China's Auto Industry in 2026: Integrated Trend Outlook and Multi-Institution Investment Strategy Review

Category: Industry Strategy & Outlook Data Cutoff: Q1 2026

1. Executive Summary

China's auto industry is entering a critical transition point in the mid-to-late stage of electrification and intelligentization. Based on research from 12 Chinese and international brokerages and consulting firms, this report highlights six core conclusions:

1. The industry has entered an era of replacement-driven demand, and NEVs remain the only structural growth engine. China's auto market stabilized at an annual sales base of 31 million units in 2025, with vehicle parc reaching 350 million. NEV penetration has crossed the 50% threshold (BEV about 32.1%, PHEV about 15%, EREV about 5%), while legacy ICE sales are shrinking rapidly, with wholesale volume expected to fall 14%.

2. The price war has moved into a deep-water phase of "higher volume, lower profit." Vehicles priced below RMB 100,000 now account for 25% of the market. In the first three quarters of 2025, passenger vehicle sector revenue rose 8.68%, but net profit fell 15.72%, showing a clear pattern of sales growth without earnings growth.

3. Export mix upgrading and trade barriers are advancing at the same time. In the first ten months of 2025, NEV exports reached 2.014 million units, up 90.4% year on year, with PHEV exports surging 205%. However, differentiated EU tariffs (17% for BYD, 35.3% for SAIC) are forcing a medium- to long-term shift from vehicle exports to overseas manufacturing.

4. Intelligentization is the industry's most important theme in 2026. China's L3 autonomous driving commercialization threshold was cleared in December 2025, end-to-end ADAS is moving rapidly into mass-market segments, and China's intelligent vehicle sales are expected to exceed 30 million units by 2030.

5. Auto parts have significantly outperformed OEMs (+34.76% vs. -0.40%), and three investment tracks stand out. ADAS chips, domain controllers, steer-/brake-by-wire chassis, humanoid robot supply chains, and liquid-cooling thermal management are emerging as the core growth pillars for auto parts in 2026.

6. Institutional strategies differ, but each has a clear focus. OEM allocation is centered on structural alpha opportunities (Morningstar prefers Geely at 12x PE), auto parts are viewed as an industry beta trade (Soochow Securities highlights three major tracks), and battery materials are tied to global expansion (BOCI recommends full-chain exposure).

2. Industry Landscape: From Incremental Growth to Replacement Demand, with NEVs Still the Structural Growth Engine

2.1 A 31 Million-Unit Sales Platform and the Rise of Replacement Demand

China's auto market reached a stable annual sales platform of 31 million units in 2025, with total vehicle parc at 350 million. Replacement demand has now overtaken first-time purchases as the industry's core growth driver. From January to October 2025, domestic auto sales reached 22.071 million units, up 11.6% year on year, while exports reached 5.616 million units, up 15.7%.

Morningstar expects China's light vehicle demand to grow only 1%-3% in 2025, slowing from 4% in 2024, mainly because repeated policy stimulus from 2023 to 2025 has partly pulled forward medium- and long-term demand. Still, the long-term outlook remains constructive. Assuming 5.5% annual consumption growth, China's auto sales are expected to grow at around 4.5% CAGR from 2023 to 2033, and vehicle ownership per 1,000 people is projected to reach 388 by 2033, up from 227 in 2023. Faster per-capita disposable income growth in rural areas than in cities is also becoming an important source of incremental SUV demand.

2.2 NEV Penetration Above 50%: A Three-Track Powertrain Structure

China's NEV penetration rate has climbed rapidly from 20% in 2022 to over 50% in 2025, forming a diversified BEV + PHEV + EREV structure:

• BEV: Penetration rose from 3.9% in 2019 to 27.7% in 2024 and about 32.1% in the first three quarters of 2025, keeping BEVs as the dominant NEV category.

• PHEV: Penetration jumped from below 1% in 2021 to 14.9% in 2024 and about 15% in the first three quarters of 2025. China's PHEV sales reached 3.8 million units in 2024, accounting for 70% of global PHEV sales.

