Here’s the real reason why Chinese EVs are undercutting Western rivals

Politicians and auto industry leaders in the United States and Europe They have long claimed that state-sponsored subsidies to Chinese electric car makers have distorted global competition.

new a report Research firm Rhodium Group challenges this assessment, saying that structural advantages – not subsidies – are a key factor that gives Chinese electric vehicle manufacturers an advantage over Western automakers.

These structural efficiencies include vertical integration, larger production volumes, and lower overhead costs, which outweigh the effects of large government subsidies on Chinese EV manufacturers’ profit margins, according to Rhodium.

Since 2009, Chinese authorities have spent more than $29 billion in tax breaks and subsidies to manufacturers of electric consumer vehicles, according to MIT Technology Review estimates.

These subsidies were “extremely important in the early development of electric vehicles in China,” according to Bo Chen of the National University of Singapore, especially for emerging startups to obtain much-needed financing.

“[Unlike] Chen, a senior research fellow at the university’s East Asia Institute, said China and the US capital market provide sufficient financial support for companies like Tesla.

China’s dominance of the electric vehicle industry suggests that Beijing’s approach is working.

Tu Lu, founder of automotive consultancy Sino Auto Insights, said this support, coupled with the spirit of innovation and rapid development, has allowed Chinese electric vehicle manufacturers to get ahead of legacy automakers from the West.

For example, BYD produces nearly 80% of its core components in-house, more than twice as much as BYD produces Teslaaccording to Rhodium estimates, allowing the Chinese automaker to reap significant savings in supplier price margins on various components.

This allows BYD to save about $2,369 in profit margins per unit on the Seal sedan compared to the Tesla Model 3, according to the report.

Thus, BYD was able to achieve a gross profit margin of 20% in 2025, compared to 18% for Tesla, although… Model 3 It sells for about 235,000 yuan ($33,943) in China, nearly three times the 79,800 yuan BYD advertises for its base. seal Rhodium is a model, he said.

However, Leon Cheng, head of the mobility practice at management consulting firm YCP, cautioned that vertical integration is not a uniform feature across China’s auto industry.

“[Among] Chinese EV players, only a few, such as BYD, [do] “This,” Cheng said. “You have a lot of legacy car players — they don’t really have that vertical integration.”

The report identified BYD and Leapmotor – an electric vehicle startup Partially owned by Stellantis – as clear outliers in terms of vertical integration. Leapmotor produces approximately 60% of its components in-house and saves about $816 per B01 sedan compared to Tesla’s Model 3, according to Rhodium.

Batteries, which represent one of the largest expenses in electric vehicle production, are produced internally by BYD and Leapmotor, which greatly reduces overall production costs for both automakers, Cheng said.

Cheng also cautioned against taking the Rhodium Report’s calculations too seriously, as it is difficult to determine the exact cost advantages of Chinese manufacturers from profit and loss calculations alone.

Chinese automakers They are known to rely on extended payment terms with suppliers, allowing them to delay cash outflows and maintain higher levels of working capital, Cheng said.

He added that these longer payment cycles could make profit margins appear wider in the short term.

Other analysts echoed Cheng’s view. “Vehicles manufactured in China benefit from structural efficiencies that are often underestimated,” said Chris Liu, senior analyst at Omdia. “Longer payment terms to suppliers enhance working capital flexibility, while lower labor costs… reduce overall production expenses.”

“These combined supply chain advantages play a big role in enhancing affordability, beyond the impact of direct government subsidies,” Liu added.