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

The outlook for China's auto industry in 2025 appears strong on paper, with automakers producing 15.62 million vehicles and selling 15.65 million units in the first half of the year—both up over 10% year-on-year. However, despite record production and sales, the industry faces profit declines, with total profits dropping 12% to 178 billion yuan ($24.8 billion) from January through May. A relentless industry price war—driven by intense competition, or "involution"—has failed to consolidate the sector, as the collective market share of the 15 largest automakers actually declined to 92.2%[para. 1][para. 2][para. 3][para. 4][para. 5].

This ongoing price war endangers not only automaker profitability but also the financial health of suppliers and dealers, raising doubts about the sustainability of the world’s largest auto market[para. 5]. Policymakers are now pushing for industry consolidation to phase out excessive capacity and weaker brands, rather than simply suppressing competition[para. 6][para. 7]. The origins of the current turmoil lie in years of government-led capacity expansion and heavy subsidies, particularly for new-energy vehicles (NEVs). Local governments frequently provided funding for new factories, further increasing production capacity without a matching rise in demand. By May 2022, unsold passenger cars in China surpassed 3 million units, reaching a five-year high of 3.45 million units in May 2025, creating the conditions for an inevitable price war[para. 8][para. 9][para. 10][para. 11][para. 12].

The transition to NEVs lowered industry entry barriers, leading to a glut of similar, minimally differentiated vehicles and intensified pricing pressures. In 2023, Tesla spurred a wave of price cuts by slashing prices up to 14% on certain models, prompting Chinese automakers to follow suit. The average per-car discount deepened to 21,000 yuan in the first half of 2025. BYD has become the most aggressive and successful player, cutting prices by over 40% on some models and capturing 16% of the domestic market[para. 13][para. 14][para. 15][para. 16][para. 17][para. 18]. Meanwhile, many automakers have seen profits plummet—Guangzhou Automobile Group, for instance, posted a 2.6 billion yuan net loss in the first half of 2025. Industry-wide, per-vehicle profits fell from over 20,000 yuan before 2022 to 14,000 yuan in early 2025[para. 19].

Suppliers and dealerships are also suffering. The proportion of suppliers reporting profit growth dropped from 61% in 2022 to 43% in 2024. Suppliers now face greater price-cut demands and longer payment cycles, sometimes waiting up to 270 days for payment. Nearly 73% of dealerships missed their sales targets, and 42% reported losses in 2024. Dealer associations have issued pleas for urgent support amid mounting inventory and financial distress[para. 20][para. 21][para. 22][para. 23][para. 24][para. 25][para. 26].

The government has responded with stepped-up intervention. Measures include new regulations mandating faster supplier payments, tougher anti-unfair competition laws, and initiatives to consolidate the sector. For example, automakers must now pay small and midsize suppliers within 60 days, and a revised law coming in October will penalize companies that force unfair terms on suppliers[para. 27][para. 28][para. 29][para. 30][para. 31]. Although large mergers remain rare due to industry complexity and regional economic interests, consolidation is starting within corporate families (e.g., Geely merging with Zeekr, GAC integrating Aion and Trumpchi). Industry leaders believe that only 15 of the current 129 NEV brands will likely survive by 2030[para. 32][para. 33][para. 34][para. 35][para. 36].

Ultimately, the consensus is that the industry must undergo painful rationalization. Sustainable success depends on automakers investing in R&D, differentiating products, and innovating—such as Li Auto’s profitable focus on extended-range hybrids—rather than just competing on price[para. 37].