We’re often asked: Why are Chinese EVs so cheap? Comparing costs between Western and Chinese automakers in China shows that subsidies matter, but they’re only part of the story. Chinese carmakers benefit from fundamentally lower cost structures, driven by tighter control over their supply chains and a stronger focus on the China market—both of which significantly reduce operating costs. They also make more aggressive use of supplier-backed financing, a practice Beijing is now cracking down on.
These advantages will narrow somewhat as Chinese EV makers expand abroad and their costs rise. Even so, closing the cost gap would require Western OEMs to follow a difficult path—investing more deeply in China to build local R&D and supplier ties, while cutting costs and jobs at home. That strategy increasingly puts automakers at odds with Western governments whose industrial policies are geared toward protecting domestic auto employment and value creation.
Why Western OEMs struggle to compete on price
EVs made in China are cheaper than those made in Europe or the US. China benefits from a deep EV ecosystem, widespread subsidies across the supply chain, and lower wages. But this does not fully explain why even Western OEMs producing locally in China still struggle to compete with Chinese rivals. Their supply chains are largely localized, and imports are limited to a few premium models—yet the price gap persists.
This cost gap is a crucial issue as Western OEMs continue to lose ground in China, with market share down roughly 40 percentage points since 2020 and profits quickly eroding. As brand loyalty fades, price and available features have become the key currency for consumers. For Western carmakers hoping to catch up, closing the cost gap is essential.
Take BYD and Tesla, the largest Chinese and Western EV producers. Both offer similarly positioned sedans—the BYD Seal and the Tesla Model 3. The Model 3 outsells the Seal, partly reflecting Tesla’s focused two-model strategy compared with BYD’s lineup of several dozen models. Still, the two vehicles are broadly comparable: similar size, similar LFP batteries, the Seal equipped with a Qualcomm chip and the Model 3 with Tesla’s in-house chip. Yet between late 2022 and late 2025, BYD reduced the Seal’s sticker price from $30,198 to $24,190, while the Model 3’s price barely moved—from $32,909 to $32,688. How was BYD able to cut prices so sharply while maintaining a higher profit margin than Tesla?
To answer this question, we conduct an apples-to-apples comparison: Chinese OEMs producing in China versus Tesla producing in China. We examine three leading Chinese automakers—BYD, Geely, and Leapmotor—alongside Tesla’s China operations. Together, these four companies account for nearly 50% of China’s new energy vehicle (NEV) sales and represent the largest Chinese EV-focused OEMs as well as the leading Western player. Our aim is to identify by how much each Chinese OEM is able to undercut Tesla’s prices in China while maintaining similar—or even higher—margins.
The sections that follow examine what does—and does not—explain the price gap, present our per-vehicle cost estimates, and outline the implications for policymakers and Western OEMs.
First things first: This is not about productivity
A common assumption is that Chinese automakers are more competitive because they are more productive. Company data does not support this view. On standard metrics such as revenue per employee, Chinese OEMs significantly underperform Western peers. Tesla employees generate roughly six to seven times more revenue than BYD’s, and Volkswagen outperforms China’s largest OEMs by a wide margin. Similar gaps are visible at SAIC, Geely, and NIO (Figure 1). This is despite high levels of automation in Chinese plants, which often exceed those of foreign joint ventures in China.
It is true that these data are not split by geography and therefore reflect lower prices and revenues in China. Still, even when looking at Volkswagen’s China operations in isolation, the broader pattern holds. Western OEMs are more productive than their Chinese peers.
Lower measured productivity reflects business structure rather than efficiency. Chinese OEMs are expanding rapidly, adding capacity, scaling exports, and entering new technology segments, all of which increase headcount and depress short-term productivity metrics. They are also far more vertically integrated, producing key components such as batteries and power electronics in-house. This shifts more industrial activity onto their own balance sheets, raising employment while reducing revenue per employee. In addition, Chinese OEMs devote a larger share of their workforce to research and development (R&D)—BYD reportedly allocates around 11% of global staff to engineering and R&D, compared with roughly 8.8% at Volkswagen. These structural choices lower headline productivity metrics but support faster product cycles.
