In Depth: China’s Surging Auto Sales Mask an Industry in Crisis

China’s auto industry began 2025 with impressive figures on the surface: automakers produced 15.62 million vehicles and sold 15.65 million in the first half of the year, representing more than a 10% year-on-year jump according to the China Association of Automobile Manufacturers (CAAM). However, despite booming sales, industry sentiment is pessimistic due to a steep drop in profitability. Total profits for automakers plummeted by 12% to 178 billion yuan ($24.8 billion) in the first five months of the year [para. 1][para. 2][para. 3]. This is attributed to a relentless price war, labeled as “involution,” which has persisted for over two years without leading to meaningful industry consolidation. In fact, the top 15 automakers’ market share shrank by 1.4 percentage points to 92.2% over the year, indicating continued fragmentation [para. 4].

The roots of this crisis trace back to years of overexpansion, driven by aggressive government support and generous subsidies, particularly for new-energy vehicles (NEVs). Local governments often funded new factories without requiring investment from automakers, leading to chronic overcapacity; as of May 2025, China’s passenger car inventory hit a five-year high at 3.45 million units [para. 9][para. 10]. Further aggravating the issue, the boom in NEV manufacturing lowered the barrier to entry, resulting in a glut of similar products and minimal brand differentiation. This evolution has caused consumers to focus primarily on price, intensifying downward price pressure [para. 12][para. 13][para. 14][para. 15].

The price war, ignited by Tesla’s significant price cuts in early 2023, continues unabated. Average price reductions on discounted models reached 21,000 yuan in the first half of 2025. Major player BYD has discounted some models by over 40%, securing roughly 16% of the market, while other automakers have been forced to follow suit, often reluctantly [para. 19][para. 20][para. 21][para. 22]. The consequences are widespread: established automakers like Guangzhou Automobile Group reported a 2.6 billion yuan net loss in the first half of 2025, a stark reversal from the prior year’s profit. Industry-wide, per-vehicle profits dropped from over 20,000 yuan before 2022 to just 14,000 yuan by May 2025 [para. 23].

The strain extends along the supply chain. Only 43% of domestic auto parts suppliers reported profit growth in 2024, down from 61% in 2022. Automakers increasingly demand price reductions from suppliers and stretch payment terms, sometimes delaying payments for up to 270 days. Dealers face similar pressures, with 73% failing to meet mid-year sales targets and 42% reporting losses, leading to urgent appeals for support from regional dealer associations [para. 29][para. 30][para. 31][para. 32][para. 33][para. 34][para. 35]. There are fears that relentless cost-cutting could compromise product quality and safety [para. 36].

In response, the Chinese government is intervening decisively. Measures include enforcing stricter payment terms to suppliers, introducing a revised Anti-Unfair Competition Law (effective October 15, 2025) to protect smaller players, and pushing for industry consolidation to weed out weaker participants. Major automakers have pledged to adhere to new regulations, and mechanisms for supplier complaint reporting have been established [para. 39][para. 40][para. 41][para. 42][para. 43].

Industry consensus suggests an inevitable shakeout is coming. AlixPartners projects only 15 of the current 129 NEV brands will remain financially viable by 2030. Consolidation is slowly starting, with Geely merging with Zeekr and GAC Group integrating its brands. Ultimately, experts argue recovery depends on moving beyond price competition to invest in R&D, innovate, and create truly differentiated products, as demonstrated by Li Auto’s recent success with extended-range hybrids [para. 45][para. 46][para. 47][para. 48][para. 49][para. 50][para. 51].