Source Credit : Portfolio Prints
China’s auto market is on track for its worst performance since 2021, as consumer demand for passenger vehicles slumps sharply after record sales in 2025.
Following a 20.2% decline in passenger vehicle sales during the first half of the year, the China Passenger Car Association (CPCA) cut its 2026 retail sales forecast, now expecting a 14% annual decline compared with its earlier projection of flat growth.
The industry body forecasts total passenger vehicle deliveries of 20.4 million units in 2026, down from a record 23.7 million units last year. Sales in the first six months of the year totaled 8.7 million vehicles.
Some analysts expect an even steeper downturn. Xiao Feng, head of Hong Kong/China Industrials Research at Citic CLSA, forecasts a 20% year-on-year decline in overall vehicle sales, significantly worse than the CPCA’s outlook. He is comparatively more optimistic on new energy vehicles (NEVs), including battery-electric and hybrid models, predicting sales in the segment will decline by a more modest 5% to 6%.
“This is going to continue to be a brutal year,” Tu Le, founder of Sino Auto Insights, told CNBC, pointing to intensifying competition as automakers battle for shrinking consumer demand.
Several factors have weighed on vehicle purchases this year, including rising fuel costs and the gradual withdrawal of government incentives for electric vehicles.
Transportation energy prices rose 15.3% year-on-year in June, according to China’s National Bureau of Statistics. The increase has accelerated the decline in demand for internal combustion engine (ICE) vehicles, with ICE retail sales falling 39% year-on-year during the month. Pure gasoline-powered models recorded an even steeper 42% drop and accounted for 78% of the overall decline in passenger vehicle sales.
Meanwhile, Beijing’s scaling back of subsidies for NEVs has cooled consumer demand after years of policy-driven growth. “Policy only moves demand around,” Feng told CNBC, arguing that the weak sales environment in 2026 may reflect consumers bringing forward purchases into 2025 to take advantage of incentives.
At the same time, automakers are facing mounting cost pressures. Prices for key battery materials and components, including lithium and memory chips, have risen sharply, squeezing profitability across the industry.
According to CPCA Secretary General Cui Dongshu, industry profit margins fell to just 3.4% between January and May 2026, while overall profits dropped 20% year-on-year. Passenger vehicle prices declined more than 1% in June, further eroding margins already under pressure from fierce competition.
Feng believes the challenging environment will accelerate consolidation in China’s crowded EV market, reducing the number of significant players to seven or eight by the end of the decade.
He expects many foreign automakers to struggle to remain competitive in China, with domestic manufacturers such as BYD, Geely and Leapmotor likely to emerge as long-term winners alongside global brands including Volkswagen and Toyota.
However, even established international players are under pressure. Volkswagen’s first-half delivery figures showed a 25.9% year-on-year decline in China despite the company’s aggressive push into electric vehicles.
Analysts say maintaining scale has become critical for survival. Feng estimates that automakers need annual sales of at least 500,000 vehicles to break even, around 1 million units to generate sustainable profits, and roughly 2 million units to achieve full economies of scale.
Manufacturers unable to reach those thresholds are likely to be forced out of the market as competition intensifies.
Among domestic automakers, BYD reported 1.8 million vehicle sales in the first half of 2026, followed by Geely with 1.4 million and Leapmotor with 356,000 deliveries. Among foreign manufacturers, Volkswagen Group reported 973,000 deliveries during the period, while Toyota recorded 579,000 deliveries between January and May.
Despite the near-term challenges, some analysts believe the downturn could set the stage for a recovery in 2027.
“We expect much better demand next year,” Feng said, describing China’s auto market as cyclical. As vehicle fleets age and replacement demand builds, sales are expected to rebound, particularly if economic conditions improve.
“With a better economic outlook, even stronger growth could be expected,” Feng added, reiterating his confidence in a recovery next year.
Exports could provide an additional source of support. Chinese automakers are increasingly benefiting from growing overseas demand as consumers seek alternatives to higher fuel costs.
According to CPCA data, passenger vehicle exports rose 11.5% month-on-month and surged 82.3% year-on-year to 877,000 units in June.
“Consumers overseas are pivoting to Chinese-made EVs because of the lower operating costs,” Fengming Lu, Assistant Professor in the Department of Political and Social Change at the Australian National University, told CNBC’s “The China Connection.”
Lu added that the conflict in the Middle East, which has disrupted global shipping routes and driven up fuel prices, has become “one of the major motivations” encouraging buyers to switch to electric vehicles.
