China auto 2026: slowing at home, expanding abroad

Cooling domestic needs, boiling overseas market, and a fragmented semiconductor supply chain… These are the flavors of 2026, clearly identified by Yole Group’s analysts. In this context, how will the industry evolve? What is expected for the Chinese automotive industry in 2026?

This article is based on Yole Group’s automotive collection including Automotive Semiconductor Trends 2025 – 2026 edition coming soon, Automotive Battery Management System 2026, Automotive E/E Architectures 2026 and more…

Drawing on its long-standing expertise in automotive, semiconductor, and supply chain analysis, Yole Group closely monitors the structural shifts shaping the global automotive industry. This article is authored by Yu Yang, Principal Analyst, Automotive Semiconductors at Yole Group, who attended several major automotive and semiconductor trade shows in China and in Europe over the past weeks. These on-the-ground observations are combined with Yole Group’s latest automotive market data and reports to provide a clear, data-driven perspective on what lies ahead for China’s automotive industry in 2026.

This article is based on Yole Group’s automotive collection of products, including Automotive Semiconductor Trends 2025, Automotive Battery Management System 2025, Automotive Powertrain and Electrification 2026, Automotive 48V Powernet 2026, and more.

The Chinese automotive industry, which achieved unexpected growth in 2025, is about to step into a year of “contradictory pressure” in 2026. While the domestic market faces the dilemma of slowing growth and policy adjustments, the overseas market is emerging as a new growth engine with explosive momentum.

Apart from the market dynamics, we would like to emphasize the main takeaway from our recent visit to the market: the increasingly fragmented automotive semiconductor supply chain between China and the rest of the world.

2025 was a milestone year for China’s auto industry, with new energy vehicle (NEV) penetration exceeding 50% and annual exports expected to exceed 7 million units. However, this “high base effect” has laid the groundwork for overstretched operations in 2026. The domestic market is entering a period of slow growth or even slight decline, with passenger vehicle sales projected to fall by 3%-6% year-on-year, marking a sharp contrast to 2025’s 9% growth.

Policy adjustments are the direct trigger for domestic pressure. The NEV purchase tax exemption policy, which has long supported the market, will be reduced by 50% in 2026. Another factor that fueled the expectation-beating domestic growth was incentives for trading in old vehicles, which were estimated to bring 2 to 3 million new vehicle sales.

Although there are likely to be new incentives to offset the market decline, the marginal utility is expected to be diminished, especially as a large percentage of car replacements were as a result of these incentives.

Therefore, we are conservative regarding domestic market growth for 2026, which has been ‘leaked’ by the recent sales in November, -6.5% (CAAM data), which is rarely seen at the end of a year, normally a period of high growth.

However, in November, exports of passenger vehicles experienced substantial growth of nearly 50%. The year-to-date growth was milder, but still close to 20%. Impressively, NEV exports soared 260% year-on-year, now over 40% of total export vehicles per month. This reveals the ongoing shift in the market structure of China’s automotive industry.

For OEMs already with strong global footprints, export volumes are crucial to offset the potential sales drop in China. Overseas markets are evolving from optional to a must.

However, it is worth pointing out that there has been increasing resistance from global markets to importing entire cars from China. It is hard to predict precisely how and when this will have an effect, though multiple tariff adjustments targeting China-made vehicles have been introduced in various markets, including Canada, the European Union, and Brazil.

Apart from the changing markets, another key trend we are picking up is the evolving automotive semiconductor supply chain.

Yole Group’s Triple-C Model has revealed Chinese OEMs’  intense focus on semiconductors. On the trip to China, we got the chance to see the new power module from Li Auto, a company manufacturing its own SiC modules via a joint venture factory with Sanan and designing its own SiC MOSFETs, which are manufactured by a local foundry in China.

This substantial progress highlights, on the one hand, the vertical integration of Chinese OEMs to the semiconductor level; on the other hand, it is a part of a paradigm shift in the supply chain. The “chip shortage” risk has not been fundamentally resolved, and supply chain fragmentation caused by geopolitical factors further exacerbates uncertainty.

Building a localized semiconductor supply chain has become a top priority for Chinese OEMs for various reasons. It creates large market opportunities for local players, who, spreading from OEMs to Tier-1s to Tier-2s, have been making breakthroughs. These have been closely followed by Yole Group in the past year. The challenges to global players are also clear. Supply chain fragmentation is expanding from key semiconductors manufactured by American players to more extensive chips, fueled by Nexperia’s recent dispute, even though it is wholly owned by its Chinese mother company, Wintech.

Of course, de-globalization is not unique to China. OEMs are working on plans to mitigate the impact from Nexperia and will soon see price volatility in DDR memory. Semiconductor supply resilience is again becoming a priority for global automotive executives.

Stay tuned on Yole Group website and LinkedIn for future insights!

Yu Yang, PhD, is Principal Analyst, Automotive Semiconductors at Yole Group.

Based in Belgium, Yu is engaged in the development of technology and market products dedicated to mobility electrification, especially the automotive industry. Yu coordinates all studies and activities within Yole Group on the automotive industry.

Prior to Yole Group, Yu worked as a business development partner and R&D project leader at Punch Powertrain N.V. (Belgium), R&D project manager at Bekaert N.V. (Belgium), and doctoral researcher at IMEC (Belgium).

Yu Yang holds a PhD in materials engineering from Leuven University (Katholieke Universiteit Leuven) in Belgium and a master’s in electrical engineering from Tsinghua University (China).

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Source: www.yolegroup.com