China's Auto "Involution" Bloodbath: JPM Details The Carnage As Foreign Brands Collapse
In a detailed and unflinching look at China's automotive sector, J.P. Morgan’s Asia Pacific Equity Research team has laid bare the brutal reality of the world's largest car market. The October 2025 report, a preview of Q3 earnings and a look ahead to 2026, paints a picture of a market in the throes of a seismic shift, characterized by a savage price war—euphemistically dubbed "anti-involution"—and the stunning collapse of foreign joint ventures against a rising tide of domestic champions. For any investor in the global auto space, this report is essential reading, documenting a Darwinian struggle where only the fittest, most aggressive, and vertically integrated will survive.
The core of the issue is a simple, yet brutal, supply-demand imbalance and a technological chasm between New Energy Vehicles (NEVs) and their legacy Internal Combustion Engine (ICE) counterparts. While total vehicle sales are projected to grow a respectable 7% in 2025, this top-line number masks the carnage underneath.
The Great Wall of NEVs Crushes Legacy ICE
The transition to electrification is no longer a forecast; it's a complete market takeover. J.P. Morgan highlights the staggering pace of adoption, with NEV penetration set to explode. The bank notes:
"China NEV (wholesales) penetration is forecast to surge from 32% in 2023 to 41% in 2024, and to 49% in 2025, reaching 55% in 2026. For passenger vehicles (PV) alone, the penetration will hit 53% in 2025, meaning every other new car sold will be an NEV."
This rapid shift is leaving ICE vehicles in the dust, particularly in the mass-market segments. The report’s data on sales by price segment is stark: sales of ICE cars priced below RMB 150,000 have fallen off a cliff, with declines ranging from 13% to 19% year-over-year. In contrast, NEVs in almost every price bracket are seeing explosive growth. This isn't a cyclical downturn for ICE; it's a structural extinction event.
"Anti-Involution": A Price War by Any Other Name
The intense competition, or "involution," has triggered a devastating price war. While Beijing has made token efforts to call for "rational" pricing, the market dynamics of overcapacity and a desperate fight for market share have made deep discounting the norm. J.P. Morgan points to low factory utilization rates as the root cause, particularly for foreign brands.
"The root cause of the challenging pricing environment is overcapacity... Pricing discounts rose after 1Q22 to a record-high in June 2025, and have narrowed only slightly since government 'anti-involution' initiatives."
The bifurcation in the market is clear: JPM estimates local brand utilization rates are hovering around a healthy 85-88%, while Joint Venture (JV) brands are languishing at a disastrous 45-56%. This means foreign automakers are operating factories at half capacity, bleeding cash while their Chinese rivals press their cost advantage.
Three Tiers Of Survival: Leaders, Upstarts, And The Walking Dead
J.P. Morgan elegantly categorizes the battlefield into three distinct groups of combatants.
First Group: The Leaders. These are vertically-integrated Chinese giants like BYD, Geely Automobile, and Great Wall Motor. Characterized by "scale, vertical integration, and cost leadership," they are not only dominating domestically but are also increasingly turning to exports as a new growth engine.
Second Group: The NEV Upstarts. This group includes names like Li Auto, XPeng, NIO, and Zhejiang Leapmotor Technology. They are leveraging their strengths in "digital content, connectivity, smart cockpit, and autonomous driving" to capture the tech-savvy consumer.
Third Group: The JVs / Foreign Brands. This is the group facing an existential crisis. The report grimly notes: "Many have been losing market share" and some have "exited (e.g., PSA, Renault, Mitsubishi Motors) or reduced exposure/capacities (e.g., Ford, Hyundai, Nissan, Honda, GM)."
The macro-level takeaway is a complete rout. JPM states what many have witnessed in real-time, but puts a stunning long-term number on it:
"The aggregate market share of Chinese brands topped 68.5% in 1H25. We expect it to accelerate towards 80% on a monthly basis in the long term, up from 65%/57% in 2024/23."
3Q Earnings Preview: More Divergence And Pain Ahead
Looking to the imminent Q3 2025 earnings season, J.P. Morgan's estimates signal further divergence. While some, like Leapmotor, are expected to post strong sequential volume growth (30%), others are hitting a wall. Industry leader BYD is expected to see a 3% sequential dip in volume and a 26% drop in net profit.
Crucially, the bank's forecasts show significant deviations from market consensus. JPM is 19% below consensus on BYD's net profit and an alarming 42% below on XPeng's, where it expects a net loss of RMB 834 million yuan (US$115 million) versus a consensus of RMB 586 million. Conversely, it is far more optimistic on NIO's ability to narrow its losses than the street. These divergences highlight the volatility and uncertainty that persist, even as the broader trend of domestic dominance solidifies. The relentless price war, it seems, will continue to separate the winners from the losers.