This year alone, more than 650 new or completely redesigned models have been introduced into the Chinese automotive market. Nearly all of those from domestic manufacturers both large and small. Some we’ve heard of, like Geely, Chery, and Galaxy. Others are much more obscure like Byton, HiPhi, and Yudo Auto.
On the heels of somewhere around US$200 billion in subsidies and financial aid over the past decade or so (about half of which were consumer incentives), the Chinese automotive market is shrinking as that aid dries up. About a third of that money went to manufacturers directly and the rest to charging system infrastructure around the country. For comparison, the U.S. government spent about $20B in the same time span.
Despite the counters from some of the press, this government investment has been a huge reason that other governments have taken notice and acted to protect their markets. Many reports, like the much-cited Rhodium Group “5%”, ignore the impact that very low-interest loans and the heavy direct investment by the Chinese government into manufacturing have had. That has given Chinese automakers huge advantages compared to the rest of the world. This is why reports like that of OECD are more realistic when considering what the Chinese government’s role in automotive production has been. And what will happen once those government incentives leave the market.
Right now, the domestic market in China is stagnating and slipping. It’s fallen by roughly 20 percent in the past year, with non-domestic nameplates like General Motors and Volkswagen seeing a lot of that decline directly. China’s domestic brands are a mixed bag of market loss, some losing very little and others losing even bigger than the foreigners. What’s more, the high competition in the Chinese market has meant fierce discounting wars and oversaturation in product launches. This has greatly watered down the market on the whole and seems to have caused consumers to pull back. Especially in non-electric options and entry-level purchases.
To help make up for these losses domestically, Chinese automakers have been aggressively expanding the export market. High demand in some markets, such as Europe, Southeast Asia, and Latin America, has meant that many larger Chinese brands have been able to make up for sluggish at-home sales by selling elsewhere.
But that too is beginning to show signs of oversaturation. July 2026 was a banner month for exports, but the markets being exported to are now also beginning to slow.
Europe is a slow-growth market and most of the Chinese incursion has been at the expensive of legacy European automakers like BMW and VW, rather than in new sales. Mostly in low-cost electric vehicle market. But the European market is already full of EVs and is struggling due to a lack of investment in charging infrastructure as power consumption throughout the region reaches peak production.
Southeast Asia faces different issues. Most of these markets are dominated by Japanese brands and the market as a whole is growing at a solid pace. Yet electric vehicle infrastructure and interest from buyers in EVs is not as fast paced. Chinese brands are mainly gaining foothold through a tech-forward approach to design, which is now being countered by tech-heavy, non-EV (mostly hybrid) models from Toyota as a result.
The Chinese brands are doing best in Latin America, where the EV market has been slowly expanding in the large population centers of Mexico and Brazil. Brazil, however, has given some pushback on this as its domestic manufacturers continue to offer ethanol-based engines, the region’s most prominent low-cost fuel. Consumers are finding that charging an EV and filling the tank of an ethanol burner is about the same price. The Brazilian government has been heavily subsidizing and pushing sugar-based ethanol for decades. Mexico, meanwhile, has a slow-growth domestic market and primarily manufactures vehicles for export to the north. Something the Chinese cannot do. Some Chinese brands are building facilities for manufacture in Latin America, hoping to counter protective tariffs.
The trouble is that two of these three markets have something else not helping newcomers: very long vehicle lifespans. Both Southeast Asia and Latin America have long average durations of ownership and long-lifespan vehicles in their used markets. It’s tough to introduce a bunch of new models when proof of longevity for so many legacy models is all around you. Most of the Chinese growth in these areas has been with the more niche “early adopter” buyers.
As of right now, the Chinese automotive scene is still technically growing. But the cracks in the dam are visible. Like most boom-bust cycles, what we’ll likely see in China is the sudden failure of a host of domestic automakers. Mostly small fry and over-specialized makes. These will either disappear or be absorbed by larger competitors. Eventually, a handful of large, dominant companies will remain. They’ll all be companies that have been exporting heavily for the past year, like BYD, SAIC, and Chery.
This will further be pushed by the pullback of direct subsidization to manufacturers and consumer subsidies from the Chinese government, which as been focusing on political agreements to bolster exports.
Most domestic, consumer-side subsidies have dropped by over half in the past couple of years. Most notably the trade-in/scrappage program promoting electric car adoption and tax breaks for new energy vehicles (NEVs).
Manufacturer subsidies are still substantial, but many larger makes like BYD have seen the percentage of direct government subsidy drop by at least a third year-on-year. This will begin cutting into those manufactures’ ability to push cheap prices in foreign markets. Currently, Chinese makes receive roughly four times the government support (in terms of tax concessions, low-interest government loans, and direct grants) compared to their Western counterparts. That number is fading.
And with those fading numbers will come fading interest as the Chinese EV bubble starts to burst.
This article originally appeared on the AaronOnAutos Substack.
