In the first half of 2026, the average profit margin in the domestic vehicle manufacturing sector dropped to 1.5%, yielding a mere profit of 1,500 RMB for every 100,000 RMB new car sold. As the industry is dragged into a "profit winter" by the price war, a new cost pressure emerges.
Effective September 1, the 11-year consumption tax exemption policy for lithium-ion batteries officially comes to an end. Lithium-ion storage batteries will be the first to face a 2% tax rate, which will double to 4% a year later.
For battery manufacturers with a net profit margin of just 3% and automakers with a profit margin of merely 1.5%, this newly added tax burden is enough to exacerbate the struggles of companies already on the brink of break-even, further squeezing their profit margins.
As the "price war" compounds with the "consumption tax", the elimination race in the new energy industry has only just begun.
Who Is Under Pressure, and Who Is Benefiting?
According to statistics from the China Automotive Power Battery Innovation Alliance, China's power and energy storage battery production reached 1068.9 GWh in the first half of this year, up 53.3% year-on-year; sales hit 979.4 GWh, up 48.6% year-on-year; and exports reached 181.3 GWh, up 42.5% year-on-year. With production, sales, and exports all surging, the industry remains on the fast track.
However, the introduction of these taxes is quietly rewriting the logic of profit distribution.
A research report by Soochow Securities points out that the consumption tax was already priced into market expectations, with feedback from the industry chain emerging in May. The actual implementation aligns with expectations, and the overall impact remains controllable.
Specifically, calculated at tax rates of 2% and 4%, the current unit price of energy storage batteries is approximately 0.36 RMB/Wh, with corresponding cost increases of 0.007 RMB/Wh and 0.014 RMB/Wh, respectively. This is roughly equivalent to a lithium carbonate price increase of 12,000 to 24,000 RMB/ton. Given that the current price of lithium carbonate has dropped significantly from its peak, it leaves a buffer space for cost absorption.
Coupled with robust downstream demand, leading companies are operating at full production and sales capacity. The aforementioned research report concludes that the consumption tax can be smoothly passed on to downstream clients, leaving the unit net profit of battery manufacturers unaffected. Conversely, second- and third-tier battery manufacturers with weak bargaining power are expected to be gradually weeded out amid the cost squeeze, allowing leading companies to reap the full benefits.
This redistribution of the tax burden is destined to be far from evenly distributed.
One of the winners is the leading battery manufacturers. Relying on economies of scale, technological barriers, and strong bargaining power, industry leaders can smoothly pass cost pressures down the supply chain. Goldman Sachs has identified CATL (Contemporary Amperex Technology Co., Limited) as the most resilient target; even in a scenario where 50% of the tax is passed on, its profit decline would be limited to 1% to 6%.
The second winner comprises automakers that manufacture their own batteries. The policy introduces a key deduction mechanism: taxable battery products produced and used by the taxpayer for the continuous production of other taxable battery products are exempt from the consumption tax. Cui Dongshu, Secretary-General of the Passenger Car Market Information Joint Conference (under the China Automobile Dealers Association), believes this is equivalent to providing institutional incentives for automakers that "produce and use in-house." By manufacturing their own batteries and directly integrating them into vehicles, these automakers can effectively bypass the consumption tax burden incurred during external procurement.
Beyond the winners, the most scrutinized by the public are the second- and third-tier battery manufacturers. These companies inherently possess limited profit margins and insufficient economies of scale. The increase in tax costs will directly squeeze their already meager profitability. Small and medium-sized brands with outdated technology routes and weak cost-control capabilities face even greater operational pressure. Industry insiders note that this policy adjustment will directly trigger a new round of industry reshuffling, accelerating the exit of tail-end enterprises lacking core technologies and cost advantages.
Cao Guangping, Partner at Chefu Consulting, pointed out in an interview with Gasgoo: "The introduction of the battery consumption tax will affect the competitive landscape of the battery industry to a certain extent, but the most fundamental factors remain the competition in technology, quality, and cost. The costs for leading enterprises like CATL will inevitably rise, and other pure-play battery manufacturers are also under pressure. As for BYD, it is not that they pay no tax; rather, they optimize their tax burden through internal product pricing mechanisms among different group entities, which essentially achieves the effect of tax avoidance or reduction."
Eleven Years of Tax Exemption: Why Now of All Times?
The "Announcement on Adjusting the Consumption Tax Policy for Certain Batteries", jointly issued by the Ministry of Finance, the General Administration of Customs, and the State Taxation Administration, brings an end to the 11-year consumption tax exemption era for lithium-ion batteries that began in February 2015. It also marks the official transition of China's new energy industry from a "policy-supported phase" to a "market-oriented competition phase."