• EREV: Penetration increased from nearly zero to about 5%, with range-extended systems gaining further traction in the premium segment.

KPMG forecasts China's NEV sales will rise from 11 million units in 2024 to 13 million units in 2026. Penetration varies sharply by segment: NEVs have reached 100% penetration in A00 microcars and 76% in A0 small cars, while C-segment large vehicles are also moving upward.

CMB International expects wholesale volume of new energy passenger vehicles to grow 18.5% year on year in 2026, and independent Chinese brands' market share to rise to 61.8%.

2.3 The Deep-Water Phase of the Price War: Higher Volume, Lower Profit

The price war is reshaping China's market price-band structure. CMB International notes that vehicles priced below RMB 100,000 now account for 25% of the market, while Chinese consumers are increasingly crossing vehicle classes and price bands in pursuit of value for money, weakening brand loyalty.

This trend is especially visible in profitability. According to Soochow Securities, passenger vehicle sector revenue rose 8.68% year on year in the first three quarters of 2025, but net profit fell 15.72%. Sales growth without profit growth has become the new normal. Aggressive pricing can lift volume in the short term, but it continues to pressure industry-wide profitability.

Sales of NEVs still maintain 15%-25% high growth, but sector-wide profit has fallen sharply. The industry is caught in a trap where selling more does not necessarily mean earning more, reflecting the core contradiction in China's current auto competition: market share has taken priority over profitability.

3. The New Export Landscape: Product Mix Upgrading and Trade Barriers Coexist

3.1 Export Mix Shifts Toward NEVs and Mid-to-High-End Models

In the first ten months of 2025, China's NEV exports reached 2.014 million units, up 90.4% year on year. BEV exports reached 1.78 million units, up 24.7%, while PHEV exports reached 783,500 units, up 205%. The export mix is shifting from low-priced ICE vehicles toward a dual structure of NEVs and mid-to-high-end models.

The technology and brand halo effects of emerging EV makers are lifting the overall overseas image of Chinese vehicles. BOCI expects China's NEV exports to reach 6.72 million units in 2025, up 20% year on year, making exports an important growth pillar for the industry.

3.2 Differentiated EU Tariffs and the Shift in Overseas Expansion Models

The EU's anti-subsidy tariffs on Chinese BEVs differ sharply by automaker: BYD 17.0%, Geely 18.8%, SAIC 35.3%, Tesla 7.8%, and other companies 35.3%. At the same time, Europe's 2025 CO2 emissions target was tightened by 19%, starting from 116 g/km for passenger vehicles, pushing European automakers to accelerate electrification. After declining in 2023-2024, Europe's NEV penetration recovered to over 22% in 2025.

Guoyuan Securities argues that as trade barriers rise, pure vehicle exports face a ceiling. Overseas production capacity, localized manufacturing, and coordinated supply-chain expansion are becoming the core path to breaking the medium- and long-term growth bottleneck. Chinese auto parts companies are following a "low-cost regional hub" strategy, such as building capacity in Mexico under USMCA to serve North America, and in Central and Eastern Europe, including Poland, Serbia, and Hungary, to serve Europe.

Exports are still growing at 90.4%, but tariffs as high as 35.3% and localization requirements are narrowing the space for a pure vehicle-export model. Future growth will increasingly depend on overseas capacity buildout.

3.3 A Stronger Matthew Effect and the Rise of Independent Chinese Brands

CMB International expects independent Chinese brands' passenger vehicle market share to rise to 61.8%. Guoyuan Securities notes that the Matthew effect is intensifying, industry concentration is accelerating toward leading players, and weaker automakers face a rising risk of exit. At the same time, state-owned automakers may gain structural opportunities through resource integration and deeper joint-venture partnerships, such as GAC Toyota and Volkswagen's cooperation with SAIC.

4. Policy Reset: 2026 Purchase Tax Adjustment and Normalized Trade-In Programs

4.1 Short-Term Demand Impact from Purchase Tax Changes

A key policy change in 2026 is the rollback of NEV purchase tax incentives. Under the June 2023 joint announcement by three government ministries, new energy passenger vehicles were fully exempt from purchase tax in 2024-2025, capped at RMB 30,000, but the policy shifts to a half-rate exemption in 2026-2027, capped at RMB 15,000.

