Gasgoo Munich-The price war is ending; the technology war is beginning. In the second half of the new energy vehicle era, cutthroat competition isn't going away—it's just shifting tracks.
By 2026, China's new energy vehicle industry has reached a critical turning point.
The penetration rate climbed to 56.9% in May and is expected to surge further to 64.5% in July. This means that for every ten new cars sold, at least six are new energy vehicles. That figure arrives nearly a decade ahead of the original 2035 target.
Yet, the shadows behind the spotlight are just as stark: the auto industry's profit margin fell to 3.8% in the first half, the lowest in a decade; the purchase tax exemption shifted from a full waiver to a 50% reduction; the EU imposed anti-subsidy tariffs of up to 45.3% on Chinese pure electric vehicles; and the U.S. raised its EV tariff to 100%.
As the penetration rate crosses a critical point, policy subsidies fully retreat, and global trade barriers continue to rise, the logic of industrial competition has fundamentally shifted—it is no longer about who runs faster, but who stands more firmly.
As Gou Bin, deputy general manager of the Xiangyang Da'an Automotive Testing Center, noted at the 2026 China Automotive Forum: "The domestic new energy market is currently struggling to turn a profit and is generally in a state of loss; but when it comes to overseas markets, everyone's eyes light up. We are shifting from competing domestically to competing abroad." The Chinese new energy vehicle industry is moving from the "zero to one" scale expansion phase into a "big to strong" quality offensive.
Li Ning, deputy general manager of Changan Automobile's quality department, also believes that the next five years will hold both opportunities and challenges: "The overseas markets we can open up account for two-thirds of the global volume. In most countries, new energy penetration and vehicle replacement cycles are low. Chinese new energy and intelligent models possess significant product competitiveness—this is a major window for us to build our brands and leap from the low-to-mid end to the high end."
Domestic: Cutthroat Competition, No Profit, Hurting Both ICE and EV
Sales data are still climbing. In 2025, production and sales of new energy vehicles reached 16.63 million and 16.49 million units respectively, with the penetration rate jumping from 5.34% in 2020 to 47.9%. In the first half of 2026, the overall penetration rate reached 49.6%; according to the CPCA, retail sales of new energy passenger vehicles hit 4.7 million, a penetration rate of 54.1%.
Meanwhile, the internal combustion engine (ICE) market is shrinking rapidly. Cumulative sales in the first half were 399,600 units, a year-on-year decline of 26.4%.
However, the rise in penetration rate has not driven an expansion of the overall auto market. Retail passenger car sales in the first half totaled 8.7 million, a 20.2% decline from the previous year. This means that the growth of new energy vehicles comes primarily from cannibalizing ICE market share, rather than creating new demand.
As the ICE share falls below 40%, the space for oil-to-electric substitution is narrowing. Cui Dongshu, secretary-general of the CPCA, pointed out that the current market downturn is not a collapse in demand, but a concentrated manifestation of structural imbalance.
Image Source: BYD
The policy landscape is also undergoing a profound shift. Starting January 1, 2026, the new energy vehicle purchase tax adjusted from a full exemption to a 50% reduction, officially ending a subsidy cycle that lasted more than a decade. For a 200,000 yuan pure electric vehicle, consumers now need to pay an additional 8,850 yuan in purchase tax.
This is just the beginning: in July, preferential vehicle and vessel tax policies entered an exit phase; in September, an 11-year exemption on consumption tax for lithium batteries will also end. A tax incentive system covering purchase, use, and production is withdrawing in stages, and "oil-electric parity" is moving from industry advocacy to policy reality. For the industry, this means companies that rely on subsidies to survive and lack core technologies will be accelerated out of the market.
The combination of policy retreat and price wars continues to intensify profit pressure. In the first half of 2026, the auto industry's profit margin fell to 3.8%, the lowest in nearly ten years.
