China’s car market heads for worst year since 2021 as sales fall 20%

China’s auto market appears headed for its worst year since 2021 after consumer demand for passenger vehicles collapses Record sales in 2025.

After passenger vehicle sales fell by 20.2% in the first half of the year, the China Passenger Vehicle Association Lowers 2026 full-year retail sales forecast to 14% decline from an earlier estimate of flat sales on an annual basis.

A final delivery volume of 20.4 million units is expected at the end of 2026, at a record level. 23.7 million last year. Cumulative sales in the first half of the year have now reached 8.7 million units.

Xiao Feng, head of Citic CLSA’s Hong Kong/China Industry Research, expects a bleaker outlook from the CPCA: he predicts cumulative auto sales will fall 20% annually, compared to the 14% decline the association forecast for the full year. Feng remains slightly more optimistic about new energy vehicles (NEVs) such as electric and hybrid cars and pickup trucks, seeing NEV sales falling 5% to 6% year-on-year.

“This will continue to be a brutal year,” Tu Le, founder of Sino Auto Insights, told CNBC, noting increased competition as original equipment manufacturers struggle to catch up with declining demand.

Rising fuel costs and a decline in electric vehicle subsidies have contributed to Chinese automakers’ struggles as consumer demand declines.

Transportation energy costs increased by 15.3% on an annual basis in June. According to data from the National Bureau of Statistics of ChinaIt triggered a collapse in demand for internal combustion engine (ICE) vehicles. Retail sales of ICE-equipped vehicles fell 39% year-on-year in June; pure gasoline models fell 42%, accounting for 78% of the total decline in passenger car sales this month.

Beijing’s withdrawal of NEV subsidies, which had previously stimulated consumer appetite, reduced demand for cars in 2026. “Policy only drives demand,” Feng told CNBC, noting that the lackluster vehicle sales seen so far “could pay back last year’s front-loaded demand.”

On the other hand, Chinese automobile manufacturers are under pressure due to increasing raw material and component costs.

Battery-related input costs, including lithium and memory chips, are rising sharply and contributing to industry-wide sales margins falling to 3.4% in the period January to May 2026, while industry profits fell 20% year-on-year. CPCA General Secretary Cui Dongshu. Passenger car prices fell more than 1 percent on an annual basis in Junefurther narrowing already thin profit margins.

Feng expects razor-thin margins to lead to market shake-up and consolidate China’s fragmented EV market into seven or eight major players by 2030.

He predicts that American automakers will not be able to survive in the fiercely competitive Chinese auto market. domestic manufacturers BYD, Geely and Leapmotor, Volkswagen of Germany And Toyota of Japan among those left standing.

But even as Volkswagen turns to electric cars in China, delivery figures remain low. reported by the automaker It shows an annual decline of 25.9% in the first half of 2026.

Analysts say keeping sales at scale is crucial to survival at this point in the EV race.

Feng estimates that an automaker in China needs to achieve annual sales of 500,000 units to break even, 1 million units for sustainable profits, and 2 million units to achieve full economies of scale. Smaller players who fail to reach those numbers are “largely [the] Sunday.”

BYD is among the leading domestic automobile manufacturers 1.8 million Geely and Leapmotor surpassed in sales in the first half of 2026 1.4 million And 356,000 deliveries respectively. For foreign companies Volkswagen Group reported 973,000 While deliveries were made in the same period, Toyota also 579,000 deliveries Between January and May.

While experts remain pessimistic about the industry’s outlook in the second half of the year, Feng expects the decline to give way to recovery in 2027.

“[We] “We expect much better demand next year,” he said. Feng noted that the Chinese auto market is cyclical in nature; as vehicle fleets age and owners look to replace vehicles, sales are expected to rebound.

“With [a] Better economic outlook, better growth [in the EV market] can be expected,” Feng said, reaffirming his confidence that the market will recover next year.

This recovery could be supported by strong exports as Chinese automakers turn to capital. Increasing fuel costs in foreign markets.

In June, total passenger vehicle exports reached 877 thousand units, with an increase of 11.5% monthly and 82.3% annually. According to the CPCA.

Overseas consumers are “returning” [to] “China-made electric vehicles because of their operating costs,” Fengming Lu, Assistant Professor in the Department of Political and Social Change at the Australian National University, told CNBC’s “China Connection” program.

The war in the Middle East, which has caused shipping disruptions and fuel prices to rise around the world, is “one of the key motivations” driving buyers toward electric vehicles, Lu said.