Gasgoo Munich- Over the past five years, the market share of domestic passenger car brands has surged from 33% to 64%. In the new energy vehicle sector, that figure hits 90%, while export volumes have jumped from 1 million to 7.1 million units.

Yet that scale hasn’t translated into profitability. The net profit margin for China’s auto manufacturing sector has slid from 7.8% in 2017 to just 3.2% in the first quarter of this year.

These figures come from Xu Changming, former deputy director of the State Information Center, speaking at the 6th International Forum on Automotive Powertrain. He used this contrast to highlight a stark reality for Chinese automakers: scale is expanding rapidly, but profitability isn’t keeping pace.

For context, Toyota consistently maintains a net profit margin of 9% to 10%, while Mercedes-Benz hovers around 8% in normal years. Among top Chinese players, Chery led the industry last year with 6.5%. BYD, Geely, and Great Wall Motor sit between 4% and 5%, while SAIC and Changan are at just 2%. Some companies are even in the red.

Xu stressed a point throughout his speech: strong profitability and strong innovation are the defining traits of world-class enterprises. By that standard, the gap between Chinese automakers’ rapid scale expansion and their lagging profits represents a structural contradiction in the industry’s current development.

The Share-Profit Inversion

The rise of Chinese automakers is most visible in how they’ve rewritten the competitive landscape at home. Brands like BYD, Geely, Chery, Changan, and Great Wall Motor have seized the initiative in the mainstream market, leveraging their head start in the energy transition, product definitions tailored to local needs, and complete supply chains. In just six years, Chinese brands achieved a historic breakthrough, pushing market share from 30% to 60%.

But that leap in market share hasn’t delivered a corresponding boost in earnings. Data from the National Bureau of Statistics shows the net profit margin for domestic auto manufacturing has continued to slide from 7.8% in 2017 to 3.2% in the first quarter of this year—a figure that sits on the low end of the manufacturing sector.

The gap is even starker when compared with global heavyweights. Toyota’s revenue for 2025 is projected at roughly 2.2 trillion yuan, with gross margins long stabilized at 18% to 20% and net margins holding at 9% to 10%. Mercedes-Benz is expected to generate about 1.1 trillion yuan in revenue, with gross margins around 20% and net margins near 8% in a typical year. BMW’s net margin was around 6% last year.

Volkswagen Group saw its net margin retreat to about 2% last year, weighed down by volatility in the Chinese market. Yet its annual R&D spending remains close to 20 billion euros, keeping it at the top of the global automotive industry.

The contrast tells the story: China’s auto industry has reached the threshold of an automotive powerhouse in scale, but its value creation remains stuck at the level of a “large auto nation.” At home, Chinese brands hold one to two times the market share of international rivals, yet their profit margins are just half—or even a third—of theirs. This isn’t a management issue for a single company; it’s an industry-wide failure to shift the profit model from scale-driven to value-driven.

Xu points out that even when domestic companies report profits, they rely heavily on policy incentives and withholding payments to suppliers and dealers, rather than on pure competitive strength. That means the foundation for Chinese automakers’ current profitability is far from solid.

Any adjustment to purchase tax incentives, intensifying overseas competition, or a slowdown in domestic demand will squeeze industry profits. And it’s already happening: in the first quarter of 2026, domestic passenger vehicle demand fell 22% year-on-year. The market has entered a phase of contraction, leaving little room for further expansion.

The problem of “higher share, thinner profit” reflects how Chinese automakers have spent the last five years chasing scale. During the critical window of the EV transition, companies prioritized rapid market coverage and price wars to displace traditional joint ventures. The cost has been steep: profit margins are being continuously squeezed, trapping companies in a cycle where they sell more but earn less.

Viewed this way, Chinese automakers have achieved scale leadership at home but have yet to build the “profit and innovation cycle” that world-class companies rely on to survive.

The “Dual Strength” Logic of Global Giants

Through long-term tracking of global leaders like Tesla, BMW, Toyota, and Huawei, Xu has reached a conclusion: world-class companies are invariably “dual strong” in both profitability and innovation. They use profits to fund R&D, which feeds back into the brand, which supports pricing, creating a sustainable value loop.

Financially, top global automakers maintain a stable state of high gross margins and high R&D spending. Tesla’s 2025 revenue is approaching $95 billion, with gross margins holding around 18% and annual R&D investment at $6.4 billion—6.8% of revenue. In Xu’s view, Tesla’s ability to keep investing in AI, digital technology, and cost-cutting manufacturing is built entirely on that stable profit base.