This means that in 2026, consumers buying an NEV priced below RMB 339,000 will pay an additional purchase tax cost of about 4.42%, while buyers of models above RMB 339,000 will bear an extra fixed cost of RMB 15,000. Lower-priced mass-market models are more sensitive to price changes and are likely to be hit harder.

4.2 Normalized Trade-In Policies and Year-End Demand Pull-Forward

China's trade-in policy continued in 2025. The central government offered RMB 15,000-20,000 scrappage subsidies to buyers replacing China III/China IV emissions-standard vehicles and early-generation NEVs, while replacement subsidies were capped at RMB 15,000 for NEVs and RMB 13,000 for ICE vehicles. However, no new 2026 policy has been issued yet, and provinces including Hubei and Jiangsu have already suspended local auto trade-in subsidies.

This policy timing has pulled some demand forward into 2025, creating a year-end sales boost, but it also raises the risk of demand being overdrawn in 2026.

Taking both the half-rate purchase tax policy and the suspension of local subsidies into account, NEV demand may face short-term pressure in the first half of 2026, but should gradually recover in the second half as new policies are rolled out and the industry adapts.

4.3 Purchase Tax Relief Through 2027 Provides a Medium- to Long-Term Floor

Importantly, the purchase tax benefit is being reduced, not eliminated. NEVs will still receive a half-rate exemption in 2026-2027, creating a policy floor for demand. Morningstar notes that even with incentive rollback, NEVs may still be included in urban license-plate quota systems. Combined with higher consumer acceptance, better driving range, and smarter user experiences, the substitution of NEVs for ICE vehicles is unlikely to reverse.

5. Intelligentization: The Core Industry Theme of 2026

5.1 L3 Commercialization Approval: A Milestone from Testing to Deployment

On December 15, 2025, China's Ministry of Industry and Information Technology approved market-entry applications for two intelligent connected vehicle models equipped with L3 conditional autonomous driving, marking the formal shift of China's L3 autonomous driving from testing to commercial deployment.

AJ Securities expects 2026 to be a window in which advanced ADAS technology maturity, regulation, user acceptance, and business models all break through together. Penetration of L2+ and above advanced ADAS is expected to accelerate from 2026, while L4/L5 may achieve meaningful breakthroughs in 2027-2028. By 2030, intelligent vehicle sales in China are expected to exceed 30 million units.

5.2 Technology Roadmap: End-to-End Systems and Embodied Intelligence

Advanced ADAS is evolving from rule-based systems to AI-powered perception (BEV + Transformer), then to end-to-end control and ultimately embodied intelligence. Guoyuan Securities lists "faster democratization of end-to-end ADAS" as one of its top ten trends for 2026, implying that advanced ADAS is spreading from premium vehicles to the mass market.

Smart cockpits are also reshaping purchase decisions. The cockpit is becoming the center of perceived user experience, and features such as HUDs are seeing higher fitment rates as demand for differentiated experiences rises.

5.3 Scaling Three Major Autonomous Driving Use Cases

Guoyuan Securities identifies three major autonomous driving deployment scenarios:

• Robotaxi: Commercialization will be driven by mature advanced ADAS, policy pilot expansion, and lower costs from scale. Robotaxi penetration in China's smart mobility market is expected to exceed 30% by 2030.

• Autonomous mining: Penetration rose quickly from 1.1% in 2021 to 5.7% in 2024. Financing activity increased significantly in 2024-2025, and the segment has moved from technical validation to scale replication.

• Logistics and commercial vehicles: L3 commercialization will drive mass adoption of intelligent chassis technologies, including brake-by-wire, steer-by-wire, and domain controllers, making this one of the earliest L4 scenarios to reach a closed commercial loop.

6. Auto Parts: Three Investment Tracks Outperforming OEMs

6.1 Auto Parts vs. OEMs: A Clear Performance Divergence

In 2025, the auto parts index rose 34.76%, while the passenger vehicle index fell 0.40%, showing clear outperformance by auto parts over OEMs. Soochow Securities argues that overall beta in auto parts may weaken in 2026, but structural opportunities remain better than aggregate growth opportunities.

