China’s hyper-competitive electric vehicle market faces overcapacity and shrinking margins as technological differentiation gives way to relentless price cuts.
By Gong Fangyi, Si Wenwen, Zhao Yu, Guo Ruichan, Zeng Xing, Li Anqi
In January 2024, Omead Afshar, a close confidant of Elon Musk, flew to Shanghai alongside several Tesla manufacturing executives. Guided by Tom Zhu, then head of Tesla’s China and North American automotive business, they test-drove eight Chinese new energy vehicles.
The following month, Musk convened dozens of executives to cancel the development of Model 2, a planned $25,000 entry-level car. Within two months, many of those executives and more than 10,000 employees were laid off.
At the time, the decision was seen as a sign of Tesla’s inability to match Chinese manufacturing costs. Two years later, however, it appears Musk’s pivot toward autonomous vehicles and robotics was driven by a deeper realization: China’s EV industry faced a bleak future of endless, low-margin price wars where meaningful product differentiation had become nearly impossible.
The deflationary spiral
During the peak of the boom, Li Auto’s market value soared to 350 billion yuan, and Xiaomi launched its SU7. By the end of 2024, BYD employed nearly one million people and posted annual net profits exceeding 40 billion yuan ($5.9 billion). At that year’s Beijing Auto Show, scalpers charged financial analysts up to 1,500 yuan just to enter the venue.
At a subsequent Beijing Auto Show, however, top automotive analysts were nowhere to be found. “The car industry is just too brutal,” said one analyst who shifted his focus to artificial intelligence. “I’m barely looking at autos now.”
During the first five months of this year, Chinese automotive sales fell 11.8% year on year. Quarterly profits at BYD and Xiaomi plunged by more than 50%, while Li Auto fell into the red. Market capitalizations across all three companies dropped by at least 40% from their historical peaks.
The pain has extended to suppliers and engineers. In the past year, two-thirds of autonomous driving engineers surveyed by Late Post have left the automotive sector, mostly migrating to embodied AI firms. Contemporary Amperex Technology (CATL), the world’s largest battery maker, has begun investing in data centers and power providers, and participated in the first funding round for AI startup DeepSeek. Inovance Technology, which derives 45% of its revenue from automotive components, noted that shareholders at its recent meeting ignored the car sector entirely, focusing instead on data centers, energy storage, and humanoid robotics.
The autonomous driving mirage
To escape commodity status, Chinese EV brands initially treated intelligent driving systems as proprietary core technology. BYD, Huawei, Xpeng, and Nio built research teams of over 1,000 engineers each. Renting AI computing power was costing a single EV startup over one billion yuan annually.
A fierce race ensued to deploy city-level Navigate on Pilot (NOA) software, which allows cars to navigate urban streets autonomously based on map data. Companies enforced grueling schedules, with engineers working from 9am until past 10pm, six days a week.
In February 2025, BYD released its “God’s Eye” advanced driving system, equipping 21 models with high-level assisted driving. Its cheapest equipped model, the Seagull, retailed for just 78,800 yuan—roughly equivalent to the standalone price of Tesla’s Full Self-Driving (FSD) software package in the U.S.
However, consumers weren’t choosing brands for their autonomous capabilities. BYD and Li Auto became market leaders before they started offering advanced driving software, and Tesla’s FSD take-rate remained in the low teens. Market research by Nielsen confirmed that advanced driving ranked well behind price, interior space, and exterior design in consumer purchasing decisions.
Frontline sales staff reported that instead of paying a premium for assisted driving features, consumers routinely asked for discounts of 10,000 yuan to 20,000 yuan to opt out of the technology. Advanced driving became a baseline requirement, similar to airbags or anti-lock braking systems, rather than a premium differentiator.
Supply chain squeeze
As consumers refused to pay premiums, car manufacturers transferred financial pressure downstream. During online bidding wars held by car makers, procurement systems favored the lowest bidders. One global component supplier recalled adjusting bids through 10-hour sessions, systematically stripping out profits, financial fees, and administrative costs just to reach the cost line.
Even after winning a contract and developing tooling molds worth millions of yuan, suppliers faced demands for annual cost reductions of 10% to 15%. To save costs, some joint-venture car makers relaxed component defect tolerances from one in 5,000 to one in 2,000, allowing cheaper suppliers into their ecosystems.
In the retail market, aggressive discounting disrupted distribution networks. By the end of the year, more than 4,900 dealership showrooms closed nationwide, with over 80% of dealers selling cars below cost. Zhongsheng Group, China’s largest car dealership network, recorded a net loss of 1.67 billion yuan, down from a profit of 3.2 billion yuan the previous year. At its annual shareholder meeting, BYD Chairman Wang Chuanfu grew emotional while discussing the market pressures. The company’s full-year net profit subsequently declined 19%, its first drop since 2021.
The post-subsidy reality
Since 2009, Chinese state subsidies and tax exemptions for new energy vehicles have exceeded 1.5 trillion yuan. This industrial policy succeeded in building a dominant global supply chain and establishing automotive manufacturing as a pillar of domestic economic growth. Combined with its upstream and downstream sectors, the automotive industry now accounts for 10% of total employment in China, supporting tens of millions of jobs.
Although national subsidies have phased down, price cuts continue because consumer purchasing power has softened. Mass-market buyers increasingly view EVs as basic transport utilities, and vehicles priced between 100,000 yuan and 200,000 yuan are seen as “good enough.” Like televisions or personal computers before them, electric vehicles have entered a mature phase where product choices are uniformly sufficient, turning a revolutionary technology into a low-margin commodity business.
Source:
Late Post
