By Jin Yan
A market in free fall: China’s EV industry enters a ‘deep winter’
China’s new energy vehicle (NEV) market has begun 2026 not with a slowdown, but with a collapse. According to figures released by the China Passenger Car Association (CPCA), an industry body tracking auto sales, retail sales of new energy passenger vehicles in the first eleven days of January reached just 117,000 units—down 38 percent from a year earlier and a stunning 67 percent from the previous month.
Even more alarming is the collapse in market share. NEVs, which accounted for nearly 60 percent of all vehicle sales at the end of 2025, plunged within days to 35.5 percent. In practical terms, the sector lost nearly half its share almost overnight.
Major manufacturers responded not with restraint, but with desperation. BYD, Huawei-backed Aito, Xiaomi, and Tesla all launched sweeping price cuts. More than seventy models entered simultaneous discounting, triggering what industry insiders openly describe as a “suicide-style” price war.
Against this backdrop, reports that Li Auto planned to shutter roughly 100 retail stores—about one-fifth of its physical sales network—sent shockwaves through the industry. The question now confronting China’s EV sector is no longer whether a shakeout is coming, but whether the system itself is approaching structural failure.
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Li Auto’s retreat signals more than corporate ‘optimization’
Li Auto’s rumored store closures became the first major flashpoint of China’s EV industry in 2026. Multiple media reports indicated that the company intended to close around 100 underperforming retail outlets in the first half of the year, particularly high-rent locations in shopping malls where customer acquisition costs have surged.
The company publicly denied the precise figure, insisting that reports of “100 closures” were inaccurate and framing any adjustments as routine operational optimization. Yet individuals familiar with internal deliberations confirmed that a broad reassessment of expansion-era stores is underway. The scope, they said, remains under evaluation.
The underlying numbers tell a harsher story. Li Auto operates 548 direct retail centers nationwide, expanding to more than 900 including partner outlets, across 159 cities. In 2025, deliveries fell to 406,000 vehicles—down 18.8 percent year-on-year and well below expectations. After several profitable quarters, the company slipped back into losses in the third quarter, posting a net loss of 624 million yuan.
Average deliveries per store dropped from nearly 1,000 units to just 741. Conversion rates at mall-based outlets sank below 5 percent. Operating costs soared. What had once been an aggressive growth strategy became a liability almost overnight.
Li Auto is now pivoting to its “Hundred Cities, Thousand Stars” plan, a lighter-asset model focused on lower-tier cities and AutoPark vehicle campus stores with lower rents and broader functionality. The shift is not about ambition. It is about stopping the bleeding.
This retreat is not unique. It is symptomatic.
Policy shock meets demand collapse
The wider industry is under similar strain. According to the China Association of Automobile Manufacturers (CAAM), a state-linked auto industry organization, China produced 16.63 million NEVs and sold 16.49 million in 2025, posting growth rates near 30 percent and pushing market penetration to 47.9 percent. Yet the turn of the year exposed how fragile that growth had become.
On Jan. 1, China ended its full purchase-tax exemption for NEVs, replacing it with a 50 percent levy capped at 15,000 yuan. Entry-level models suddenly cost thousands more. At the same time, technical access thresholds were raised. Consumers responded by waiting—and not buying.
From Jan. 1 to 11, wholesale NEV volumes fell 30 percent year-on-year and 51 percent month-on-month. While CPCA analysts described the plunge as a “normal” transition shock, the scale of the drop suggests something far more serious: a collapse in confidence.
Banks are increasingly pessimistic. UBS forecasts low single-digit declines in wholesale volumes and mid-single-digit drops in retail sales. Deutsche Bank and JPMorgan expect overall vehicle sales to fall by 3 to 5 percent in 2026.
Price wars as a symptom, not a strategy
The industry’s response has been ruthless price cutting. Since New Year’s Day, more than seventy models have launched aggressive promotions. BYD pushed its Qin L down to 116,800 yuan, with some pure-electric variants entering the 80,000-yuan range. Xiaomi rolled out three-year zero-interest financing. Huawei’s Aito H5 stacked subsidies. Tesla offered five-year zero-interest loans on the Model Y.
Early January order data shows intensifying polarization. BYD logged 197,000 orders, down 17 percent year-on-year. Li Auto fell 18 percent to 23,000. Meanwhile, XPeng surged 95 percent and NIO jumped 60 percent. The strong grow stronger; the rest fight for oxygen.
A slogan on a Chenglong truck advertisement captured the moment with brutal clarity: “Only by surviving do you earn the right to talk about ideals.”
Overcapacity and involution: an industry eating itself
China’s EV sector has moved decisively from expansion to neijuan—involutional competition. In 2025, capacity utilization fell below 70 percent. Output exceeded 10 million vehicles, while effective demand hovered near 7 million. The result is chronic oversupply.
Prices fell an average of 15 percent year-on-year. For some models, gross margins dropped below 5 percent. Dealer surveys reveal that only 30 percent of dealerships were profitable in the first half of 2025, while nearly three-quarters of models sold below cost.
Suppliers are squeezed relentlessly, forced to underbid simply to stay in production—working harder, earning nothing. This pattern mirrors distortions across China’s platform economy, where food delivery giants flood markets with discounts while pushing costs onto merchants, hollowing out margins and degrading quality.
The EV industry is not an exception. It is a case study.
The structural roots: oversupply, monopoly, and demand collapse
At its core, involution is the product of excessive competition over constrained resources. On the supply side, China’s state-driven “campaign-style” development—subsidies, cheap land, and KPI-based local investment—rapidly built industrial chains at historic speed. What took Western economies decades, China compressed into years.
The cost was loss of control.
Resource monopolization has compounded the damage. Platform giants in finance, logistics, and e-commerce absorb disproportionate value, leaving manufacturers, dealers, and workers scrambling for scraps. Consumers enjoy lower prices briefly, but wages stagnate, jobs disappear, and product quality erodes.
On the demand side, the crisis is decisive. Household debt is high. Incomes are weak. Confidence is fragile. China’s household savings rate stands at 33 percent—more than six times that of the United States. Pensions remain meager. Property prices have fallen 20 to 40 percent, destroying household balance sheets.
Cutting capacity alone, economists warn, risks triggering a self-reinforcing “death spiral”: layoffs reduce income, consumption contracts, demand weakens further, and involution intensifies.
This industrial unraveling is unfolding inside a broader deflationary economy. Reporting from Shanghai’s Qipu Road clothing market, The Wall Street Journal observed vendors overwhelmed with returns rather than sales, some earning barely half of last year’s income.
China’s GDP deflator has been negative since 2023. Corporate profit margins are at their lowest since 2009. Fixed-asset investment fell in 2025 for the first time on record. Household consumption accounts for just 40 percent of GDP, far below global norms.
People are not spending because they cannot afford to take risks.
Expert warnings: collapse is a matter of time
Fu Peng, a prominent Chinese macroeconomic commentator, argues that involution represents “abnormal competition” driven by the collision of oversupply and insufficient effective demand. Price wars, he says, are merely the surface. “Real competition should reduce costs and generate profits. If efficiency produces no profits, that is involution.”
Fu sharply criticizes platform monopolies for draining small businesses and wages, worsening income distribution and suppressing consumption. He advocates a “symbiotic” model—higher wages, shared profits, sustainable supply chains—in place of zero-sum survivalism.
Another analyst offers a darker metaphor: under monopolized distribution, most firms and individuals earn nothing, fighting like “stray dogs over rotten bones.” True anti-involution policy, he argues, must raise wages and expand demand—not simply slash capacity.
Fu’s warning is blunt: “If this kind of involution continues, collapse is inevitable.”