The decline in profits is driven by multiple intertwined factors: lithium carbonate prices rose from an average of 75,500 yuan per ton in 2025 to over 170,000 yuan per ton, an increase of about 125%; the intensity of the terminal price war intensified; and rigid investment in transformation remained high. Performance previews for several automakers show widening losses; even companies maintaining positive sales growth generally face the dilemma of "volume up, profit down."
Many senior automaker executives believe that the industry is still in an elimination stage, and competition will remain intense for the next two to three years. The logic of competition has shifted from a financing-driven expansion race to a contest of systemic capabilities—covering the entire chain of R&D, supply chain, manufacturing, quality, and user service.
Li Weihua, deputy general manager and chief quality officer of JAC, expressed a similar view at the forum: "Commercial vehicles are core productive assets, and their core value is reflected in three dimensions: high operational availability, stable operation, and operational safety. Relying on technological innovation to solve pain points in specific usage scenarios, relying on full-process quality control to stabilize product quality, and building a comprehensive security system to prevent operational risks are the core paths for the industry to break through development bottlenecks." Although this judgment targets commercial vehicles, it also reflects the quality transformation proposition of the entire new energy vehicle industry.
Overseas: Beyond Tariffs, Rule Upgrades
As domestic market growth slows, overseas markets are seen as critical for incremental growth. But the globalization path for Chinese automakers is encountering unprecedented trade barriers.
In October 2024, the EU officially imposed definitive anti-subsidy duties on pure electric vehicles imported from China for a period of five years; the U.S. raised tariffs on Chinese electric vehicles from 25% to 100%. Trade barriers are evolving from simple tariff tools into a complex rule system combining tariffs, price undertakings, quotas, and localization investment requirements.
More alarming than tariffs is the competition at the rules level. The EU's battery regulations incorporate carbon footprint declarations, recycling efficiency, and supply chain due diligence into the regulatory framework; the "AI Act" imposes escalating compliance requirements on AI systems such as autonomous driving and intelligent cockpits; the U.S. "Inflation Reduction Act" effectively raises the localization threshold for Chinese enterprises entering its subsidy system through restrictions on battery components, critical minerals, and entities of concern.
The globalization of Chinese automakers will depend in the future not only on product price and technical performance, but even more on the ability to build systemic capabilities covering trade policy, regional manufacturing, supply chain traceability, carbon management, data security, and intelligent compliance.
Image Source: Leapmotor
Facing this situation, Chinese automakers are accelerating their transition from whole-vehicle export to localized production. BYD's Hungary plant and Chery's Spain joint venture project are proceeding steadily, but new self-built factories generally require two to three years from site selection to mass production.
In terms of short-term strategy, some automakers are shifting their export focus from pure electric to plug-in hybrid. The EU currently only imposes anti-subsidy duties on pure electric vehicles, and plug-in hybrids are not yet within the taxation scope. In June 2026, Chinese brands' share in the European plug-in hybrid market reached 34%, a record high, but there is high uncertainty as to how long this policy window will last.
At the forum, Gou Bin analyzed in detail the complexity of overseas scenarios: "Global climate and environmental differences are huge, and different road conditions trigger many quality issues. Completing development verification domestically is fine, but once entering overseas markets—for example, de-icing salts used in Russian winters can corrode car bodies; in Southeast Asia and the Middle East, air conditioning systems may fail to reach preset temperatures. If we do not strictly control overseas product quality and do not conduct targeted research on specific scenarios, the reputation of Chinese brands will inevitably be damaged."
He further pointed out that overseas verification regulations involve numerous requirements; if various problems encountered overseas can find alternative solutions domestically, it will provide significant assistance to OEMs.
Changan Automobile's global layout provides a case study. According to Li Ning, Changan has completed a preliminary global industrial layout, establishing 44 technology R&D centers and 22 vehicle manufacturing bases worldwide. The joint venture plant in Brazil commenced production in the first quarter of this year; at the same time, KD plants in Egypt, Kazakhstan, and Uzbekistan were all completed.