Subsidies matter, but only to a certain extent
Government support is a legitimate concern for Western policymakers and multinational firms, as it does contribute to Chinese OEMs’ cost competitiveness. Chinese automakers benefit from a mix of grants, tax incentives, and preferential financing. They are actually relatively transparent about this support. For example, in 2022, BYD disclosed receiving $9 million in fixed-asset grants for its Changsha plant and $5 million for hybrid engine development. In 2024, BYD’s total government grants reached $1.4 billion. SAIC received $730 million, Geely $113 million, and Leapmotor $24 million.
That said, Western OEMs operating in China also benefit from many of the same incentives, such as reduced corporate income tax rates and local government grants. BMW cites subsidies as one of the drivers for its China investments. Tesla received $251 million in Chinese cash grants between 2019 and 2022, plus at least $39 million in assets and services.
However, there is a substantial difference in magnitude. Chinese OEMs simply get a lot more state support than Western rivals. Since 2022, Tesla has reported no grant income in China, while BYD’s subsidy income has risen sharply—accounting for 35% of net income in 2025, up from 26% in 2024. By comparison, between 2019 and 2022, when Tesla received Chinese state aid, Tesla’s disclosed grants amounted to roughly 2% of net income over the same period. This pattern is consistent with the European Commission’s findings in its anti-subsidy investigation into Chinese EV exports (Table 1) which found that Chinese OEMs disproportionally benefit from Chinese state aid.
When spread across BYD’s more than four million vehicles sold, direct grants translate into a cost advantage of roughly $292 per vehicle relative to Tesla (2023–24 average). For Geely, the equivalent figure is around $64 per vehicle. These are meaningful sums—and in BYD’s case, the subsidized cost advantage is growing—but they remain small compared to the structural cost advantages discussed below.
Beyond direct grants, preferential financing also plays a role, though a smaller one. Tesla has access to a CNY 20 billion working capital facility at interest rates 1.18 percentage points below the China Loan Prime Rate. Using the OECD’s methodology, we estimate that BYD also benefits from below-market borrowing, though the per-vehicle impact is modest. Based on 2023–24 disclosures, we estimate that preferential financing adds roughly $12 per vehicle to BYD’s cost advantage relative to Tesla.
No deliberate margin sacrifice
We also examined whether Chinese OEMs are simply pricing more aggressively by accepting lower margins, thereby lowering their per-vehicle costs. We find no clear evidence of this. Chinese firms are not cutting prices more than their competitors to suggest deliberate margin sacrifice.
It is true that several Chinese EV makers have been unprofitable or only marginally profitable—until recently this included Leapmotor. But this largely reflects the ramp-up phase of young companies rather than systematic underpricing.
While BYD’s margins have declined somewhat in 2025, the company still reports higher gross and EBITDA margins than both Volkswagen and Tesla. This suggests that price cuts may be affecting all OEMs, but it does not explain how BYD has been able to undercut Tesla on price. Geely and Leapmotor, meanwhile, have improved their profitability in recent years, further complicating the argument that lower prices simply reflect weaker margins.
Structural factors are key
Instead, beyond government support, Chinese OEMs’ ability to price consistently below Western peers is driven by structural advantages: deeper vertical integration, greater scale, and lower overhead costs, including significantly cheaper R&D.
Vertical integration
Over the past few decades, Western carmakers have reduced vertical integration by outsourcing major components to specialized suppliers—a shift exemplified by GM and Ford’s spin-offs of Delphi and Visteon in the 1990s, which turned in-house parts divisions into independent Tier-1 suppliers serving multiple OEMs. This move was driven by cost pressure, capital discipline, and the belief that suppliers could deliver greater efficiency and innovation at scale.
