China's Auto Industry Profit Squeeze: OEMs Struggle as Suppliers Surge

The Chinese automotive industry is facing one of its most challenging periods in recent memory. At the High-Quality Development Summit Forum of China's Automotive Industry, Chen Shihua, Deputy Secretary-General of the China Association of Automobile Manufacturers, revealed that the profit level of the automobile manufacturing industry is at a historical low. The profit margin of complete vehicle manufacturing stands at only 1.5%.

Calculated based on a 1.5% profit margin, for a new car priced at 100,000 yuan, the profit of the complete vehicle manufacturer is merely 1,500 yuan. This razor-thin margin reflects the intense competition and rising cost pressures that have come to define the domestic automotive market.

According to data from the China Passenger Car Association (CPCA), from January to May this year, the profit of the automotive industry reached 144 billion yuan, down 20% year-on-year. The profit margin of the automotive industry was 3.4%, which is lower than the average 6.1% profit margin of downstream industrial enterprises. The situation is particularly concerning given that May has historically been a period of relatively high industry profitability.

Cui Dongshu, Secretary-General of the CPCA, analysed the trend. "May of every year is a period with a relatively high industry profit margin, but the automotive industry profit margin in May this year still remains at a historical low, with the downward pressure on profitability becoming increasingly prominent," he said. "Recently, as the production scale of the automotive market expands and the PPI rises, the profits of upstream mining industries such as non-ferrous metals and petroleum have skyrocketed."

A Tale of Two Industries

While automakers struggle with shrinking margins, upstream automotive supply chain enterprises have staged a completely different market trend. According to incomplete statistics, among the 58 non-ferrous metal companies that have disclosed their interim performance forecasts, 49 have recorded pre-increased profits, and 4 have turned losses into profits, with the positive performance ratio exceeding 91%.

Leading enterprises in multiple segments have delivered reports of substantial net profit growth. For example, Tianqi Lithium estimates that its net profit attributable to shareholders of listed companies in the first half of 2026 will increase by up to 49 times year-on-year, reaching 4.25 billion yuan. Ganfeng Lithium also predicts that its net profit in the first half of this year will reach 3.65 billion to 4.6 billion yuan, achieving a turnaround from losses to profits.

This divergence highlights the structural imbalance in the automotive value chain. While upstream suppliers benefit from surging raw material prices, automakers bear the brunt of these cost increases without the ability to fully pass them on to consumers.

The Cost Crunch

The material cost per vehicle of many mainstream new energy models has risen by a magnitude of ten thousand yuan. Taking the new-generation Li Auto L6 as an example, its battery capacity has been expanded from 36.8kWh to 51kWh. With the rising price of lithium carbonate, the cost of the battery alone has increased by more than 8,000 yuan. At the same time, the memory cost of the new car has risen by nearly 4,000 yuan, and the cost of the Qualcomm 8797 chip is expected to increase by more than 2,000 yuan. After adding up these three core components, the comprehensive per-vehicle cost increase has exceeded 14,000 yuan.

Li Bin, Chairman and CEO of NIO, discussed the realistic cost pressure during a recent interview. "Due to the rising prices of raw materials, the cost of each NIO ES8 vehicle has increased by nearly 20,000 yuan. If this is reflected in the selling price, the price needs to rise by 30,000 yuan to maintain a comparable gross profit, and the cost pressure is extremely huge," he said.

Zhang Xinghai, Chairman of Seres Group, echoed these concerns, stating that the unit price of memory chips has risen from 20 yuan to nearly 100 yuan. Coupled with the lithium carbonate price surging from 80,000 yuan/ton in the same period of last year to 180,000 yuan/ton, the average per-vehicle cost of AITO vehicles has increased by 15,000 to 20,000 yuan.

The situation is exacerbated by the ongoing price war in the Chinese automotive market, which has been raging for over two years. Aggressive price cuts have eroded what little profitability remained, with some models being sold below cost. The fierce competition has led to a "survival of the fittest" environment, with weaker players being forced out of the market.

On July 15, Hunan Yuneng, a leading enterprise in the lithium iron phosphate sector, issued a price adjustment letter to its customers. Due to the continuous upward trend in the prices of core upstream raw materials, the company's ongoing full-capacity production, and the fact that this year's newly added production capacity cannot meet the growing order demand of all customers, the price of its full series of lithium iron phosphate products will be increased by 2,000 yuan/ton starting from August 1.

An employee of a joint-venture brand automaker painted a grim picture of the current environment. "The (automotive industry) is having a hard time. Competition in the terminal market has not weakened at all, while upstream batteries, bulk metals, and automotive-grade chips are constantly rising in price, squeezing the profit margins of automakers from both sides," the employee said. "Since the beginning of this year, the biggest pressure within our company has been cost control. This competitive pressure is expected to ease only by the end of 2027 or 2028."

The Chinese automotive industry is caught in a perfect storm of rising costs, intense competition, and structural imbalances in the value chain. While automakers struggle with razor-thin profit margins and escalating material costs, upstream suppliers are enjoying record profits. The pressure is expected to persist until at least 2027 or 2028, as raw material prices remain elevated and competition shows no signs of abating. For automakers, the path forward will require careful cost management, strategic partnerships, and a relentless focus on efficiency. For the industry as a whole, the current challenges may ultimately lead to a more consolidated and competitive market, but the transition period will be painful for many players. As the industry continues to evolve, the ability to navigate these pressures will determine which companies survive and which are left behind. The next few years will be critical for the future of China's automotive industry.