China's Price War Intensifies: How Subsidy-Driven Competition is Undermining Corporate Profitability and Investor Confidence

China's food delivery and electric vehicle (EV) sectors are at a crossroads. For years, aggressive subsidy practices and price wars fueled rapid growth, but these strategies are now backfiring. Regulatory crackdowns, margin compression, and unsustainable business models are eroding corporate profitability and testing investor confidence. As the government enforces stricter competition laws and global markets scrutinize China's export practices, the long-term sustainability of these sectors hinges on their ability to adapt to a new era of rational competition.

The Food Delivery Sector: A Race to the Bottom

The food delivery market, dominated by Meituan, JD.com, and Alibaba, has become a battleground for price wars. Platforms have slashed delivery fees and offered “zero-cost meals” to attract users, but these tactics have led to razor-thin margins. In 2025, the Producer Price Index (PPI) for the sector fell to -3.6% year-on-year, reflecting deflationary pressures. The State Administration for Market Regulation (SAMR) has intervened, compelling companies to end “cutthroat competition” under the revised Anti-Unfair Competition Law (AUCL).

While Meituan and JD.com have publicly committed to reducing subsidies, the transition is fraught with challenges. For example, Yum China, a key player in the delivery ecosystem, reported a 14% increase in operating profit in Q2 2025, but its operating margin of 10.9% remains fragile. Rising labor costs and delivery rider expenses threaten to reverse gains. Investors are wary: Yum China's stock price dropped 6% post-earnings due to concerns over subsidy sustainability.

The EV Sector: Subsidies, Margins, and Global Headwinds

China's EV sector, led by BYD, has mirrored the food delivery industry's trajectory. Government subsidies enabled BYD to cut production costs by 20–30% in 2025, but gross margins plummeted to 10–15%, trailing Tesla's 18%. BYD's reliance on subsidies has created a dependency risk: a 10% reduction in support could erase 3–5% of its net income.

Global expansion further complicates the picture. While BYD's 22 models captured 50% of China's EV market in 2025, international tariffs (17–100% in the EU and U.S.) and investigations into unfair competition threaten its global ambitions. Meanwhile, Xiaomi's entry with the SU7 and SU7 Ultra models—selling 15,000 units in 24 hours—signals innovation but also intensifies domestic competition.

Regulatory Interventions: A Double-Edged Sword

The AUCL's emphasis on “fair competition” has forced companies to recalibrate. In the food delivery sector, Meituan and JD.com are shifting toward AI-driven logistics and premium offerings to offset margin erosion. For EVs, BYD is investing in battery technology and vertical integration to reduce costs. However, these strategies require significant capital and time to bear fruit.

The government's anti-involution campaign, launched in 2024, aims to stabilize prices and reduce overcapacity. Early signs are positive: average EV price discounts declined in July 2025, and food delivery platforms agreed to end aggressive discounting. Yet, the success of these policies depends on sustained enforcement and consumer demand recovery.

Investor Confidence: Cautious Optimism Amid Uncertainty

Investor sentiment remains mixed. While Yum China's disciplined approach and BYD's global sales growth (4.27 million units in 2024) have drawn attention, broader concerns persist. Foreign direct investment (FDI) in China fell 28.2% year-on-year in H1 2025, with private investment in EVs and food delivery sectors lagging.

For investors, the key is to identify companies that can navigate regulatory shifts and margin pressures. Yum China's focus on price integrity and digital infrastructure, and CATL's dominance in EV batteries (38% global market share), offer long-term potential. Conversely, over-reliance on subsidies or unprofitable expansion—BYD's 3.21-month inventory overhang—poses risks.

Conclusion: A Path to Sustainable Growth

China's food delivery and EV sectors are undergoing a painful but necessary transformation. The end of irrational competition and the rise of regulatory oversight will likely lead to a more concentrated market, favoring companies with strong balance sheets and innovative strategies. While short-term volatility is inevitable, the long-term outlook for sectors that prioritize quality over price-driven growth remains cautiously optimistic.

Investors should monitor policy developments, margin trends, and global trade dynamics. For now, the winners will be those who adapt to a new normal: one where profitability, not market share, defines success.

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