Here’s the real reason why China’s EVs dominate their Western rivals

Politicians and auto industry leaders in the United States and Europe have long argued that state subsidies for Chinese electric car makers distort global competition.

A new report from research firm Rhodium Group challenges this assessment, saying structural advantages, not subsidies, are the key factor giving Chinese EV makers an advantage over Western automakers.

According to Rhodium, these structural efficiencies include vertical integration, increased production scale, and lower overhead costs, which outweigh the impact of heavy state subsidies on Chinese electric vehicle manufacturers’ profit margins.

Since 2009, Chinese authorities have disbursed more than $29 billion in tax breaks and subsidies to manufacturers of consumer electric vehicles, according to estimates from MIT Technology Review.

According to Bo Cheng of the National University of Singapore, these subsidies are “very important in the early development of EVs in China”, especially for startups to gain access to much-needed funding.

“Unlike China, the U.S. capital market provides sufficient financial support to companies like Tesla,” said Chen, a senior fellow at the university’s East Asia Institute.

China’s dominance in the EV industry suggests that the Chinese government’s approach is paying off.

Tu Le, founder of auto consultancy Sino Auto Insights, said these subsidies and a spirit of innovation and rapid development have allowed Chinese EV makers to stay ahead of traditional carmakers in the West.

Rhodium did not dispute the benefits provided by China’s state subsidies, but said the cost benefits from subsidies (which Western automakers operating in China also benefit from) “remain small compared to the structural cost benefits.”

The report said increased vertical integration, in which companies control multiple production stages, is the “single most important factor” allowing Chinese automakers to lower the cost of EVs without significantly sacrificing profit margins.

For example, BYD produces nearly 80% of its core components in-house, more than twice as much as any other company. teslaRhodium estimates that this will allow Chinese automakers to save significantly on supplier price hikes for various parts.

According to the report, this will save BYD about $2,369 in supplier markups per Seal sedan compared to Tesla’s Model 3.

As a result, BYD was able to secure a gross profit margin of 20% compared with Tesla’s 18% in 2025, Rhodium said, even though the Model 3’s selling price in China is about 235,000 yuan ($33,943), nearly three times the 79,800 yuan that BYD advertises as the base Seal model.

However, Leon Chen, head of the mobility practice at management consulting firm YCP, cautioned that vertical integration is not a uniform feature across China’s auto industry.

“Among EV players in China, only a few companies like BYD are doing this,” Chen said. “There are a lot of legacy auto players and they don’t really have this kind of vertical integration.”

The report identified BYD and Leapmotor (an EV startup partly owned by Stellantis) as clear outliers in terms of vertical integration. Rhodium says Leap Motor produces about 60% of its parts in-house, saving its B01 sedan about $816 per model compared to Tesla’s Model 3.

According to Chen, batteries, which account for one of the largest costs in EV production, are produced in-house by BYD and Leap Motor, significantly reducing indirect production costs for both automakers.

Chen also cautioned against taking the Rhodium report’s calculations at face value, as it is difficult to determine the exact cost advantage of Chinese manufacturers from profit and loss calculations alone.

Chinese automakers are known to rely on extended payment terms with suppliers to help slow cash outflows and maintain higher working capital levels, Chen said.

Longer payment cycles could also make margins look wider in the short term, he added.

Other analysts echoed Chen’s view. “Vehicles manufactured in China benefit from structural efficiencies that are often underestimated,” said Omdia Senior Analyst Chris Liu.

“These embedded supply chain benefits play an important role in driving affordability, beyond the direct state subsidy impact,” Liu added.

Although not universally applied to all Chinese manufacturers, vertical integration is “more common[among Chinese companies],” said Sino Auto Insights’ Li.

According to the Rhodium report, many Western automakers have “reduced vertical integration by outsourcing key components to specialized suppliers” over the past few decades.

This push for outsourcing was driven by cost pressures and “the belief that suppliers can achieve efficiency and innovation at scale,” but the report said concerns about higher unit costs due to vertical integration “are not really applicable.”

Rodium said Western assumptions about the cost efficiency of outsourcing are being challenged as construction and manufacturing costs in China have fallen significantly. This allows companies like BYD to concentrate production domestically and maintain significant cost advantages.

But it will be difficult for Western automakers to return to vertical integration without incurring significant costs.

According to YCP’s Chen, outsourcing has created deep interdependencies between traditional original equipment manufacturers and component suppliers.

Some expenses are not purely financial. Chen said bringing component production back in-house could also lead to mass layoffs among suppliers.

—CNBC’s Dylan Butts contributed to this report.