China Battery Output Set for Sharp Correction in Early 2026 as EV Subsidies Fade
China’s lithium battery industry faces a significant contraction in production entering early 2026, driven by a pronounced slowdown in electric vehicle (EV) demand following a fourth-quarter cooling in 2025. Manufacturers are expected to slash output schedules and extend holiday shutdowns to manage inventory levels as the sector enters a period of adjustment.
Cui Dongshu, Secretary General of the China Passenger Car Association (CPCA), projects a quarter-on-quarter decline of at least 30% in new energy passenger vehicle sales at the start of 2026. This downturn is primarily precipitated by adjustments to vehicle purchase tax policies and the conclusion of aggressive year-end subsidy drives that pulled demand forward into late 2025.
The looming demand gap highlights a severe imbalance within the supply chain. While upstream raw material suppliers enjoyed profit margins of approximately 30% during the first 11 months of 2025—seven times higher than the automotive manufacturing sector—battery makers now face mounting pressure. The disconnection between robust upstream profits and weakening downstream demand suggests a volatile period ahead for independent battery suppliers.
Furthermore, export markets are offering limited relief for the broader supply chain. While vehicle exports remain strong, they are dominated by vertically integrated giants like BYD Co. (比亚迪股份有限公司), leaving independent battery manufacturers with fewer growth avenues. Simultaneously, exports to the U.S. have deteriorated significantly, with no immediate boost materialized from the booming American AI energy storage sector.
Policy Shifts Trigger Demand Volatility
The primary catalyst for the anticipated production cuts is the withdrawal of fiscal support. The domestic market for new energy passenger vehicles (NEVs) is bracing for a tax policy adjustment that will dampen consumer appetite in the first quarter of 2026. Production plans for lithium batteries were already being scaled back in the fourth quarter of 2025 as the market absorbed the strong growth recorded from January to September.
Commercial vehicles face an even steeper decline. The segment saw explosive growth in 2025, with battery demand for commercial EVs surging 114%, driven by heavy subsidies and tax exemptions. In Shanghai, for instance, subsidies for replacing diesel trucks with electric models reached up to RMB 280,000 (US$38,800) per vehicle. However, with subsidies set to decline by 20% in 2026, the cost advantage of electric heavy trucks will erode, leading to a predicted "cliff-like" drop in orders reminiscent of the electric bus market cycle years ago.
Export Market Bifurcation
While China’s lithium battery exports remain a key economic driver, the landscape is becoming increasingly uneven. Total exports in 2025 slowed compared to the hyper-growth of previous years. Although exports to the European Union grew, accounting for roughly 40% of the market, the U.S. market has collapsed for Chinese battery makers.
Exports of lithium batteries to the United States plunged 45% by value in 2025 to just US$1.04 billion, with unit prices falling 22%. Despite the surge in power demand from artificial intelligence and energy storage sectors in the U.S., Chinese battery manufacturers have not benefited, indicating a decoupling in this specific supply chain.
Furthermore, the strength in Chinese EV exports is heavily concentrated in automakers with in-house battery capabilities. BYD, which manufactures its own cells, contributed significantly to export numbers in late 2025. This vertical integration means that the export boom does not translate into increased orders for independent third-party battery suppliers, leaving them more exposed to domestic fluctuations.
Profit Disparities and Energy Storage Weakness
The industry is also grappling with structural profitability issues. The upstream mining and materials sector continues to capture the lion's share of profits, maintaining high margins even as downstream manufacturers face squeezing prices. For the industry to develop sustainably, a more balanced distribution of profits and stable pricing mechanisms are required.
Hopes that the domestic energy storage market could absorb excess battery capacity remain dim. Bidding prices for domestic energy storage projects have fallen significantly below RMB 300 (US$41.50) per kilowatt-hour. At these levels, production is unprofitable, and demand remains weak as developers hesitate to buy into a falling market. Consequently, vehicle battery manufacturers cannot rely on the storage sector to offset losses or distribute overhead costs during the automotive slowdown.