While Western OEMs have generally moved toward outsourcing, this is not true across the board for Chinese automakers, some of which retain much higher levels of in-house production. BYD and Leapmotor, in particular, have roots in electronics manufacturing and operate with high degrees of vertical integration. Leapmotor reportedly produces 60–70% of its components in-house. Our bill-of-materials analysis indicates that BYD manufactures around 80% of Tier 1 components and roughly 36% of Tier 2 components internally—more than twice Tesla’s in-house share of Tier 1 components (37%). A UBS study similarly estimates that 75% of BYD’s Seal is produced in-house, compared with 46% for Tesla’s Model 3 and 35% for Volkswagen’s ID.3.
For BYD, vertical integration is the single most important factor behind the company’s price advantage. That said, even among Chinese OEMs, BYD and Leapmotor are outliers. This helps explain why BYD has been among the companies most consistently leading price decreases over 2024 and 2025.
Vertical integration requires higher upfront capex and R&D, but it eliminates supplier markups across a much larger share of the vehicle. To estimate these savings, we use detailed bill-of-materials (BOM) data for BYD’s Seal and Tesla’s Model 3—both produced in China and, with the exception of some chips, largely sourced from Chinese suppliers. We identify the share of externally purchased Tier 1 components and assume an average gross margin of 22% for China-based auto suppliers, based on reported margins at firms such as CATL, Bosch, Desay SV, Valeo, and Ningbo Joyson. On this basis, we estimate that BYD avoids roughly $2,369 per vehicle in supplier markups relative to Tesla in the Seal–Model 3 comparison.
For Leapmotor, we do not have detailed BOM data, but we assume a 60% vertical integration rate—the conservative end of the publicly reported 60–70% range. On this basis, Leapmotor’s B01, the closest comparable model to Tesla’s Model 3 and BYD’s Seal, would enjoy a vertical integration advantage of roughly $816 per vehicle relative to the Model 3.
Vertical integration has downsides—most notably higher fixed costs per vehicle—which is why many Western automakers moved away from it. However, our analysis of depreciation per vehicle suggests that this concern does not hold in practice. Averaged over 2023–24, BYD’s depreciation and amortization amounted to roughly $2,076 per vehicle, compared with $2,789 for Tesla. The gap widened further in 2024–25, with BYD at $2,268 and Tesla rising to $3,361.
A key reason is BYD’s concentration of assets in China, where construction and manufacturing costs are significantly lower. Nearly all of BYD’s long-term assets—about $343 billion out of $350 billion—are located in China. Tesla, by contrast, holds only around $3 billion of its $57 billion in long-term assets there. While this includes substantial intangible assets, the difference is clear in plant economics: Tesla’s Shanghai facility initially cost around $2 billion (later expanding to $3.5–4 billion), while its smaller Berlin plant cost more than $5.5 billion.
Scale and overhead
Scale and the concentration of R&D and administrative functions in China add to Chinese OEMs’ cost advantage. This appears to be more incidental—reflecting their lower degree of internationalization—than the result of an explicit strategy. Chinese automakers remain largely focused on a single market, their home market, while Western OEMs must fund multi-market homologation, localization, and more complex organizational structures. As Chinese OEMs globalize, some—but not all—of these overhead advantages are likely to decrease.
We find that Chinese OEMs across the board have substantially lower R&D and selling, general, and administrative (SG&A) spending per vehicle than Western OEMs (Figure 4). This is not because they are skirting on product development. BYD has a higher absolute spend on R&D, but because they can spread that cost out over many more vehicles, their per-vehicle costs are substantially lower. Adjusted for automotive revenue, BYD spends roughly $930 per vehicle on administrative expenses and $1,373 on R&D, for a combined $2,302 per vehicle. Tesla spends around $4,021 per vehicle on admin and R&D, implying an overhead advantage of approximately $1,719 per vehicle for BYD.
