Entry-level models that benefited from prior stimulus policies are facing greater pressure, while the upscale segment will become the primary battleground for domestic brands to expand their market share.
On December 2, the Head of China Automotive Research at UBS issued a warning in a latest report: signs of structural weakening in domestic demand for the passenger vehicle market are evident. It is projected that the sales growth rate will plummet from 8% in 2025 to -2% in 2026, indicating a year-on-year negative growth.
This forecast sounds an alarm for the auto market, which is currently in a period of policy adjustment.
The report points out that in 2026, China’s automotive industry regulators are facing two major changes, including the imposition of a 5% purchase tax on new energy vehicles and potential adjustments to scrap and trade-in subsidies.
Consequently, the growth rate of domestic passenger vehicle sales may slow from 8% in 2025 to -2% in 2026, while the wholesale growth rate for passenger vehicles could decelerate from 11% to 3%.
From a market structure perspective, entry-level models that benefited from previous stimulus policies face greater pressure, while the premium market will become the main battlefield for domestic brands to expand their share. In the mass market, overseas sales appear to be the primary channel for profit growth.
The market weakness is corroborated by recent sales data.
The report notes that despite the approaching traditional year-end sales season, the Q4 sales guidance provided by many automakers is generally below market expectations.
In November 2025, several leading automakers experienced a slowdown or decline in month-on-month growth. BYD’s sales decreased by 5.25% year-on-year. Some new automakers, such as XPeng and NIO, saw their sales drop by more than 10% month-on-month.
NIO’s CEO, William Li, previously stated that the core issue for the industry in the fourth quarter is weaker-than-expected demand, and the impact of changes in subsidy policies on the market has exceeded industry estimates.
Although facing short-term challenges, the UBS report is not pessimistic about the industry’s long-term prospects. It indicates that export expansion and product portfolio upgrading will become two major positive factors to counter weak domestic demand. The penetration rate of electric vehicles is still expected to increase by 6 percentage points, and exports will continue to play the role of a growth driver.
Regarding subsidy policies, UBS proposes differentiated recommendations: provide strong subsidies equivalent to the purchase tax for economy vehicles, offer moderate support for mid-range products, while premium models should not receive subsidies—or even be considered for a luxury consumption tax—to precisely target limited resources towards mainstream consumer groups.
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