Chinese EV Makers Face Profitability Crisis Amid Intensifying Competition

Based on my comprehensive research, I’ll provide a detailed analysis of the key factors impacting Chinese EV makers’ retail strategy and profitability amid intensifying competition.

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Li Auto (理想汽车) has confirmed plans to close underperforming retail stores, particularly unprofitable mall-based stores (商超门店), as part of an efficiency improvement program [1]. This strategic shift represents a significant departure from the company’s aggressive expansion approach.

Key observations:

• The majority of stores targeted for closure were established during Li Auto’s rapid expansion phase
  [2]
• 2023 marked the fastest expansion year
  , with the company adding
  179 retail stores
  that year alone [2]
• Single-store efficiency declined significantly year-over-year
  [3]
• These closures affect retail centers only, excluding after-sales service centers and authorized body shops [3]

The retail network adjustment reflects a broader industry recognition that physical store footprints must align with actual sales performance rather than brand visibility alone. This marks a transition from a “growth at all costs” mentality to a more disciplined capital allocation approach.

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Li Auto experienced a significant decline in 2025, with deliveries dropping

[4]. This represents a substantial reversal from its 2024 position as the sales champion among new energy vehicle (NEV) startups.

Company	2025 Deliveries	YoY Growth
Li Auto	406,000	-18.8%
NIO	326,028	+46.9%
XPENG	429,445	+126%
Leapmotor (零跑)	~597,000	+108%
Huawei-HUAWEI (鸿蒙智行)	~589,000	+116%

The “Xiaoli” (Xiaomi, Li Auto) vs. “XiaoLi” (XPENG, Leapmotor) dynamic has fundamentally shifted, with

[5].

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The Chinese NEV market has developed a distinct

, where demand concentrates at two extremes [6]:

• Consumers seeking “experience and emotional value”
• Willing to pay premium prices for technology and status
• Targeting the high-income demographic
• Represented by brands like
  Wenjie (问界)
  and
  Huawei’s premium offerings

• Price-sensitive consumers seeking “value for money”
• Dominated by budget-friendly models under ¥150,000
• Represented by
  Leapmotor (零跑)
  and
  XPENG’s MONA M03

The has become increasingly difficult, caught between these two extremes. Li Auto’s core product lineup is concentrated in this challenged middle segment, making it vulnerable to competition from both above and below [6].

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The continuous price war has created significant profitability challenges across the industry:

• Industry average gross margin
  : approximately
  19.99%
  in Q3 2025, with median at
  19.04%
  , slightly down YoY [7]
• Domestic passenger car average price
  : dropped from
  RMB 184,000
  in 2024 to
  RMB 178,000
  in the first 11 months of 2025 [8]
• Industry profit margin
  : declined from
  6.2% in 2020
  to approximately
  4.3% in 2024
  [8]

• BYD’s dominance
  : Commands one-third of the domestic market share with 4.27 million vehicles sold in 2024 [9]
• Cost advantage
  : BYD’s massive scale enables lower marginal costs for R&D and marketing, maintaining pricing power in any price war [9]
• Tesla’s position
  : Despite a 8.6% global sales decline in 2025, Tesla maintains cost advantages through streamlined manufacturing [8]

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As core technologies become standardized, competitive differentiation is shifting:

Previously Differentiating	Now Standardized
800V high-voltage fast charging	City NOA (Navigation on Autopilot)
Smart cockpit features	NVIDIA Orin-X chips, LiDAR
Range-extended powertrains	OTA updates

With technical parameters converging, (情感价值) is becoming the key premium determinant:

• NIO’s “Blue Sky Coming”
  environmental philosophy
• Li Auto’s “Mobile Home”
  warm family narrative
• Huawei’s technology trust
  and ecosystem integration [9]

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• 2025
  : Maximum tax reduction of RMB 30,000 continues
• 2026-2027
  : Tax reduction
  halved
  (maximum RMB 15,000) [9]

The 2024 trade-in subsidy policy (up to RMB 20,000 for NEV purchases) contributed to approximately , with NEVs accounting for over 60% of these [9]. The phase-out of such policies will create significant demand volatility.