This is not a Tesla–BYD anomaly. Geely’s overhead costs per vehicle are even lower than BYD’s, while Volkswagen’s are higher than Tesla’s. The main driver is cheaper China-based R&D, where large engineering teams can be maintained at far lower cost than in the US or Europe, combined with closer collaboration with local suppliers to secure more competitive bids for subcomponents.
Supplier payment float
Another way Chinese OEMs lower costs is by minimizing financing needs through very long supplier payment terms. In 2023–24, BYD took an average of about 155 days to pay suppliers, Geely 149 days, and Leapmotor a staggering 225 days. This stands in sharp contrast to Western peers, whose payment terms are far shorter—roughly 60 days for Tesla, 43 for Volkswagen, and 41 for Toyota—indicating that they have not followed their Chinese rivals’ practices.
While this practice benefits OEM cash flow, it has severe consequences for suppliers, limiting their ability to reinvest in capex and R&D and potentially undermining quality—posing longer-term risks for China’s auto industry. Beijing has begun to rein in excessive payment delays, but enforcement has been slow. In 2025, Chinese OEMs’ payment terms remained far longer than those of Western counterparts.
These extended payment terms translate into a tangible financial advantage, allowing Chinese OEMs to lower vehicle costs and sustain margins. Relative to Tesla, we estimate that supplier payment float provides a cost advantage of roughly $214 per vehicle for BYD and $83 for Geely, assuming these firms would otherwise need to borrow to shorten payment terms. To remain conservative, we exclude the use of electronic supplier debt instruments, which would raise BYD’s financial advantage further to more than $450 per vehicle.
Licensing costs
Finally, we estimate that Chinese OEMs are able to reduce costs by limiting or delaying payments for software and technology licensing. These practices are difficult to verify at the company level, but interviews and media reporting suggest Chinese OEMs are more likely than Western peers to resist or defer licensing payments for both production software (including design and manufacturing software used by suppliers) and in-vehicle technologies.
One example is cellular connectivity: Most Western automakers license 4G/5G standard-essential patents through the Avanci pool, paying around $20 per vehicle for 4G and $32 for 5G. Chinese OEMs, by contrast, have largely avoided paying Avanci licensing fees, and China’s market regulator, SAMR, has even issued a warning letter to Avanci over alleged monopolistic conduct. This may change as Chinese OEMs internationalize and patent holders increasingly pursue litigation against firms such as BYD in overseas courts.
In Germany, SAIC-owned MG is facing litigation over alleged non-compliance with open-source software license requirements in its EVs. In many cases, the cost advantage is not material, but it does reflect looser compliance practices and a higher tolerance for legal and regulatory risk.
In total, we conservatively estimate savings to be around $50 per vehicle based on widespread use but nonpayment for 4G licenses and other essential licenses.
What the cost gap means for trade policy and third market competition
Bringing these factors together, we estimate that BYD enjoys a per-vehicle cost advantage of roughly $4,700 versus Tesla, Geely around $2,700, and Leapmotor about $2,000. For BYD, this equates to roughly 15% of the Model 3’s sales price (Table 2).
The two largest drivers are vertical integration and significantly lower overheads, which together account for at least three-quarters of the cost advantage for all three OEMs. Subsidies matter, but less than often assumed. For BYD, we estimate subsidies account for roughly 5% of the $4,700 cost gap relative to Tesla.
These findings have important implications for trade policy. Exports, of course, entail additional costs—logistics, homologation, overseas sales networks, and tariffs. But the underlying cost gap would be even larger if we compared Chinese OEMs in China not with Tesla in China, but with Western OEMs producing outside China. Those firms cannot benefit from Chinese state support or lower Chinese labor and input costs.
This helps explain why traditional trade defense tools—such as anti-subsidy investigations—are unlikely to be sufficient. These instruments are designed to address government support, not structural firm-level cost advantages (see Ain’t No Duty High Enough). It also sheds light on why European OEMs have struggled to sustain exports from China to the EU after duties were introduced, while Chinese OEMs—most notably BYD—have continued to expand.