Looking back to 2015, China included batteries in the scope of consumption tax collection for the first time, setting a benchmark tax rate of 4%. At that time, China's lithium-ion battery industry was still in its early stages of development, holding a global market share of less than 30%. Key technologies relied on imports, and the industrial chain was far from mature. To foster the new energy industry, the policy granted consumption tax exemptions for seven categories of battery products, including mercury-free primary batteries, lithium-ion storage batteries, solar cells, and fuel cells.
Image source: Ministry of Finance
At the time, almost no one could foresee that this decision would eventually spawn a globally leading strategic industry. Eleven years of tax concessions have yielded a track record worthy of being etched into China's industrial history.
Today, China's lithium-ion battery industry has completed the leap from "following" to "leading." It has become the world's largest producer and exporter of lithium-ion batteries, accounting for over 80% of global shipments, and has established an independent and controllable full-industry-chain system.
In 2025, China's total production and sales of power and energy storage batteries reached 1755.6 GWh and 1700.5 GWh, respectively, with the industry's revenue scale approaching 1 trillion RMB.
The decision to resume taxation at this specific time window is no coincidence. Three driving forces lie behind it.
First, industry maturity has reached an inflection point. When the tax exemption was introduced in 2015, the industry was still in its infancy. Today, China's photovoltaic and lithium-ion battery supply chains hold a dominant position globally. The universal tax exemption has fulfilled its historical mission of "helping the industry get on its feet," making the necessity of maintaining large-scale exemptions significantly lower. Industry insiders point out that resuming taxation on mature battery categories helps better leverage the regulatory function of the consumption tax.
Second, "involution-style" competition has forced a policy shift. Over the past few years, the capacity expansion speed in the battery industry has consistently outpaced effective demand. The capacity utilization rate of some small and medium-sized enterprises has fallen below 30%, and disorderly low-price competition has intensified. The original universal tax exemption policy had an overly broad scope, objectively failing to effectively distinguish between "top performers" and "underperformers." Resuming taxation essentially shifts the industry back onto the track of "market-oriented competition" from "policy dividend-driven" growth, steering competition away from price wars toward technological iteration and quality enhancement.
Third, practical considerations amid fiscal revenue and expenditure pressures. According to calculations by Industrial Securities based on 2023 data, fully restoring the 4% consumption tax in industries such as lithium-ion battery manufacturing and photovoltaic equipment and component manufacturing could generate annualized incremental revenues in the hundreds of billions of RMB. For governments at all levels facing widening local fiscal deficits in recent years, this incremental revenue holds strong practical appeal.
Notably, the core of this policy adjustment is "phased collection and precise exemption": for mature batteries such as lithium-ion storage batteries, a 2% tax rate will apply starting September 1, 2026, increasing to 4% from September 1, 2027. Photovoltaic cells will be taxed at 2% starting April 1, 2027, rising to 4% from April 1, 2028. Emerging technologies, including sodium-ion batteries, solid-state batteries, fuel cells, and perovskite batteries, will be exempt from the consumption tax from September 1, 2026, to December 31, 2028.
This design has been dubbed "precision drip irrigation" by the industry—gradually reinstating taxes on mature technologies while continuing to provide policy support for emerging ones. It reflects a refined tax regulation logic centered on "supporting the superior, eliminating the inferior, and guiding innovation." The one-year buffer period and the initial "halved" rate of 2% also reserve time for the supply chain to adapt and strategize.
Thus, the curtain rises on a profound transformation from "policy-driven" to "market-driven."
"Equal Treatment for ICE and NEV" Is No Longer Just a Slogan
The reinstatement of the battery consumption tax marks a critical milestone in the phased phase-out of the "protection period" for NEV (New Energy Vehicle) tax incentives.
This policy is not isolated; rather, it is part of the orderly phase-out of tax incentives across the entire new energy supply chain.
Starting in January 2026, the vehicle purchase tax for NEVs has shifted from a full exemption to a 50% reduction. From January 1, 2027, the policy of halving the vehicle and vessel tax for energy-efficient vehicles will be abolished, along with the exemption of vehicle and vessel tax for battery electric commercial vehicles, PHEVs (Plug-in Hybrid Electric Vehicles), and fuel cell commercial vehicles.
