Who is Squeezing the Auto Industry's Profits Thin?

Gasgoo Munich-Halfway through 2026, the auto industry's balance sheet looks grim: revenue is inching up, but profits are sliding. Data shared by Cui Dongshu, a senior official at the China Passenger Car Association (CPCA), shows industry revenue climbed 2.7% year-on-year in the first seven months, while profits plunged 20%. The sector's profit margin sits at just 3.6%, dipping as low as 2.4% in July alone.

New-energy vehicle penetration has topped 50%, and exports are climbing, yet automakers are finding it harder than ever to turn a profit. Why are margins getting squeezed so thin?

Image source: Shitu Network

Revenue is still rising, so why can't profits hold up?

Consider three core data points. From January to July, the auto industry generated 6.078 trillion yuan in operating revenue, up 2.7%. Operating costs reached 5.406 trillion yuan, up 3.8%. Total profit came to 216.2 billion yuan, a 20% decline.

With revenue still in positive territory, a double-digit profit slide points to one culprit: costs. Cost growth outpaced revenue by 1.1 percentage points. On a revenue base of over 6 trillion yuan, that single-point difference wipes out tens of billions in profit potential.

Consequently, the industry's profit margin has fallen to 3.6%. That compares poorly with the 6.5% average across downstream industrial sectors—auto is earning just over half of what its peers make. Even among downstream industries, automakers rank near the bottom, trailing high-margin sectors like tobacco, alcohol, and pharmaceuticals.

Image source: Cui Dongshu

The monthly data for July is even bleaker. The industry booked 888.7 billion yuan in revenue, up 8.3% year-on-year, while costs hit 795.7 billion yuan, a 10% jump. Total profit stood at 20.9 billion yuan, down 28%, pushing the margin to just 2.4%. The top line is expanding, but the bottom line is contracting.

Cui notes that July is typically a weak month for margins, but this year the pressure was amplified by a sharp contraction in internal combustion engine (ICE) vehicle production. While 2.4% is higher than the low of 1.8% seen in December 2025, it remains in a historically low range.

Zoom out, and the trend becomes clearer. Cui's analysis of sales margins over the years shows the industry at about 9% in 2014. By 2024, it had fallen to 4.3%—already a significant drop from historical norms—and slipped further to 4.1% in 2025. For the first seven months of this year, it sits at just 3.6%.

In other words, for every 100 yuan in revenue generated, the industry now retains just 3.6 yuan in profit, down from roughly 9 yuan in 2014—a loss of about 60%.

The math looks similar when broken down per vehicle. Using National Bureau of Statistics production data to calculate a supply chain-wide metric (which includes double counting), Cui found that from January to July, revenue per vehicle reached about 345,000 yuan, up 5.3%. Costs hit 307,000 yuan, up 6.5%. Taxes came to 26,000 yuan, up 6.3%. That left a gross profit of just 12,000 yuan per vehicle—down 19%.

Image source: Cui Dongshu

Revenue, costs, and taxes are all climbing, yet gross profit has shrunk by nearly a fifth.

The contrast with other sectors is stark. In the first seven months, the electronics and non-ferrous metals industries saw revenue growth of 18%, with profits surging 99% and 89% respectively in the first half. Auto manufacturing, by comparison, saw revenue rise just 3% while profits fell 21%. In July, auto manufacturing revenue slipped 9% month-on-month, dropping the sector to fourth place among the top ten industries. Once an industrial pillar, it is now firmly on the back foot.

A divergence is evident among major automakers that have released half-year reports. Market leader BYD posted 344.815 billion yuan in revenue for the first half, down about 7%. Its net profit of 12.325 billion yuan made it the only automaker to cross the 10-billion-yuan mark. Geely Auto followed in second place with 9.091 billion yuan.

Traditional giants remain profitable, but margins have generally slipped year-on-year. Losses are concentrated among manufacturers struggling with transition and most "new force" EV startups. Among the new forces that have reported, only Leapmotor achieved a half-year profit, with net earnings of about 200 million yuan. Others swung from profit a year ago to loss.

Individual cases don't tell the whole story, but combined with the industry-wide 20% profit drop, the pressure on automakers is undeniable. Demand hasn't collapsed, and EV sales are surging, yet the money made on each car is shrinking. We need to break down exactly how these profits are being squeezed away.

