How Subsidy Repayments, EU Probes, and Xinjiang Labor Issues Are Redefining Risk for Chinese EV Giants—Time to Shift to Compliant Players?

The rapid rise of Chinese electric vehicle (EV) manufacturers like BYD and Chery has been fueled by government subsidies and aggressive pricing strategies. But a perfect storm of regulatory scrutiny, subsidy repayment demands, and forced labor allegations is now casting a shadow over their profitability and global ambitions. Investors must reassess the risks of backing companies entangled in non-compliance controversies—and pivot to those with stronger compliance frameworks to avoid financial and reputational fallout.

The Subsidy Repayment Problem: A Financial Overhang

BYD and Chery face potential demands to repay $121 million in improperly claimed subsidies for EVs that did not meet mileage requirements, according to a 2025 audit by China's Ministry of Industry and Information Technology. Over 21,000 vehicles, including 7,663 from Chery and 4,973 from BYD, were deemed ineligible, signaling systemic compliance failures. While penalties are not yet finalized, the government has warned that non-compliant companies must repay subsidies—a move that could squeeze margins at a time when both firms are battling overcapacity, inventory gluts, and price wars.

BYD's stock price has already reflected these pressures. Over the past year, its shares have lagged behind global peers like Tesla and Volkswagen, as investors factor in subsidy repayment risks and slowing sales growth.

EU Investigations: A Threat to Market Access

BYD's expansion into Europe is under threat as the EU probes its Hungarian EV plant for alleged unfair subsidies. If found guilty, the company could face fines, asset sales, or restrictions on exporting to the EU—a market it relies on for growth. This mirrors broader geopolitical tensions over Chinese subsidies, which the EU claims distort competition. For BYD, the risk extends beyond Hungary: its reliance on Chinese government support could trigger retaliatory tariffs or trade barriers.

Xinjiang Labor Allegations: A Global Reputational Minefield

BYD's supply chains are under fire for ties to forced labor in Xinjiang, where Uyghur workers are reportedly coerced into factories via state-backed labor transfer programs. Suppliers like Xincheng Auto Parts—linked to BYD's aluminum and component production—have been flagged in investigations. The U.S. Uyghur Forced Labor Prevention Act (UFLPA) now presumes all Xinjiang-sourced goods are tainted, risking product seizures at borders. EU due diligence laws could similarly block BYD's exports, while reputational damage could deter partnerships with Western firms.

Chery, while less scrutinized, faces similar risks due to its reliance on Chinese suppliers and aluminum sourced from Xinjiang. The lack of transparency in its supply chains makes it vulnerable to regulatory action.

Investment Implications: Time to Rebalance Portfolios

The cumulative risks—subsidy repayments, EU probes, and forced labor controversies—are forcing investors to confront a stark reality: Chinese EV giants are not just exposed to operational challenges but to existential compliance threats. Companies that fail to address these issues could see profitability collapse, market access curtailed, and investor confidence eroded.

The safer bet? Pivot to EV players with transparent supply chains and robust compliance frameworks. Tesla, for example, has invested in supply chain mapping and audits, while European automakers like Volkswagen have pledged stricter oversight of joint ventures in China. Even within China, smaller firms with localized supply chains or clearer subsidy compliance records could offer better risk-adjusted returns.

Final Call: Compliance Is the New Competitive Edge

The EV sector's race to dominate markets is now a race to comply. Investors should prioritize companies that can navigate subsidy rules, avoid forced labor hotspots, and withstand regulatory probes. For BYD and Chery, the path to sustainability may require radical transparency—and investors may want to wait until the fog of compliance clears before diving back in.

In short: the era of unchecked growth for Chinese EV giants is ending. The time to shift toward compliant players has arrived.