China's passenger vehicle market is having a rough year. After a record 2025 when 23.7 million cars were delivered, the industry is now heading for its worst year since 2021. The China Passenger Car Association, or CPCA, recently revised its full-year forecast to a 14% decline. It had earlier predicted flat sales.
The first half tells the story. Cumulative sales came in at 8.7 million vehicles, down 20.2% from the same period last year. June was especially tough.
Sales of internal combustion engine cars dropped 39% year over year, and pure gasoline models fared even worse with a 42% plunge. In fact, declining sales of gasoline-powered vehicles made up 78% of June's total drop.
So what is behind the slump? Two big things. First, transportation energy costs in China jumped 15.3% in June compared with a year ago, according to the National Bureau of Statistics.
That hits consumers at the pump and makes them think twice about buying a new car. Second, the government has pulled back on subsidies for new energy vehicles, which had been juicing demand. "Policy only moves demand around," said Xiao Feng, who oversees the Hong Kong and China Industrials Research division at Citic CLSA. "This could be paying back the frontloaded demand from last year."
Falling sales are crushing profits. From January through May 2026, the industry-wide profit margin sat at just 3.4%. Profits fell 20% from the prior-year period, as reported by CPCA Secretary General Cui Dongshu.
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That thin margin matters because high production costs are narrowing profits further. According to Feng, a Chinese automaker must sell 500,000 cars annually just to cover costs, 1 million to generate sustained profit, and 2 million to benefit from full economies of scale.
Most automakers are falling short. Volkswagen Group delivered 973,000 cars in China during the first half, down 25.9% from last year. Toyota managed 579,000 deliveries from January to May.
Even the local giants are not immune. BYD sold 1.8 million vehicles in the first half, Geely 1.4 million, and Leapmotor 356,000.
"This is going to continue to be a brutal year," said Tu Le, founder of Sino Auto Insights.
Not everything is falling. Chinese-made passenger vehicle exports surged 82.3% in June compared with a year ago, reaching 877,000 units. That was up 11.5% from May.
The growth is being driven partly by electric vehicles, which are attracting buyers overseas because of rising fuel costs. The war in the Middle East is "one of the major motivations" pushing consumers toward EVs, said Fengming Lu, assistant professor at the Australian National University.
Those exports could cushion the blow for Chinese automakers while domestic demand recovers. And analysts do expect a recovery. Citic CLSA's Xiao Feng projected the market downturn will reverse in 2027, helped by a cyclical need for people to replace old vehicles and a better overall economic outlook.
"We expect much better demand next year," he said. He also sees stronger EV growth ahead, though he notes new energy vehicle sales could still fall 5% to 6% this year.
One more thing to watch: consolidation. Xiao Feng expects the Chinese EV market to consolidate to roughly seven or eight dominant companies by 2030, with homegrown firms BYD, Geely, and Leapmotor, plus Germany's Volkswagen and Japan's Toyota, among the survivors.
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