The essence of this divergence is that OEMs are under direct pressure from the price war, while auto parts companies are finding new growth space through technology upgrades and global expansion.

6.2 Three Key Tracks

Track 1: Intelligent Driving Hardware (Chips + Domain Controllers + Sensors + By-Wire Chassis)

Domain controllers are the key to hardware-software decoupling and software-defined vehicles, with the ADAS domain and cockpit domain at the core and future evolution moving toward cross-domain cockpit-driving integration. High-compute SoCs are becoming a core configuration in new models, and by-wire chassis is the critical actuator-layer hardware foundation for L3+ advanced ADAS. Dongxing Securities believes L3 commercialization is approaching, and localization of intelligent chassis hardware, including brake-by-wire, steer-by-wire, domain controllers, and compute chips, is accelerating.

Track 2: The Humanoid Robot Supply Chain

Soochow Securities defines 2026 as the scale-up stage in which embodied intelligence moves from 1 to 10. Tesla Optimus V3 is expected to launch in Q1 2026, and a "1 million units per year" production line is already under construction. UBTECH's Walker series orders had reached RMB 1.3 billion by November 28, 2025. Domestic participants include Unitree, AgiBot, UBTECH, and XPeng.

Humanoid robot technology is shifting from hardware-driven development to a dual engine of "hardware + intelligence." In 2020-2021, the focus was on mechanical structure and motion control. After the release of ChatGPT, AI foundation models gave robots cognitive and self-learning capabilities. From 2021 to 2024, Tesla, UBTECH, Fourier, AgiBot, XPeng, BYD, and Huawei all entered the field aggressively.

Track 3: Liquid-Cooling Thermal Management for AIDC

As energy storage battery demand supports a stronger profit outlook, liquid-cooling thermal management is becoming a key enabler of battery safety and performance. Soochow Securities includes it among the three major auto parts tracks for 2026.

6.3 Key Recommended Names

From an EPS perspective, Soochow Securities prefers product-driven companies and globalized platforms; from a PE perspective, it focuses on the three major tracks above. Its key recommended names include Fuyao Glass, Xingyu Automotive Lighting, Minth Group, Joyson Electronics, and Tuopu Group.

7. Integrated Review of Multi-Institution Investment Strategies

7.1 Overview of Institutional Views

7.2 OEM Investment: Structural Alpha Opportunities

Geely Automobile — Morningstar's Top Pick

Morningstar explicitly names Geely Automobile as its preferred stock, mainly for the following reasons:

• Valuation discount: Geely trades at 12x 2025 PE based on PitchBook consensus, below BYD's 21x and about 20% below Geely's own historical average.

• Accelerating NEV transition: NEV penetration reached 41% in 2024, up from 28% in 2023. Geely targets 1.5 million NEV sales in 2025, up 69% year on year, with NEVs accounting for 55% of total sales.

• Dual-brand growth engine: Zeekr delivered 222,000 vehicles in 2024 and targets 320,000 in 2025, up 44%; Galaxy targets 1 million units in 2025, doubling year on year.

• Margin inflection: Zeekr's unit losses continue to narrow, while Galaxy's scale benefits are emerging, and Geely's gross margin is expected to expand from its 14%-15% trough.

Other OEMs to Watch

Guoyuan Securities suggests watching export leaders such as BYD, Chery Automobile, SAIC Motor, and Geely Automobile, as well as emerging EV brands expanding overseas, including Leapmotor, XPeng, and Xiaomi Group. AJ Securities recommends XPeng, Xiaomi Group, Li Auto, Leapmotor, and Changan Automobile, and favors leading automakers with full-stack in-house capabilities across algorithms, chips, and data closed loops.

7.3 Auto Parts Investment: Industry Beta Opportunities

Soochow Securities' three-track auto parts strategy provides a clear framework for 2026 allocation. Compared with OEMs under price-war pressure, auto parts companies can generate excess returns through three routes:

• Technology upgrade: Moving from single components to system solution providers, such as domain controllers and by-wire chassis.