Multiple pressures are bearing down at once, layer by layer squeezing margins thin

Cui attributes the pressure on automaker profits to a convergence of forces: an unrelenting price war in the existing market that prevents passing costs to consumers; rising prices for lithium carbonate and memory chips driving up BOM costs; and heavy R&D spending on smart driving and new models, compounded by asset impairments at some companies.

With these pressures hitting simultaneously, it’s no surprise that margins are being breached.

The first pressure is the price war, driven by a rapid shift in market structure. From January to July, auto production totaled 17.61 million units, down 3%. New-energy vehicles accounted for 8.95 million units, up 10% and claiming a 51% penetration rate. ICE vehicles, meanwhile, fell to 8.67 million units, a 14% drop.

By July, monthly NEV production hit 1.55 million units, up 30%, with penetration surging to 61%. ICE production was down to just 980,000 units, plunging 27%. As the ICE base contracts rapidly and NEV makers battle each other for share, prices are under siege on every front.

Cutting prices is easy; costs are rigid. Automakers cannot simply pass rising costs on to consumers as they might in mature markets, forcing them to swallow the difference.

By the end of July, national passenger vehicle inventory stood at about 3.22 million units—enough to cover roughly 55 days of sales. With that much stock on hand, automakers have little leverage to hold the line on pricing.

The second pressure is a cost rebound, centered on batteries. Data shared by Cui shows lithium carbonate prices have doubled this year, while components like memory chips are also getting more expensive.

Image source: Longsys

According to CCTV Finance, automotive-grade memory chip prices rose by about 180% between March and June. Depending on a model's level of intelligence, this adds hundreds or even thousands of yuan to the BOM cost per vehicle, with high-end smart-driving models feeling the pinch most acutely. These combined costs are driving up per-vehicle material expenses and are the primary reason cost growth outpaced revenue from January to July.

A notable contrast has emerged: the average export price of lithium batteries has fallen for three consecutive years, dropping from about 142,900 yuan per ton in 2024 to 112,300 yuan in 2025, and further to around 105,000 yuan this year. Yet, the price domestic automakers pay for batteries is rebounding.

With export prices falling and domestic procurement prices rising, Cui argues this highlights the lack of bargaining power held by automakers that don't manufacture their own batteries.

He predicts that as the Producer Price Index (PPI) rises and lithium costs climb, the difficulties for automakers without battery capacity will become more pronounced, squeezing profits further. As electrification deepens, control over battery production is becoming the watershed for profitability.

The third pressure is investment in intelligence. City navigation, end-to-end large models, cockpit-driving-integrated chips, and next-generation electronic/electrical architectures all require continuous heavy R&D spending. It is a race with no exit; fall behind by a step, and your product rhythm is broken.

Analysts at Gasgoo Auto Research Institute also point out that features like lidar, high-computing chips, and city navigation are trickling down to mid-range models. The industry norm of "more features for the same price" means these high investments in intelligence are hard to convert into premiums in the short term, forcing automakers to absorb the costs themselves.

Cui specifically notes that heavy R&D on smart driving and new models, combined with asset impairments at some companies, is further eroding current profits. Several automakers that swung from profit to loss cited rising raw material costs and asset impairments as primary reasons in their financial reports.

Intelligence may determine how far an automaker can go, but the bill is due now. For manufacturers already trapped in a price war, that burden is particularly heavy.

There is also the pressure dictated by position in the value chain. Automakers sit at the very bottom, bearing the risks of scale, marketing, distribution, and rapid iteration—making profits inherently fragile. Plants and production lines are heavy assets; dealerships and channels are rigid costs. With model cycles shortening, one wrong bet on a vehicle can drag down an entire quarter.

Factor in taxes of about 26,000 yuan per vehicle—up 6.3%—and automakers find themselves boxed in by costs, expenses, taxes, and the price war. There is very little room to maneuver.

With these pressures stacking up, a popular explanation has emerged: the upstream players are taking all the money. While the upstream sector has certainly made a killing this cycle, whether that narrative holds water requires a return to the data.