From the 50% reduction in purchase tax and the cancellation of vehicle and vessel tax exemptions to the current reinstatement of the battery consumption tax, tax incentive policies in the NEV sector are exhibiting a phased and rhythmic phase-out trend. Gradually reinstating the consumption tax on batteries also helps narrow the tax burden gap between ICE (Internal Combustion Engine) vehicles and electric vehicles to a certain extent.
Undoubtedly, the curtain on "equal treatment for ICE and NEV" is slowly rising.
For automakers, the cost pressure is not to be underestimated. Taking a mainstream battery electric vehicle equipped with a 70 kWh battery pack as an example: at a 2% tax rate, the cost per vehicle increases by approximately 490 to 840 RMB; when the tax rate rises to 4% in September 2027, the cost increase will reach 980 to 1,680 RMB. If calculated based on a 150 kWh battery pack, the cost increase under a 4% tax rate could reach 2,100 to 3,600 RMB. For automakers producing a million vehicles annually, this translates to hundreds of millions of RMB in additional expenditures each year.
Even more severe is the industry's already precarious profit baseline. From January to May 2026, the sales profit margin of the automotive industry stood at a mere 3.4%, hitting a historical low. The profit distribution pattern where "battery manufacturers eat the meat while automakers only get the broth," catalyzed by the new consumption tax policy, will see its contradictions further intensified.
Notably, the most profound design of the policy is hidden between the lines of the detailed rules. Articles 5 and 6 of the announcement stipulate: if a taxpayer purchases battery products that have already paid the consumption tax from manufacturing enterprises for the continuous production of taxable battery products, the paid tax is deductible; if a taxpayer uses self-produced taxable battery products for the continuous production of other taxable battery products, no consumption tax shall be levied.
The implication of this rule is crystal clear: automakers that manufacture their own batteries can legally avoid or deduct the consumption tax, whereas those relying on external procurement can only passively absorb the tax burden passed on by battery manufacturers.
Cui Dongshu stated bluntly, "Automakers must manufacture their own batteries; otherwise, it is impossible to become a world-class vehicle manufacturer." He pointed out that this adjustment to the battery consumption tax essentially provides institutional incentives for automakers to build their own battery production capacity.
In fact, leading automakers have already made their moves: BYD is already a powerhouse in the LFP (Lithium Iron Phosphate) battery sector; SVOLT, under Great Wall Motor, ranks second in ternary battery installation volume; and the Magazine Battery independently developed by GAC Group has been installed in a cumulative total of 1.5 million vehicles.
It is foreseeable that in-house battery production is rapidly evolving from a "competitive advantage" into a "survival prerequisite," leaving small and medium-sized automakers lacking vertical integration capabilities to face even more severe survival tests.
Will ordinary consumers then bear a heavier burden when purchasing vehicles? In the short term, a comprehensive increase in vehicle prices is unlikely. Amid fierce market competition, it is difficult for automakers to pass the newly added costs entirely onto end-users. A more likely outcome is that automakers, battery manufacturers, and other stakeholders will share this cost pressure.
For end consumers, the impact may not be immediately perceptible. Calculations by Soochow Securities show that at a 2% tax rate, the cost of energy storage batteries increases by approximately 0.007 RMB/Wh; at 4%, it increases by about 0.014 RMB/Wh. Extrapolating from this, the cell cost for a 60 kWh family electric vehicle would only increase by about 400 RMB.
However, the "mildness" of short-term perception does not equate to the "insignificance" of long-term impacts. The cost structure of the industry is undergoing fundamental changes. Automakers that cannot develop batteries in-house, lack the resources to deploy new technologies, and operate on razor-thin margins will be accelerated out of the game in this new round of elimination. Competition in the new energy industry is shifting from a "price war" to a "value war," and from "policy dividend-driven" to "technological strength-driven."
In an interview, Cao Guangping pointed out that the levying of the battery consumption tax means that ICE vehicles and electric vehicles have taken a substantive step toward being on the "same track" in terms of tax burden, partially realizing equal treatment for ICE and NEVs. However, there is still a distance to go before achieving comprehensive equal treatment.
Final Thoughts
Eleven years ago, when the policy first introduced the words "tax exemption," perhaps no one could have imagined that this industry would reach the heights it has today. Eleven years later, as the policy is rewritten once more, changing "exemption" to "collection," everyone is asking the same question: Are you ready?
The answers are destined to be divided. Leading companies are crunching the numbers, small and medium-sized enterprises are struggling, automakers that manufacture their own batteries are quietly relieved, while those relying on procurement are forced to re-evaluate their supply chains. Now that batteries are also being taxed, no one can afford to be absent from this exam on cost, technology, and survival.
The tide of new energy has never receded, but it is changing its course.