• Globalization: Following Chinese OEMs overseas and using low-cost regions such as Mexico and Central/Eastern Europe to serve North America and Europe.

• Cross-industry expansion: Entering the humanoid robot supply chain and AIDC liquid-cooling track to open new growth space.

7.4 Batteries and Materials: Global Expansion Opportunities

BOCI recommends NEV opportunities across the full value chain:

• Batteries: CATL, EVE Energy, Sunwoda, and Highpower Technology. SVOLT completed its Hong Kong IPO in April 2025, and CMB International believes its market value is still underappreciated.

• Materials: Dynanonic, Ronbay Technology, XTC New Energy, Huayou Cobalt, Putailai, Shanshan Tech, Zhongke Electric, SEMCORP, Tinci Materials, and Capchem.

Chinese battery and materials companies are accelerating global expansion with capacity deployments in Brazil, Hungary, Thailand, Malaysia, the United States, Türkiye, Morocco, Indonesia, France, Spain, and South Korea.

7.5 Guoyuan Securities' Three Industrial Curves Framework

Guoyuan Securities proposes a layered, phase-based investment strategy from an industry life-cycle perspective:

• First curve (traditional ICE vehicles): Shrinking overall, but still offering structural opportunities through SOE consolidation and deeper JV cooperation.

• Second curve (electric intelligent vehicles): The main battlefield, where rising NEV penetration and intelligentization are the core growth drivers.

• Third curve (autonomous driving / embodied intelligence): The future industry wave, supported by L3 commercialization and humanoid robot mass production.

7.6 Strategy Summary and Allocation Suggestions

8. Key Conclusions and Risk Factors

8.1 Key Conclusions

1. China's auto industry has shifted from "broad-based incremental growth" to "replacement-driven divergence." The 31 million-unit annual sales platform is in place, and growth mainly comes from NEVs replacing ICE vehicles. NEV penetration rose from 20% to over 50% in just three years, but profitability remains under heavy pressure, with net profit down 15.72%, and the deep-water price war is unlikely to reverse in the near term.

2. Policy creates short-term disruption in 2026 but does not change the long-term direction. Half-rate purchase tax treatment and the suspension of local trade-in subsidies may weigh on first-half demand, but NEVs' product advantages over ICE vehicles, including 400-1,000 km range and smarter user experiences, together with license-plate quota policies, should continue to support medium- and long-term penetration gains.

3. Intelligentization is the most visible industry theme in 2026. L3 market-entry approval, democratization of end-to-end ADAS, scaling of three unmanned commercial scenarios, and the run-up to humanoid robot mass production together create an industry resonance that extends from autos to broader intelligent hardware.

4. Auto parts offer a clearly better investment risk-reward than OEMs. The 2025 performance gap of +34.76% versus -0.40% shows that in a price-war environment, auto parts companies transitioning toward intelligentization, globalization, and cross-industry expansion are more attractive than OEMs directly exposed to pricing pressure.

5. The export model is shifting from "selling products" to "building capacity." Export growth of 90.4% and peak EU tariffs of 35.3% coexist, which means medium- and long-term competitiveness will depend on overseas manufacturing footprints and localized operations.

8.2 Risk Factors

• Policy risk: No new 2026 trade-in policy has been announced yet, and the suspension of local subsidies could create a larger-than-expected demand shock.

• Trade barrier risk: EU tariffs are as high as 35.3%, and trade protection in other countries or regions could escalate further.

• Price-war deterioration risk: If the industry's "higher volume, lower profit" pattern worsens, weaker automakers may exit in larger numbers and trigger supply-chain spillovers.

• Technology execution risk: Commercialization of frontier technologies such as L3/L4 autonomous driving and humanoid robots may proceed more slowly than market expectations.

• Intensifying domestic competition: As independent Chinese brands' share rises to 61.8%, joint-venture brands may counterattack through deeper cooperation, such as GAC Toyota and Volkswagen-SAIC, increasing uncertainty in the competitive landscape.