CHANGCHUN, CHINA – JULY 11: People visiting the 23rd Changchun International Automobile Expo held on July 11, 2026 in Changchun, Jilin Province, China. The exhibition was attended by 53 Chinese and foreign car manufacturers and exhibited more than 1,000 vehicles. (Photo credit: Zhang Yao/China News Service/VCG, Getty Images)
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China’s auto market looks set for its worst year since 2021 as consumer demand for passenger cars slumps after record sales in 2025.
With passenger car sales down 20.2% in the first half of this year, the China Passenger Vehicle Association has revised down its full-year retail sales forecast for 2026 to a 14% decline from the previous forecast of flat year-on-year growth.
Final shipments are expected to be 20.4 million units by the end of 2026, down from last year’s record high of 23.7 million units. Cumulative sales for the first half of the year are currently 8.7 million units.
Xiao Feng, head of Hong Kong/China industry research at CITIC CLSA, expects a bleaker outlook than CPCA. Cumulative car sales are expected to decline 20% year-on-year, compared to the association’s full-year forecast of a 14% decline. Feng maintained a slightly optimistic outlook for new energy vehicles (NEVs) such as electric cars, hybrid cars and vans, expecting NEV sales to decline 5% to 6% year-on-year.
“It’s going to be a tough year,” Sino Auto Insights founder Tu Le told CNBC, noting that competition is increasing as original equipment manufacturers struggle to capture sluggish demand.
Rising fuel costs and shrinking subsidies for electric vehicles are contributing to Chinese automakers’ struggles amid weak consumer demand.
According to data from China’s National Bureau of Statistics, transportation energy costs rose 15.3% in June compared to the same month last year, causing a collapse in demand for internal combustion engine (ICE) vehicles. Retail sales of ICE vehicles in June were down 39% year-on-year, and pure gasoline models were down 42%, accounting for 78% of the decline in overall passenger car sales for the month.
Automobile demand in 2026 will be suppressed due to the withdrawal of the Chinese government’s NEV subsidy, which had previously stimulated consumer appetite. “Policies only move demand,” Feng told CNBC, noting that the previous slump in auto sales “could be a reaction to last year’s front-loaded demand.”
Meanwhile, Chinese automakers are being squeezed by rising costs for raw materials and parts.
According to CPCA Secretary-General Choi Dong-soo, the cost of battery-related inputs, including lithium and memory chips, has skyrocketed, which has caused the industry’s overall sales profit margin to fall to 3.4% from January to May 2026, resulting in a 20% year-on-year decline in industry profits. Passenger car prices in June fell by more than 1% compared to the same month last year, further shrinking already thin profit margins.
Feng predicts that these razor-thin profit margins will lead to market consolidation, with China’s fragmented EV market consolidating into seven or eight large players by 2030.
He predicted that US automakers would not be able to survive in the highly competitive Chinese car market. Domestic manufacturer BYD, geely and leap motor, german volkswagen and toyota japan Among those who remain standing.
However, despite Volkswagen’s pivot to electric vehicles in China, the automaker’s reported deliveries show a 25.9% year-on-year decline in the first half of 2026.
Analysts say maintaining large-scale sales is critical to survival at this point in the EV race.
Feng estimates that Chinese automakers need to sell 500,000 units a year to break even, 1 million units to achieve sustainable profits, and 2 million units to achieve full economies of scale. Small businesses that fail to reach these numbers will face a “significant exit from the market.”
Among the major domestic automakers, BYD reported sales of 1.8 million units in the first half of 2026, followed by Geely Automobile and Leap Motor with deliveries of 1.4 million units and 356,000 units, respectively. Among foreign companies, Volkswagen Group reported deliveries of 973,000 vehicles during the same period, while Toyota recorded deliveries of 579,000 vehicles from January to May.
BYD “Shenzhen”, the world’s largest car carrier, will load more than 7,000 BYD new energy commercial vehicles at Haitong Terminal in Taicang Port District of Suzhou Port and set sail for Brazil on April 27, 2025 in Taicang City, Jiangsu Province, China.
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Surging exports expected to fuel economic recovery next year
Although experts remain pessimistic about the industry’s outlook for the second half of this year, Feng expects the economic downturn to turn to recovery in 2027.
“We expect the demand to be even higher next year,” he said. Feng said China’s car market is cyclical in nature, with sales expected to recover as vehicle fleets age and owners look to replace their vehicles.
“With the improved economic outlook, we can expect further growth (of the EV market),” Feng said, reaffirming his confidence in the market recovery next year.
Strong exports could support a recovery as Chinese automakers take advantage of higher fuel costs in overseas markets.
According to the CPCA, the total number of passenger cars exported rapidly increased by 11.5% from the previous month and 82.3% from the same month last year, reaching 877,000 units in June.
Fengming Lu, assistant professor at the Australian National University’s School of Political and Social Change, told CNBC’s The China Connection that overseas consumers are “shifting to Chinese-made EVs because of operating costs.”
The Middle East wars have disrupted transportation and increased fuel prices around the world, and are “one of the big motivators” driving buyers toward EVs, Lu said.
