Here’s the real reason why Chinese EVs are undercutting Western rivals

politicians and automotive industry leaders in the United States and Europe It has long been claimed that state-backed subsidies for Chinese electric vehicle manufacturers distort global competition.

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

According to Rhodium, these structural efficiencies include vertical integration, greater production scale and lower overhead costs; These outweigh the effects of heavy government subsidies on Chinese electric vehicle manufacturers’ profit margins.

Chinese authorities have paid more than $29 billion in tax breaks and subsidies to consumer electric vehicle manufacturers since 2009, according to estimates by MIT Technology Review.

According to Bo Chen of the National University of Singapore, these subsidies “were critical to the early development of China’s electric vehicles,” particularly in helping startups access much-needed financing.

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

China’s dominance of the electric vehicle industry shows that Beijing’s approach is paying off.

Tu Le, founder of automotive consultancy Sino Auto Insights, said these subsidies, along with a sense of innovation and rapid development, have allowed Chinese EV manufacturers to get ahead of the West’s legacy automakers.

While Rhodium did not object to the advantages provided by China’s government subsidies, the firm said the cost advantages from the subsidies, which Western automakers operating in China also benefit from, “continue”.[ed] “It’s small compared to the structural cost advantages.”

Greater vertical integration, in which a company controls multiple stages of production, is the “single most important factor” that allows Chinese automakers to reduce EV costs without significantly compromising profit margins, according to the report.

BYD, for example, produces almost 80% of its core components in-house; which is more than twice that of BYD. Tesla’sThis allows the Chinese automaker to realize significant savings in supplier margins on various components, Rhodium estimates.

As a result, BYD was able to achieve a 20% gross margin in 2025 compared to Tesla’s 18% gross margin. model 3 It sells for about 235,000 yuan ($33,943) in China; this is almost three times the 79,800 yuan BYD advertised for its base Seal model, Rhodium said.

But Leon Cheng, head of mobility practice at management consulting firm YCP, cautioned that vertical integration is not a uniform feature in China’s automotive industry.

“[Among] Only a few Chinese EV players, such as BYD, [do] “This,” Cheng said. “You have a lot of legacy autoplayers – they don’t actually have that vertical integration.”

The report identified BYD and Leapmotor, an EV startup partially owned by Stellantis, as clear outliers in terms of vertical integration. Leapmotor produces about 60% of its components in-house, saving about $816 per B01 sedan compared to Tesla’s Model 3, according to Rhodium.

Batteries, which constitute one of the largest expenses in EV production, are produced in-house by BYD and Leapmotor, significantly reducing overall production costs for both automakers, Cheng said.

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

Chinese automakers are known to rely on extended payment terms with suppliers that allow them to delay cash outflows and maintain higher working capital levels, Cheng said.

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

Other analysts echoed Cheng’s view. “Vehicles manufactured in China benefit from structural efficiencies that are often underestimated. Longer supplier payment terms increase working capital flexibility, while lower labor costs… reduce manufacturing overhead,” said Chris Liu, senior analyst at Omdia.

“These established supply chain advantages play an important role in improving affordability, beyond the impact of direct government subsidies,” Liu added.