Despite recent profit swings, Volkswagen Group still invests nearly 20 billion euros in R&D annually—roughly 150 billion yuan—keeping it at the forefront of the industry. Mercedes-Benz and BMW maintain similar intensity, with R&D ratios above 6%.

Toyota’s R&D ratio is about 3%, or just over 73 billion yuan. That’s not high among multinational automakers, yet it maintains leading advantages in HEV hybrids, lightweight materials, and battery technology—including solid-state batteries. It has long concentrated resources on improving fuel economy and reliability. That is the core competitiveness that keeps Toyota at the top of the global market.

Xu shared a telling detail: during the boom years of China’s auto market, Toyota refused to expand production aggressively. They believed that doubling output would make quality guarantees difficult. That cautious approach to safety is something other automakers would do well to learn from.

Huawei’s model offers even more direct proof of how high margins support innovation. In 2025, Huawei generated 880 billion yuan in revenue with a gross margin of 46.5%. It poured 192.3 billion yuan into R&D—more than 20% of its revenue.

Image Source: 6th International Forum on Automotive Powertrain

Xu noted that Huawei can afford to pursue multiple technology tracks simultaneously precisely because of that ample profit space, which also fosters a healthy supply chain. Huawei’s per-person cost is about 950,000 yuan, and it pays suppliers in roughly 80 days. Domestic automakers, by contrast, typically stretch that to 120 to 150 days.

The contrast is revealing. The core strength of world-class companies isn’t just leading in one technology; it’s establishing a positive cycle of “high profit → high R&D → high brand → high pricing.” Chinese automakers are currently stuck in a negative loop: low profit → scattered R&D investment → weak brand premium → forced price cuts → even lower profit. This isn’t a gap in a single capability; it’s a breakdown at the very start of the value cycle—profitability.

Currently, the average gross margin in China’s auto industry sits between 16% and 17%, with R&D spending around 6%. On paper, the gap with multinational automakers isn’t massive. The problem isn’t the intensity of investment, but its structure.

Domestic companies pour vast resources into rapid model development, shortening product cycles to 12 to 24 months. This results in lower production volumes per model, making it difficult to amortize R&D costs effectively. International automakers, meanwhile, typically maintain product cycles of 5 to 6 years, focusing on iterating software and core technologies. That drives higher R&D efficiency and profitability.

The gap in brand value further widens the profitability chasm. Brand value data shows Toyota at $62.7 billion, with Mercedes-Benz and BMW following at over $40 billion each. Volkswagen is at $35.8 billion, and Tesla sits above $27 billion. BYD ranks 11th, the only Chinese brand to crack the top 20.

This is because international automakers rely on brand premiums to secure pricing advantages, while Chinese brands still largely compete on value-for-money. The underlying logic of their profitability is fundamentally different.

The Truth About Profit After Policy Fades

Beyond weak brand premiums and fragile foundations, the paper profits of Chinese automakers also rely heavily on external policies and supply chain conditions. Xu explicitly warned that several policy supports propping up industry profitability are being phased out.

The vehicle purchase tax exemption has the most direct impact. The previous 10% exemption for new energy vehicles translated directly into price advantages and profit margins for companies. With that boost, the market share of domestic new energy passenger vehicles rose to 53% in 2025. Companies like BYD and Geely benefited, expanding sales volume and keeping profits relatively stable even as the price war intensified.

But after the tax was adjusted to 5% this year, the pressure on corporate profits became immediately apparent. Because the policy pullback had front-loaded some consumer demand, most listed Chinese automakers saw their profits squeezed in the first quarter of 2026. For instance, BYD, Geely, and Great Wall Motor all reported double-digit declines in net profit during that period.

Image Source: 6th International Forum on Automotive Powertrain

Xu estimates that if the tax returns to the statutory 10%, the 5-percentage-point difference won’t be absorbed by automakers alone. It will be passed down to consumers and the supply chain, further compressing industry profits.

Consumption tax and power battery incentives are equally significant. Pure electric vehicles are currently exempt from consumption tax, and batteries enjoy tax breaks. Yet Xu emphasizes that every dominant industry eventually returns to a normal tax system; the withdrawal of these incentives is an inevitable trend.

Beyond policy, occupying funds in the supply chain is a crucial tool for automakers to maintain paper profits. Global automakers typically pay suppliers within 35 to 60 days: Toyota at 52, Volkswagen at 40, Mercedes-Benz at 36, BMW at 42, and Tesla at 60. Top Chinese companies, however, often stretch payment cycles to 125 to 200 days—with some exceeding six months.

