"This Year Will Continue to Be Tough": China's Auto Market Is Heading for Its Worst Year Since 2021

China's auto market is heading toward its worst performance in five years as consumer demand for passenger cars declines following record sales in 2025, according to CNBC. Analysts are warning of fierce competition and the squeeze-out of weaker players.

The China Passenger Car Association has revised downward its retail sales forecast for all of 2026: whereas it had previously expected flat growth on a year-over-year basis, it now forecasts a 14% decline. This comes after passenger car sales in China plummeted by 20.2% in the first half of the year, CNBC reported. According to the association’s estimates, total passenger car deliveries by the end of 2026 will amount to 20.4 million units, compared to a record 23.7 million in 2025. Total sales for the first half of the year are estimated at 8.7 million units.

The cost of battery materials, including lithium and memory chips, is rising sharply, causing the automotive industry’s gross profit margin to drop to 3.4% from January through May 2026, while the sector’s total profit fell by 20% year-over-year, Cui Dongshu, secretary-general of the China Passenger Car Association, reported in late June. Passenger car prices in June fell by more than 1% compared to last year, further eroding already modest margins, according to CNBC. At the same time, passenger car exports in June increased by 11.5% compared to May and soared by 82.3% year-over-year, reaching 877,000 units.

"Overseas consumers are 'shifting their focus to Chinese-made electric vehicles because of operating costs,'" Fengming Lu, an assistant professor in the Department of Political and Social Change at the Australian National University, told CNBC.

Xiao Feng, head of the Hong Kong and China Industrial Research Department at the investment bank Citic CLSA, expects a bleaker outlook than the association does: He forecasts that total auto sales will plummet by 20% year-over-year. However, he remains slightly more optimistic about new energy vehicles (NEVs), such as electric and hybrid cars and vans, expecting their sales to decline by 5–6% year-over-year.

CNBC notes that Beijing's reduction of subsidies for new-energy vehicles—which had previously fueled consumer demand—led to a slowdown in auto demand in 2026.

"Policy merely shifts demand over time," Feng noted in an interview with the TV channel, adding that the sluggish car sales currently being observed "may be the price we're paying for last year's surge in demand."

Feng also predicts that American automakers will not survive the fierce competition in the Chinese auto market, while the established players will include local companies BYD, Geely, and Leapmotor, as well as Germany’s Volkswagen and Japan’s Toyota. Meanwhile, Volkswagen reported on July 10 that it had recorded a drop in sales of approximately 20% in China during the second quarter of 2026.

Feng estimated that an automaker in China needs to reach annual sales of 500,000 units to break even, 1 million units to generate a stable profit, and 2 million to achieve full economies of scale. Smaller players that fail to meet these targets will be “largely pushed out of the market,” the expert believes.

"This year will continue to be tough," Tu Lei, founder of Sino Auto Insights, told CNBC, citing intensifying competition as automakers vie for dwindling demand.

Although experts remain pessimistic about the industry's prospects for the second half of the year, Xiao Feng expects the downturn to give way to a recovery in 2027.

"We expect demand to be much higher next year," he said. Feng described China's auto market as cyclical in nature: as the vehicle fleet ages and car owners seek to replace their vehicles, sales should rebound.

"As the economic outlook improves, we can expect even more robust growth in the electric vehicle market," he noted.

This upturn could receive an additional boost from strong exports, as Chinese automakers benefit from rising fuel prices in overseas markets, the TV channel notes.

This article was AI-translated and verified by a human editor