Will China roll over the European auto industry?

The domestic squeeze and the export imperative...

The defining feature of the Chinese automotive sector over the past two years has been intense "involution", a period of destructive competition marked by relentless price wars and severe excess capacity. In the first half of 2026, domestic vehicle sales declined by 3.2% year-on-year, constrained by sluggish consumer confidence and the broader economic drag of the property downturn. Concurrently, the phase-out of domestic purchase subsidies has exacerbated the pressure on manufacturers.

This excess capacity is the hangover effect of large-scale, fragmented industrial policy. For years, provincial and municipal governments heavily subsidized local EV supply chains to meet regional economic targets, resulting in a fractured landscape that peaked at nearly 500 EV makers. As domestic demand cooled and central subsidies were phased out, automakers slashed prices to survive, severely compressing profit margins across the sector. The situation became so acute that suppliers faced skyrocketing accounts payable, and dealerships began classifying zero-kilometer vehicles as "used" to circumvent manufacturer price floors.

Faced with shrinking margins and surplus production at home, Chinese original equipment manufacturers (OEMs) have pivoted aggressively outward. Exports surged 65.6% in 2026 H1, with New Energy Vehicle (NEV) shipments more than doubling. This export imperative has transformed Chinese manufacturers from regional players into a formidable global force, putting immense pressure on legacy automakers, particularly German firms that relied heavily on the Chinese market for volume and profitability.

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