However, challenges are equally prominent: "Risks from overseas geopolitics and policy uncertainty are high. The Middle East and Africa were once our core incremental markets, but affected by geopolitical conflicts, local sales nearly halved. We are simultaneously exploring new avenues for growth in Africa. Even if external difficulties persist, Changan remains firmly committed to its long-term globalization strategy."
Exports remain an important support. In the first half, China's auto exports broke the 5 million mark for the first time, reaching 5.1 million units, a year-on-year increase of 65.3%; June alone saw exports of 1.04 million units, the first single month to exceed 1 million. But whether overseas markets can become a sustainable source of profit depends on the ability to cross trade barriers and regulatory thresholds.
Law of Survival: Quality Determines Life or Death
Whether domestic or overseas, the underlying logic of industrial competition is being profoundly reshaped. Competition has moved from the first half of electrification to the second half of intelligence. The focus has shifted from single-performance comparisons like range and acceleration to a comprehensive system-level competition based on energy technology, with intelligent experience at the core and AI empowerment as the enabler. In-vehicle chips, AI large models, and data foundations have become the new high ground.
Intelligent capabilities are becoming a new advantage for Chinese cars in global competition, but this also implies a higher threshold for R&D investment: massive R&D, extreme safety, and full-stack proprietary technology are essential conditions for the ultimate survivors.
Image Source: Huawei Qiankun
At the same time, there are hundreds of new energy vehicle brands and thousands of models on sale in China, with serious product homogeneity, and the industry profit margin has dropped to less than 4%.
The quip on social media that "making cars is not as profitable as selling bottled water" reflects industry anxiety; during the same period, the profit margin for bottled water reached 22%. Leading automakers are seeking a solution: on one hand, breaking through via premiumization to increase per-vehicle profit; on the other hand, accelerating overseas layout to offset domestic pressure with exports.
Li Ning shared Changan's strategy for transformation: "Abandon excessive industry rivalry and take the road of high-quality, benefit-focused development. Quality is the foundation of enterprise survival." Changan benchmarks reliability against global leaders like Toyota, focusing on breaking through vehicle quality over long distances of more than 360,000 kilometers. "Promote proactive design from the R&D source, and implement two special projects for quality cost and quality safety. Aggregating global five-year comprehensive quality data, sorting out all improvement topics, and establishing a company-level reliability task force led by the president to check for improvement space across the entire chain of design, verification, manufacturing, and supply chain."
Gou Bin emphasized that quality work must be front-loaded to the design stage: "Our real goal is to help enterprises convert experience into design standards and definitions during the development of international models, avoiding repeating problems encountered in the physical stage. This is the core element of 'recurrence prevention' in quality work."
Li Weihua specifically emphasized that the competitive landscape of the industry is undergoing fundamental reconstruction: "Competition has shifted from single product competition to the comprehensive reconstruction of technology, operations, and ecosystem." He called on industry colleagues to "persist in long-termism, abandon short-term thinking of excessive price rivalry and quality compromise, and build the value brand of Chinese new energy commercial vehicles with quality."
According to incomplete statistics, there are currently more than 150 qualified vehicle enterprises. Some institutions predict that in the next few years, only 15 automaker groups will occupy 75% of the new energy market. Several senior automaker executives predict that by 2030, there may be only 5 major automakers left in China.
As of May 2026, more than 20 small and medium-sized new energy brands have ceased operations. The core variable in this elimination round is no longer scale, but quality, the completeness of the technology system, the depth of global presence, and the sustainability of the profit model.
Companies that rely on policy support and lack core technologies are being cleared out at an accelerating pace; truly competitive companies must build moats simultaneously in the three dimensions of intelligence, globalization, and profitability.
In the second half of the new energy vehicle era, the key to success is not about who runs faster, but who stands more firmly. From scale expansion to quality breakout, this profound industrial transformation is redefining the future landscape of the Chinese automotive industry.
