expenses. Companies like BYD, Great Wall, Leapmotor (ZeroRun Technology Co., Ltd.), Li Auto, and Xiaomi (Xiaomi Corp.) are already taking action: BYD has its own Fudi Battery division, Li Auto is developing its own battery packs, and Xiaomi has built a battery factory. The advantage of self-manufacturing batteries is better cost control and technological expertise; for example, Leapmotor claims that this allows them to save 10% on costs. Expanding overseas is another potential strategy, as the export price of lithium batteries has decreased by 12%. However, these measures are still in the theoretical stage, and there are no visible results yet. Despite years of calls for change, profits continue to decline. Whether the situation improves in the next six months will depend on the progress of automakers in manufacturing batteries and expanding overseas.
Conclusion
The core issues in the automotive market in the first half of 2026 were rising costs, declining sales volumes, and thin profit margins. The strong pressure from upstream supply chains and the weak downstream market have left automakers struggling to make a profit. The key to breaking this cycle lies in “controlling critical components” (such as batteries) and “entering new markets” (expanding overseas). However, these efforts will take time to yield results. Whether the industry can overcome these challenges depends on their actual performance in the coming months.