Navigating China's Automotive Subsidy Landscape: Where to Invest in a Post-Subsidy World

The Chinese government's automobile purchase subsidies have been a cornerstone of the country's rapid transition to new energy vehicles (NEVs), driving a 40% surge in EV sales in 2024 and pushing NEVs to over 50% of passenger vehicle sales in early 2025. Yet, as subsidies face phase-outs due to fiscal constraints and evolving regulatory priorities, investors must look beyond short-term incentives to identify sectors and companies positioned to thrive in a post-subsidy era. This analysis explores the sustainability of subsidy-driven demand, emerging risks like “zero-mileage used cars,” and opportunities in resilient segments of the automotive value chain.

The Subsidy Dynamics: A Transition in Motion

China's subsidy policies have evolved from direct financial incentives to broader structural support for the NEV ecosystem. The latest iteration of the old-for-new subsidy, extended in January 2025, prioritizes scrapping older internal combustion engine (ICE) vehicles and incentivizes purchases of smaller-engine ICE cars or NEVs. While the policy has boosted sales—contributing to a 5.3% revised growth forecast for 2025—its effectiveness is waning in cities where funds have been exhausted. This underscores a broader shift: the government is reducing reliance on direct subsidies while amplifying investments in battery R&D, charging infrastructure, and export competitiveness.

The sustainability of subsidy-driven demand hinges on two factors. First, cost parity between NEVs and ICE vehicles is nearing reality, with battery prices down 87% since 2010. Second, consumer preferences are increasingly favoring NEVs for their lower total cost of ownership and technological features (e.g., smart connectivity). However, risks remain. A reveals that while China dominates domestically, its automakers face trade barriers abroad (e.g., EU tariffs), which could limit export growth.

Regulatory Risks: The “Zero-Mileage Used Car” Dilemma

A lesser-known risk is the rise of “zero-mileage used cars”, where vehicles are sold as second-hand units despite being newly manufactured. This practice, enabled by relaxed eligibility criteria for subsidies (e.g., allowing traded-in vehicles to be resold rather than destroyed), creates market distortions. It undermines consumer trust and could lead to regulatory crackdowns. Investors should favor automakers and dealerships with robust certification programs for second-hand vehicles, such as those leveraging blockchain for transparency, to navigate this risk.

Implications for Automakers and EV Suppliers

Domestic automakers like BYD and Geely are the clear winners under the current framework. BYD's 29% domestic market share and aggressive pricing—up to 30% discounts on select models—reflect its ability to dominate both subsidy-sensitive and premium segments. In contrast, foreign brands like Tesla (market share: 4.9% in 2025) and Porsche are struggling due to higher costs and slower innovation adoption.

The EV supply chain offers another avenue for resilient investments. Battery manufacturers like CATL (SZSE:300750) and suppliers of critical minerals (e.g., lithium, cobalt) are beneficiaries of China's mandate to achieve 58% NEV sales by 2027. However, investors should prioritize companies with exposure to advanced battery chemistries (e.g., solid-state batteries) or vertical integration to mitigate price volatility.

Consumer Discretionary: Beyond the Subsidy Cycle

While subsidies directly boost auto sales, their broader impact is on consumer discretionary spending. The government's 81 billion yuan initiative to stimulate consumption—including auto, appliances, and electronics—has created spillover effects in adjacent sectors. For instance, automakers integrating smart technologies (e.g., Xiaomi's SU7) are driving demand for software-as-a-service (SaaS) models, which promise recurring revenue streams.

Investors should also consider auto parts manufacturers with diversified portfolios. Companies like Zhejiang Geely Holding (HKG:0175) or Wuxi Guohui (SHSE:603327), which supply both traditional and NEV components, offer insulation from subsidy fluctuations.

Investment Opportunities in a Post-Subsidy World

To capitalize on long-term trends, investors should focus on three pillars:
1. Technology leadership: Automakers and suppliers with proprietary innovations in battery efficiency, autonomous driving, or smart ecosystems (e.g., BYD's刀片电池 or NIO's battery-swapping technology).
2. Global competitiveness: Companies like BYD, which have bypassed EU tariffs by establishing local manufacturing in Europe, or those exporting to emerging markets (e.g., Southeast Asia).
3. Infrastructure plays: Firms involved in charging networks (e.g., State Grid) or rare earth mineral extraction, which underpin NEV production.

Conclusion: The Shift from Subsidies to Sustainability

China's automotive sector is at a crossroads. While subsidies remain a near-term tailwind, the industry's long-term health depends on reducing dependency on fiscal support and addressing structural challenges like overcapacity and trade tensions. Investors who focus on technology-driven resilience, global market access, and diversified revenue streams will be best positioned to navigate this transition. The road ahead is bumpy, but the destination—a sustainable, innovation-led automotive economy—is clear.