China's EV slowdown persists as BYD posts near two-year low in sales

BEIJING — China's electric vehicle juggernaut, a critical engine of its modern economy, is showing significant signs of strain as industry titan BYD reported a near two-year low in domestic sales for January. The sharp deceleration, mirrored by steep declines across at least half a dozen major EV brands, fuels mounting concerns over weakening consumer demand and a hyper-competitive market grappling with overproduction.

The slump arrives at a precarious moment for the world's second-largest economy, which has leaned on its advanced auto sector as a pillar of growth amid a protracted crisis in its real estate market. The January figures, while historically volatile, are the first to reflect the impact of reduced government support, raising a critical question for global markets: Is this a temporary speed bump or the start of a prolonged downturn for the world's largest auto market?

The Big Picture: A Market Under Pressure

The January sales data paints a troubling picture of an industry-wide contraction. Following a period of explosive, subsidy-fueled growth, the market is now confronting a confluence of headwinds that are testing the resilience of even its most dominant players.

• Key Data Point: Chinese electric car giant BYD, which recently surpassed Tesla in global EV sales, reported its lowest local sales figures in nearly 24 months, signaling a stark reversal from its recent record-breaking performance.

• Industry-Wide Impact: The slowdown is not isolated. Prominent brands from Xpeng and Li Auto to newcomer Xiaomi all reported significant month-over-month drops, according to a CNBC analysis of company filings.

• Core Challenges: Analysts point to a trio of primary drivers behind the slowdown: the scaling back of government incentives, intensifying price wars, and a broader lack of consumer confidence tied to the macroeconomic environment.

By the Numbers: A Sharp January Decline

While some seasonal volatility is expected around the Lunar New Year holiday, the scale of the drop-off has caught many industry watchers by surprise. It's important to note that some companies report deliveries rather than final sales and often do not provide a clear breakdown between domestic and overseas figures, making direct comparisons complex.

• BYD's Slump: The Shenzhen-based automaker saw a significant decline in its January sales, a stark contrast to the momentum that carried it through 2025.

• Xpeng's Plunge: The Guangzhou-based EV maker reported just 20,011 car deliveries in January. This represents a dramatic fall from its 2025 monthly average of over 35,000 vehicles.

• Li Auto Follows Suit: The Beijing-based manufacturer, known for its popular hybrid SUVs, also saw deliveries fall significantly to 27,668 cars for the month.

• Slowing Growth Trend: The January figures compound a worrying trend. According to the China Passenger Car Association, sales of new energy vehicles (NEVs)—which include both pure battery and hybrid cars—grew by a mere 2.6% year-over-year in December, the third consecutive month of decelerating growth.

Why It's Happening: Policy and Competition Headwinds

The market's sudden braking can be attributed to several powerful forces converging at once.

Policy Shifts Rattle Consumers

A crucial factor is the change in government policy. After more than a decade of robust support designed to build the industry, Beijing is pulling back.

• The Tax Reinstatement: Effective January 1, 2026, China reinstated a 5% purchase tax on NEVs. This move ends a long-standing full exemption from the standard 10% vehicle purchase tax, effectively raising the sticker price for consumers overnight.

"We see increasing pressure on China's auto market in 2026, driven by a combination of policy and competitive factors," said Helen Liu, a partner at Bain & Company. She noted that such policy changes can prompt consumers to delay purchases while making automakers "more cautious about new vehicle launches."

Fierce Competition and Price Wars

The Chinese EV market is arguably the most competitive in the world, with dozens of companies vying for market share. This has led to brutal price wars that, while benefiting consumers in the short term, are squeezing manufacturer profit margins and creating an unstable environment. The concern is that this domestic overcapacity is now forcing Chinese automakers to aggressively push exports, creating trade tensions with Europe and North America.

"We know [EV sales will] slow, we just don't know by how much," said Tu Le, founder and managing director at the consulting firm Sino Auto Insights. "We'll know much better after the first quarter is over."

The Broader Economic Ripple Effect

The health of the EV sector carries outsized importance for China's overall economy. For years, it has been a celebrated "bright spot," showcasing the country's technological prowess and providing a powerful source of growth and high-value jobs.

This stands in sharp contrast to the property sector, which once accounted for nearly a quarter of China's GDP and has been mired in a years-long slump. A simultaneous slowdown in the auto industry would remove a key support pillar for the economy, potentially forcing Beijing's hand.

"If, on top of the prolonged property slump, the autos sector worsens further, many in the industry expect Beijing to reinstate some or all of the subsidies," said Cameron Johnson, a Shanghai-based senior partner at consulting firm Tidalwave Solutions, citing recent discussions with auto parts manufacturers. "We'll have to see how Q1 goes."

The Bottom Line: What to Watch Next

The January data has set a cautious and uncertain tone for 2026. Whether this is a temporary, policy-induced blip or the beginning of a more structural slowdown will become clearer in the coming months.

• Q1 Performance: The complete first-quarter data will be the true litmus test. It will help analysts distinguish the impact of the Lunar New Year holiday from the more fundamental effects of policy changes and consumer sentiment.

• Beijing's Response: All eyes will be on the government. If the weakness persists through March, the key question is whether policymakers will intervene with fresh stimulus, new subsidies, or other measures to reinvigorate demand.

• The Export Push: Observers will closely monitor the export volumes of BYD, Xpeng, Nio, and others. An aggressive push into foreign markets could signal that domestic demand remains weak, while also escalating global trade frictions.

• BYD's Long Game: Despite the current headwinds, experts like Tu Le expect BYD to maintain its market dominance. The company's planned investments in upgrading its charging, energy storage, and intelligent driving infrastructure indicate a continued focus on long-term strategic advantage, even in the face of short-term volatility.