Xu noted that although regulations require payments to small and medium-sized enterprises within two months, practical methods are often used to extend these periods. Automakers are effectively relying on supplier capital to fund operations. This model eventually trickles down to dealerships, where channel profits are squeezed to the limit.

Data shows many listed dealership groups are in the red: Zhongsheng’s net margin was -1.2%, Yongda -9.8%, Meidong -3.8%, and Hexie -3.6%. Xu put it bluntly: “Dealer losses are essentially them absorbing pressure on behalf of the manufacturers.”

Even the power battery industry, which appears relatively profitable, shows significant structural disparities. Xu pointed out that CATL’s profits significantly inflate the industry average. If you remove that company, the profitability of most component suppliers is far from optimistic.

In other words, if you strip away policy incentives and supply chain financing, the current “market-based profit margin” of China’s auto industry is even lower than the reported figures. Without purchase tax exemptions, battery tax breaks, and the hidden capital gains from extended payment terms, a significant number of companies would likely swing from profit to loss.

Behind the Price War: Uncertain Landscape, Relentless Internal Struggle

There is a deeper structural reason why Chinese automakers struggle to escape this low-profit trap: the competitive landscape has yet to stabilize, leaving companies trapped in a cycle of sacrificing price for volume.

Xu observed that the vast majority of domestic automakers refuse to accept the current status quo. Most tend to set aggressive volume targets, making “500,000 units last year, aiming for 1 million this year” the norm. The industry is locked in a state of hyper-competition where “no one acknowledges anyone else’s dominance.”

The shifting sales rankings of domestic brands over recent years offer a glimpse into this volatility. In 2022, Geely led domestic brands with 1.32 million units. In 2023, BYD took the top spot with Chery second. In 2025, BYD held first and Geely second. In the first four months of 2026, the gap between BYD and Geely narrowed to just 30,000 units, while Chery took third with 800,000 units. The hierarchy at the top remains in flux.

Image Source: 6th International Forum on Automotive Powertrain

The root cause of the domestic price war isn’t that competition is too fierce, but that the landscape is undefined. Japan has multiple automakers, but the structure is stable, and companies prioritize profitability and operational quality because they generally accept their respective market positions.

The Chinese mindset of “no one submits” turns every battle for market share into a war of attrition against profits. Intense competition directly triggers sustained price wars. Using the 2023 domestic auto price index (100) as a baseline, the index has now fallen to 73–75. Prices have dropped by about a quarter in two years, placing severe strain on the industry’s value system.

Even more alarming is that the price war is spilling overseas. Southeast Asia has become the first battlefield for Chinese automakers’ expansion. While they’ve captured about 20 percentage points of market share, competition among Chinese brands has already extended from sales to local manufacturing. As more players enter South America and the Middle East, profit margins will face further compression. At the same time, rising requirements for overseas localized production will continue to drive up costs.

Facing this profitability dilemma, Xu offers clear advice: companies must abandon the inertia of arbitrary price cuts and instead shift toward sustained R&D investment and strengthened innovation capabilities. The path to profitability lies in technology and value.

Summary: Profitability Will Be the Key Test in the “15th Five-Year Plan”

The “15th Five-Year Plan” period will usher in a development phase distinct from the “14th.”

During the “14th Five-Year Plan,” both domestic and export markets grew together, creating nearly 10 million units of incremental space. Xu predicts the “15th Five-Year Plan” will be defined by “stability at home, growth abroad.” The domestic market is transitioning from high-speed growth to a phase of fluctuating, slow expansion.

Add to that the withdrawal of policy dividends, tightening financing environments, and intensifying overseas competition, and Xu’s conclusion is clear: profitability will be the core factor determining whether automakers can survive the “15th Five-Year Plan.”

From 33% to 64%, Chinese automakers completed a leap in scale over five years. But the profit margin slide from 7.8% to 3.2% traces a trajectory in the opposite direction. This isn’t the problem of a single company; it’s the result of an entire industry choosing a development model of “trading profit for share.” Yet as the domestic market stabilizes, export competition heats up, and policy tailwinds fade, the day when “scale growth can’t outrun profit decline” is fast approaching.

In the future, only by breaking free from dependence on price wars, policy crutches, and supply chain financing—and instead building sustainable competitiveness through core technology, brand premium, and operational efficiency—can Chinese automakers truly join the ranks of world-class enterprises. This requires not only corporate long-termism but a consensus on value across the entire industry.

The next five years for Chinese auto should be defined by winning on profitability, not just scale.