In late March 2026, BYD’s annual financial results for 2025 were announced at its expansive Shenzhen headquarters in a tone that was unusual for a company that had spent years setting records. Net profit had dropped to about $4.8 billion, a 19% decrease. Although revenue had increased, it was only by 3.5%, well below expectations. The company’s net profit margin had compressed from 5.2 percent to 4.1 percent in a single year, and its operating cash inflow had declined by more than 50 percent while borrowing had increased fourfold. The domestic market has reached “fever pitch,” according to Wang Chuanfu, chairman of BYD, and the competitive landscape is “a brutal knockout stage.” BYD is still the biggest EV manufacturer in the world by volume, so this was not a struggling company. However, it was a business outlining the structural harm that a protracted price war causes to even the most well-managed player. The state of the industry is far worse if BYD’s margins are declining so quickly.
The pressure is explained by nearly ridiculous numbers. According to Goldman Sachs, Chinese EV manufacturers will be able to produce about 25 million cars annually by 2026. The estimated total demand for EVs worldwide is roughly equal. In other words, China alone has enough factory space to produce every electric car that could be purchased worldwide. This capacity was established while the domestic market was still expanding, before demand started to decline, before subsidies were removed, and before more than a dozen significant rivals had introduced goods that were competitive enough to reduce each other’s sales. As a result, there is a type of supply glut that, regardless of any deliberate decision to lower prices, drives down prices due to the simple math of excess inventory. Something has to give when your output exceeds your clientele. What matters in the EV market is the sale price, which in turn determines the margin.
| Topic | The EV Price War: Why Profit Margins Are Shrinking Fast |
| Industry Margin Reality | Average automotive profit margins in China have fallen from 6.1% in 2021 to 5.7% in 2022 to 5% in 2023 to an industry-wide low of approximately 2.9% in early 2026. BYD — the world’s largest EV maker — reported its first annual profit decline in four years: net profit fell 19% in 2025 to 33 billion yuan ($4.8B) despite revenue growing 3.5% |
| Scale of Price Cuts | Average vehicle prices in China fell approximately 19% over two years. Battery-electric vehicles saw cuts exceeding 20%. Chinese authorities warned manufacturers in May 2025 that penalties could follow excessive price discounting — an unusual intervention reflecting the severity of the competition |
| Overcapacity Problem | Goldman Sachs estimated that by 2026, Chinese EV manufacturers would have the capacity to produce 25 million vehicles per year — equal to the entirety of projected global demand. Excess inventory is so severe that dealerships are registering brand-new cars as “used” to circumvent manufacturer-imposed price floors |
| BYD-Specific Data | Net profit margin fell from 5.2% in 2024 to 4.1% in 2025. Q2 2025: net profit fell 30% to $891 million despite revenue growing 14%. BYD’s domestic China sales dropped 7.8% to 3.55 million vehicles. China’s market share (including PHEVs) fell from 27% to 17% in the first two months of 2026. Operating cash inflow declined more than 50%; borrowing increased fourfold |
| Reference | Seafarer Funds — Nobody Wins in a Price War: Destructive Competition in China (seafarerfunds.com) |
This dynamic is known in the Chinese industry as “neijuan,” or involution, which is the phenomenon of escalating competition that eventually becomes destructive rather than productive and yields diminishing returns for all participants. It depicts a situation in which manufacturers cut prices, even if it means selling at or below cost, because the alternative—losing market share—feels worse in the short term rather than because they hope to increase profits by selling more units. In order to get around minimum price floors set by manufacturers, dealerships in China have been registering brand-new cars as “used”—a detail that may sound anecdotal but is actually diagnostic. This indicates that the distribution network is constantly coming up with new ways to get around the restriction, and the official minimum prices have no bearing on what the market will accept. The government eventually issued regulations requiring manufacturers to pay within 60 days as a result of suppliers’ complaints about payment terms that were stretched so aggressively that some exceeded 90 days. No single player has the ability to unilaterally end the price war that is squeezing the entire supply chain.
BYD’s domestic China sales fell 7.8 percent in 2025, and its share of the Chinese EV market (including plug-in hybrids) dropped from 27 percent to approximately 17 percent in the first two months of 2026 — a compression driven not by BYD losing ground to Western competition, but by Chinese rivals including Geely, Huawei, SAIC, Xiaomi, and others gaining ground simultaneously. The Chinese market now has more than 90 active automotive brands, according to some counts. In any meaningful way, none of them are profitable on their EV lines. He Xiaopeng, the founder and chairman of Xpeng, predicted in a 2025 podcast that the industry’s “knockout stage” would last up to five years and produce only five survivors from the current field. Over 400 Chinese EV companies have already closed their doors since 2018. At its height, the industry had almost 500 manufacturers.
The ramifications for Western automakers are significant and still not completely understood. Because of China’s cost structure advantage, which is estimated to be around 30% in manufacturing, battery technology, and supply chain, the price war being waged in China is already discounted in Western markets before further pressure from competitors is applied. When BYD introduces a model in Europe at a lower price than VW, it does so from a cost base that VW is unable to match in the near future and might not be able to match at all, absent a significant overhaul of the German auto industry. In 2024, the CEO of Volkswagen admitted that Chinese competition was “so fierce” that it was impossible to match it without setting “realistic expectations”—a statement that, when closely examined, sounds a lot like a warning to investors about lower returns. Ford essentially withdrew from its plans to expand EVs. After years of development, Apple ended its EV project in 2024.
Given the current state of industry margins, which are roughly 2.9 percent in early 2026 compared to double that just a few years ago, there is a sense that market forces alone might not be able to produce quickly enough and that the stabilization everyone is waiting for requires consolidation that hasn’t yet occurred. The businesses that make it through the knockout stage will probably be much stronger and more competitive internationally than they are now. However, getting there will cost the industry billions of dollars in losses, thousands of jobs in closed facilities, and at least some of the accumulated optimism regarding the speed at which the EV transition would yield returns. Price warfare was not a tactic. The market emerged. And markets with this kind of distortion usually find a difficult solution.
