China’s vehicle manufacturers earned a profit margin of just 1.5% in the first five months of 2026, a level described as an historical low for the industry by the China Association of Automobile Manufacturers (CAAM) on Monday.
Speaking at the China Automotive High-Quality Development Summit Forum, Deputy Secretary-General Chen Shihua said vehicle manufacturing profit fell 43% year over year during the January through May period, even as the automakers themselves lifted revenue.
“Profits are increasingly being diverted to emerging players at both ends of the industrial value chain,” Chen stated.
According to the executive, industry revenue increased by 1.4% to 4.2 trillion yuan ($619.4 billion), while total industry profit fell 19.8% to 143.9 billion yuan ($21.2 billion) — putting the broader automotive manufacturing industry’s profit margin at 3.4%.
Within that, vehicle manufacturing profit specifically declined 43% from a year ago, leaving vehicle manufacturers with the 1.5% margin Chen called a historical low.
The gap between the 3.4% profit margin for the broader automotive manufacturing industry and the 1.5% margin for vehicle manufacturing specifically underscores Chen’s point.
The CAAM representative was suggesting that vehicle assembly — the business of building and selling vehicles — has become one of the least profitable segments of the automotive value chain, lagging behind parts, battery, and technology suppliers.
He attributed the squeeze to a reshaping of the industry’s traditional “smile curve,” in which the biggest profits sit at the two ends of the value chain rather than with the manufacturer in the middle.
“It’s no longer the traditional auto parts suppliers upstream that are making our money,” Chen stated, adding that “it’s the companies making intelligent technologies, batteries, and chips.”
He tied the 1.5% figure to a single vehicle, saying that a car priced at 200,000 yuan ($28,000) nets its maker roughly 3,000 yuan ($420) in profit — less than the cost of a single battery pack.
Chen’s 3.4% profit margin for the overall automotive manufacturing industry is consistent with the China Passenger Car Association’s (CPCA) separate assessment that industry profitability is at its lowest level in five years — well below the 6.1% average profit margin for downstream industrial enterprises more broadly.
Still in the Early Stages
Chen also addressed the price war directly, saying the industry still needs to comprehensively address excessive internal competition — a practice widely referred to in China as “involution” — and that discounting has stopped delivering meaningful sales gains.
“Price cuts are no longer generating meaningful additional demand,” Chen noted, saying that “at the same time, manufacturing costs have risen, so some companies have begun increasing product prices in the hope of improving profitability.”
China’s automotive industry has yet to emerge from its prolonged price war and remains only in the early stages of a price recovery, he said.
According to China’s National Bureau of Statistics, manufacturer prices in the automotive manufacturing industry fell 2.2% year-on-year in the first half — an improvement of 0.1 percentage point from January-May and a sign, however marginal, that the pace of price erosion may be slowing.
A Market Still Contracting
The profitability squeeze comes against a backdrop of falling sales and mounting dealer stress.
Domestic retail sales of passenger vehicles in China fell sharply year-on-year in the first half of 2026 even as wholesale volumes were cushioned by a surge in exports.
Only eight of the 20 largest passenger vehicle brands by first-half wholesale sales posted year-over-year growth.
Total passenger vehicle inventory fell by 480,000 units in the first half — nearly three times the drawdown over the same period of 2025 — as automakers throttled shipments into an already saturated channel.
Distribution networks are absorbing much of that strain.
The China Automobile Dealers Association’s Vehicle Inventory Alert Index stood at 57.2% in June, above the 50% threshold that separates healthy conditions from elevated risk.
Exports Are Picking Up
Weak domestic demand has pushed automakers and other Chinese manufacturers to lean harder on overseas markets, and the shift shows up clearly in the trade data.
China’s vehicle exports surpassed 1 million units in a single month for the first time in June, contributing to a 27% year-on-year increase in overall exports.
The export share of China’s total manufacturing sales reached 24% in the first four months of 2026, the highest level since the country joined the World Trade Organization in 2001.
That figure has climbed steadily — from 18.3% in 2019 to 22.3% in 2025 — as domestic sales growth has cooled and manufacturers have redirected output abroad.
China’s overall trade performance remains exceptionally strong as a result, keeping the country on pace to match or exceed the roughly $1 trillion record trade surplus it posted in 2025.
Automakers are a visible part of that story.
BYD and Chery‘s overseas-focused brands Omoda & Jaecoo are among the Chinese brands continuing to gain market share overseas, particularly in Europe, at the expense of established European automakers.
Electric and plug-in hybrid vehicles have been major drivers of that export growth.
Hybrid models, which were not subject to the EU’s 2024 tariffs on Chinese battery-electric vehicles, have been particularly successful and have added to the competitive pressure on European automakers.
The pressure is visible in the restructuring underway at some of those companies, including Volkswagen’s plan to cut its workforce by over 100,000 employees as part of a broader cost-cutting program.
Policy Support Is Also Fading
Compounding the cost and demand pressure, Beijing continues to withdraw the tax incentives that helped build the world’s largest EV market.
China will end vehicle and vessel tax breaks for energy-saving and new energy vehicles from January 1, 2027, scrapping the exemptions long enjoyed by plug-in and range-extended hybrids in particular.
The move is a smaller piece of a larger rollback: China reinstated a 5% purchase tax on new energy vehicles from January 1, ending more than a decade of full exemption from the standard 10% rate.
Several automakers, including Xiaomi and Nio, opted to absorb that purchase tax themselves at the start of the year rather than pass it on to buyers already squeezed by high prices and slowing income growth — a decision that added yet another line item to the cost pressure Chen described on Monday.
Echoes Across the Industry
Individual automakers have been sounding warnings similar to Chen’s for months.
Nio‘s founder and CEO William Li said this month that rising raw material prices had added nearly 20,000 yuan ($2,900) to the production cost of each ES8, and that fully offsetting the increase would require raising the selling price by about 30,000 yuan ($4,400).
Li has separately called 2026 “the toughest year I’ve experienced since entering the auto industry.”
More than 15 automakers have announced price hikes or reduced incentives since the start of the year, according to Jiemian News, as the cost of inputs ranging from battery-grade lithium carbonate to memory chips has climbed sharply — lithium carbonate alone has risen more than 170% above its June 2025 trough.