Is Upstream Taking All the Money? The Answer Isn't That Simple

Judging by margins alone, the upstream sector is indeed shining. Data from Cui shows the sales profit margin for non-ferrous metals climbed to 40.6% in the first seven months, while oil hit 31.8%. The mining sector as a whole saw margins around 21%, with profits growing 35%.

At the company level, it's even starker. Lithium giant Tianqi Lithium posted a net profit of 4.242 billion yuan in the first half, up 4,925.46%, with a gross margin of 64.39%. With automakers scraping by on 3.6% margins while upstream players routinely post gross margins of 40% or 60%, it's no surprise that "upstream is taking all the money" has become the prevailing view.

Image source: Screenshot of Tianqi Lithium announcement

But Cui doesn't fully buy this argument. He points out that the upstream sector is also polarized; a few high-growth industries don't represent the whole. Non-ferrous metals, batteries, and lithium mines caught an upcycle and are posting standout profits, but the steel industry's margin was just 0.7% from January to July. The overall sales margin for midstream industries also fell from 6% in 2018 to 4.2% this year.

Another area of profit concentration is the midstream battery sector. CATL, the battery giant, posted a net profit of 43.284 billion yuan in the first half, far surpassing BYD, the most profitable automaker at 12.325 billion yuan. Profits aren't being siphoned off uniformly by "upstream" players; they are concentrated in specific niches like raw materials and battery giants.

Image source: Screenshot of CATL announcement

Crucially, many Tier 1 parts suppliers are also under pressure or even losing money this cycle; it's not a case where everyone outside the automaker is getting rich. Blaming the automakers' plight entirely on upstream "bleeding" misses the real structural issues.

In his view, automaker losses are the result of several converging factors: the price war depressing prices, R&D for smart driving and new models driving up expenses, and lithium and chip cycles inflating BOM costs. These three forces pushed in the same direction to crush profits. The upstream cycle is just one piece of the puzzle and doesn't explain everything.

Moreover, the stress extends far beyond automakers. Cui notes that while automakers are naturally vulnerable at the bottom of the chain, they aren't the only ones bleeding. A vast number of parts suppliers and dealers are also in the red, with dealers at the very end of the chain facing the toughest struggle—even harder than the automakers themselves.

Data by ownership type also reveals a split. From January to July, private enterprises saw a sales margin of only about 4%, with their share of total profit falling to 25%—a drop of 6 percentage points year-on-year. State-owned enterprises saw their profit share rise to 33%, an increase of 5 percentage points. Small and medium-sized enterprises with weak risk resistance are the first to feel the chill.

As for how to navigate out of this situation, Cui outlined several points.

First, reduce costs through technology and innovation, and optimize product structures to increase the share of high-value models.

Second, advance in-house supply chain development and use long-term contracts to lock in prices against raw material cycles, keeping control over key links like batteries.

Third, expand the profit contribution from exports. China exported 6.41 million vehicles from January to July, up 54%, making overseas markets a genuine buffer.

However, analysts at Gasgoo Auto Research Institute caution that price wars are also emerging overseas. Coupled with trade barriers, the need for local manufacturing, and currency fluctuations, the offsetting effect of exports on domestic profits is limited—far from a guaranteed safe haven.

Image source: BYD

Fourth, cut inefficient capacity and models, while using software and services to generate revenue beyond hardware sales.

Behind these points lies a single logic: cost-cutting alone cannot escape the trap of thin margins. Adjustments must be made simultaneously across products, supply chains, markets, and revenue streams.

Returning to the initial question: this is how the auto industry's profits are being squeezed away, bit by bit. The price war takes a slice; cost cycles take another; smart driving R&D takes a third. And the industry's inherent nature—heavy assets and rapid iteration—presses down on the ceiling for profit.

The idea that "upstream is taking all the money" is only partially correct. Raw material sectors in an upcycle are indeed making a killing, and profits are concentrating toward midstream battery giants, but many Tier 1 parts suppliers are actually shouldering the pressure alongside the automakers.

So, how did the listed parts companies—sandwiched between automakers and upstream suppliers—actually perform in the first half of 2026? Who is growing, who is losing money, and what are the profitable companies doing right? We'll dig into that in the next installment.