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

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.

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 base Seal model, Rhodium 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, like BYD, [do] this,” Cheng said. “You have a lot of legacy auto players — they don’t really have this vertical integration.”

The report identified BYD and Leapmotor — an EV startup partially owned by Stellantis — as clear outliers in terms of vertical integration. Leapmotor produces roughly 60% of its components in-house and saves around $816 per model of its B01 sedan compared with Tesla’s Model 3, according to Rhodium.

Batteries, which account for one of the largest expenses in EV production, are produced in-house by BYD and Leapmotor, considerably reducing overhead production costs for both automakers, Cheng said.

Cheng also cautioned against taking the Rhodium report’s calculations at face value, as it is challenging to determine the exact cost advantages of Chinese manufacturers from profit-and-loss calculations alone.

Chinese automakers have been known to rely on extended payment terms with suppliers, which allow them to delay cash outflows and maintain higher working capital levels, Cheng said.

Those longer payment cycles can also make profit margins appear wider in the short term, he added.

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

“These embedded supply chain advantages play a substantial role in driving affordability, beyond the impact of direct state subsidies,” Liu added.

While not applied universally by all Chinese manufacturers, vertical integration “is just more common [among] Chinese companies,” Le from Sino Auto Insights said.

According to Rhodium’s report, many Western carmakers have “reduced vertical integration by outsourcing major components to specialized suppliers” over the past few decades.

While this outsourcing push was driven by cost pressures and a “belief that suppliers could deliver greater efficiency and innovation at scale,” the report found that concerns over higher unit costs from vertical integration “[do] not hold in practice.”

According to Rhodium, Western assumptions about cost efficiencies from outsourcing are challenged by the significantly lower construction and manufacturing costs in China. That allows companies such as BYD to keep production concentrated domestically and maintain a significant cost advantage.

However, it would be challenging for Western automakers to revert to vertical integration without incurring marked costs.

Outsourcing has created deep interdependence between legacy original equipment manufacturers and component suppliers, according to YCP’s Cheng.

Some expenses may not be purely financial, either. Bringing component production back in-house could also trigger mass layoffs among suppliers, Cheng said.

— CNBC’s Dylan Butts contributed to this report.