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Industry analysts have identified critical “survival thresholds”:

Category	Annual Sales Threshold	Status
Safety Line	>400,000 vehicles	Li Auto, XPENG, Leapmotor, Huawei-HUAWEI
High Risk	<150,000 vehicles	Most second and third-tier brands
Survival Probability	>500,000 vehicles	Significantly higher chance of independence

Brands failing to achieve approximately face near-zero probability of independent survival [9].

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• NIO
  : Premium market (RMB 300,000+)
• ONVO (乐道)
  : RMB 200,000 family-focused segment
• Firefly (萤火虫)
  : High-value compact segment [5]

• Wenjie (问界)
  : Premium SUV lineup (M7/M8/M9)
• Zhijie (智界)
  : Executive sedans
• Xiangjie (享界)
  : Luxury positioning
• Shangjie (尚界)
  : Mainstream market
• Zunjie (尊界)
  : Ultra-luxury segment [6]

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1. Retail Network Rationalization
   : Optimize store footprint based on per-store ROI rather than mere geographic coverage

2. Product Portfolio Alignment
   : Adapt to K-shaped consumption by either moving up-market or down-market, avoiding the squeezed middle segment

3. Brand Differentiation
   : Invest in brand emotional value and community building as technical features become commoditized

4. Cost Structure Management
   : Achieve economies of scale and supply chain optimization to maintain pricing flexibility

5. Technology Investment
   : Prioritize AI/智能化 (intelligence) capabilities and software-defined vehicle architecture

6. Global Expansion
   : Accelerate overseas presence to reduce dependence on increasingly competitive domestic market

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The Chinese EV market is undergoing a critical transformation from “growth-first” to “profitability-first” competition. Brands that fail to adapt their retail strategies, optimize costs, and establish differentiated brand value face accelerated consolidation. The window for achieving profitability and scale is narrowing, with 2026 expected to be the decisive “year of survival” (剩者为王) for NEV manufacturers.

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[1] China EV Home - “Li Auto to Adjust Retail Network, Closing Underperforming Stores” (https://chinaevhome.com/2026/01/23/li-auto-to-adjust-retail-network-closing-underperforming-stores/)

[2] Moomoo - “Li Auto to Close Some Stores as Part of Efficiency Plan” (https://www.moomoo.com/hant/news/post/64420989/li-auto-to-close-some-stores-as-part-of-efficiency)

[3] Sohu - “Li Auto Confirms Closing Unprofitable Mall Stores, Single-Store Efficiency Down YoY” (https://m.sohu.com/a/979190628_116237)

[4] CnEVPost - “Short Interest in Li Auto Surges to Record High” (https://cnevpost.com/2026/01/23/short-interest-in-li-auto-surges-to-record-high/)

[5] Gasgoo - “Five Years On, NIO, XPENG and Li Auto Remain in the Game” (https://autonews.gasgoo.com/articles/news/five-years-on-nio-xpeng-and-li-auto-remain-in-the-game-2011760536276807681)

[6] Zhihu/Jiashishuo - “2026 New Forces: Who Can Stabilize?” (https://chejiahao.autohome.com.cn/info/24776460)

[7] China.com - “SAIC-Xpeng: Breaking Through Industry Cycles with Long-Termism” (https://m.tech.china.com/hea/articles/20260108/202601081794080.html)

[8] OFweek - “After Surpassing Tesla, BYD Faces Global Competition” (https://mp.ofweek.com/ce/a556714120637)

[9] China PR/Jia Li Zhi Lian - “New Energy Vehicle Industry Marketing Trends Insight and Outlook 2024-2028” (https://www.chinapr.com.cn/259/202601/3657.html)