Here’s the real reason why Chinese EVs are undercutting Western rivals
JINHUA, CHINA – JANUARY 13: Workers assemble new energy vehicles at an intelligent factory of electric vehicle enterprise Leapmotor on January 13, 2026 in Jinhua, Zhejiang Province of China. (Photo by VCG/VCG via Getty Images)
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Politicians and auto industry leaders in the United States and Europe have long argued that state-sponsored subsidies for Chinese electric vehicle makers have distorted global competition.
A new report from research firm Rhodium Group challenges that assessment, saying structural advantages — not subsidies — are a key factor giving Chinese EV manufacturers an edge over Western automakers.
These structural efficiencies include vertical integration, larger production scale and lower overhead costs, which outweigh the effects of heavy state subsidies on the profit margins of Chinese electric vehicle manufacturers, according to Rhodium.
Since 2009, Chinese authorities have disbursed more than $29 billion in tax breaks and subsidies to manufacturers of electric consumer vehicles, according to estimates from MIT Technology Review.
These subsidies were “critically important in the early development of China’s EVs,” according to Bo Chen from the National University of Singapore, particularly for its nascent startups to gain access to much-needed funding.
“[Unlike] China, the U.S. capital market provides sufficient financial support to companies like Tesla,” Chen, a senior research fellow at the university’s East Asian Institute, said.
China’s dominance in the EV industry suggests that Beijing’s approach has delivered results.
These subsidies, along with an ethos of innovation and rapid development, have allowed Chinese EV manufacturers to pull ahead of legacy automakers from the West, Tu Le, founder of automotive consultancy Sino Auto Insights, said.
Vertical integration over subsidies
While Rhodium did not dispute the advantages conferred by China’s state subsidies, the firm said that cost advantages gained from subsidies — which Western automakers operating in China also benefited from — “remain[ed] small compared to the structural cost advantages.”
According to the report, greater vertical integration, in which a company controls multiple stages of production, is the “single most important factor” allowing Chinese automakers to lower EV costs without significantly sacrificing profit margins.
BYD, for example, produces nearly 80% of its core components in-house, more than double that of Tesla, according to Rhodium estimates, allowing the Chinese automaker to reap considerable savings in supplier markups on various components.
This allows BYD to save around $2,369 in supplier markups per unit of its Seal sedan compared with Tesla’s Model 3, according to the report.
Consequently, BYD was able to eke out a 20% gross profit margin in 2025, compared with Tesla’s 18%, even though the Model 3 sells for about 235,000 yuan ($33,943) in China, nearly triple the 79,800 yuan that BYD advertises for its…
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