Morgan Stanley: Weakening Chinese auto demand at home widens automakers’ profitability gap as exports and localization diverge

Where is domestic demand weak?

In the first three quarters of 2026, passenger vehicle retail sales fell by about 3.31 million vehicles year on year. Sales of fuel-powered vehicles fell by 2.17 million and plug-in hybrids by 850 thousand, together accounting for 92% of the decline. Pressure was particularly concentrated in fuel-powered vehicles priced at 100 thousand–200 thousand yuan and plug-in hybrids priced at 100 thousand–150 thousand yuan.
Battery electric vehicles did not weaken across all price ranges: sales in the 50 thousand–100 thousand yuan, 200 thousand–300 thousand yuan and 300 thousand–500 thousand yuan brackets increased by about 170 thousand, 180 thousand and 100 thousand vehicles, respectively, showing that models with product advantages can still generate incremental sales.
Showroom traffic recovered during Golden Week, but orders fell short of plans. Morgan Stanley expects fourth-quarter orders to rise 10%–15% quarter on quarter, while also expecting no significant year-end sales push.

From month 1 through August of 2026, applications for trade-in subsidies covered 5.35 million vehicles, down 30% from 7.62 million in the same period a year earlier. Morgan Stanley expects full-year applications to cover fewer than 9 million vehicles, below the 11.5 million recorded in 2025.
The average transaction price of subsidized vehicles rose from 139 thousand yuan in 2025 to more than 160 thousand yuan in 2026. The bank believes policy may shift from higher subsidies per vehicle to broader coverage and a lower per-vehicle subsidy cap. Whether trade-in volumes remain flat or grow slightly in 2027 will also depend on fiscal capacity.

Morgan Stanley expects Chinese auto exports to rise from 6 million vehicles in 2025 to 9.3 million in 2026 and 12.3 million in 2027. New energy vehicle exports are expected to reach 4.9 million and 7.6 million vehicles in those respective years. By comparison, the bank expects total passenger vehicle wholesale volumes of 28.8 million in 2026 and 28.9 million in 2027.
Clear differences have already emerged in overseas exposure: in the first three quarters of 2026, overseas sales accounted for 42.9% and 35.6% of total sales at BYD and Geely, respectively. The bank expects the two companies’ earnings to be supported by sales volumes, overseas mix and cost control, but promotions, renminbi appreciation and higher component prices will affect results.
Overseas expansion also faces constraints from trade measures and local delivery capabilities. The bank believes potential tariff changes and adjustments to export tax rebates could compress export margins and prompt automakers to accelerate local production.

Morgan Stanley expects new energy vehicles’ share of passenger vehicle wholesale sales to rise from 52% in 2025 to 60% in 2026 and 64% in 2027. As the overall market stabilizes, rising penetration increasingly reflects a battle for share among automakers.
Company performance has diverged: in the first three quarters of 2026, sales at Leapmotor and NIO rose 69% and 50% year on year, respectively, while BYD and XPeng fell 4% and 9%. The bank believes the pace of new model launches, channel execution and product advantages will affect market share.
Competition is also extending beyond individual vehicles to ecosystem capabilities such as charging, data, in-house computing power and autonomous driving. The bank maintains an “in-line” view on China’s autos and shared mobility sector and favors larger, export-oriented companies with stronger margins and global delivery capabilities.