In practice, countries seeking to protect domestic industries have two broad options. One is to impose very high tariffs that account not only for subsidies but also for structural cost advantages, as the US has done. The other is to introduce non-price criteria, such as local content requirements. If, for example, BYD were required to produce in Europe and source at least 70% of its components locally in order to sell there—as envisioned in drafts of the Commission’s Industrial Accelerator Act—the cost gap could narrow substantially.
BYD would likely retain core R&D and product engineering in China, preserving some cost advantages. But the overall gap could shrink materially.
Can Western carmakers catch up?
Next to implications for third market competition, the key question for Western carmakers—whose market share in China has fallen from 62% in 2020 to 35% in 2025—is under what conditions a recovery in China is possible. Recent weakness at China’s national champion BYD may appear encouraging, but it reflects intensifying competition from other Chinese OEMs rather than a resurgence of Western OEMs.
The immediate problem is product: Western OEMs lack competitive NEV models in key segments. But product alone is not enough. To survive—and eventually compete—Western automakers must also close the price gap with Chinese peers.
Our estimated cost gaps suggest this would require a fundamental shift in operating models. To compete, Western OEMs would need to treat China as a largely self-contained business, with dedicated R&D and SG&A rather than relying on globally integrated operations. Vehicles developed mainly in high-cost home markets struggle to be profitable at the prices required in China. Said differently, the old approach—global models with limited localization for China—no longer works.
Beyond organizational separation, Western OEMs would need to sharply restructure their manufacturing footprint in China—likely closing or selling underutilized plants. These facilities now account for much of China’s auto overcapacity, with more than 22 million units of capacity operating at just 42% utilization, well below the levels of Chinese OEMs. Western firms would also need to continue pressing Beijing to enforce its “anti-involution” agenda, including curbing long supplier payment delays and other practices that disadvantage foreign automakers and China-based suppliers. Finally, OEMs may need to move further upstream—through direct investment or partnerships—to reduce development and component costs.
Finally, Western OEMs may also need to copy the playbook of Tesla and Chinese OEMs, which are finding competition within China increasingly impossible without padding margins through lucrative exports.
These are demanding and costly adjustments. Many Western OEMs—already facing falling or negative profits in China, US tariffs, and an expensive EV transition in Europe—cannot afford them. Several have already exited or scaled back: Mitsubishi and Renault have left the market, Stellantis has largely ceded China to local partners, and Hyundai and Ford have pivoted to export-led strategies that restored profitability but effectively concede the Chinese market.
Who is trying and how
However, a small number of OEMs are attempting this reset. Volkswagen is the most advanced. Since 2021, the Wolfsburg-based carmaker has shifted an unprecedented share of R&D to its new center in Hefei. Modeled on Volkswagen’s technical development hub in Germany, Hefei is the only site outside Germany with full vehicle development and validation capabilities. The strategy aims to accelerate development cycles, integrate local demand, source more Chinese components, and benefit from lower R&D costs and subsidies. The tradeoff is that Wolfsburg’s R&D budget will be spread over a smaller vehicle base as China programs move off its books.
Volkswagen has paired this with aggressive upstream investment. It acquired a 4.99% stake in EV maker Xpeng for $700 million, is investing €2.4 billion in a JV with Horizon Robotics to develop a China-specific automated driving stack, and holds a 26% stake in battery maker Gotion, acquired for €1 billion.
Toyota is also investing to regain competitiveness, but through a less capital-intensive model. In 2023, it consolidated and expanded its fragmented China R&D activities into a revamped Changshu hub. Rather than large equity stakes, Toyota has relied more on partnerships, including a 2019 JV with BYD to co-develop EVs and components, and early investments in automated driving firm Momenta.
Early results are mixed. Toyota’s bZ3X SUV, produced by the GAC–Toyota JV, reportedly sources around 65% of its components from Chinese suppliers and sold nearly 70,000 units in its first year, placing it among the top 30 EV models in China. By contrast, Volkswagen’s new Audi sub-brand—launched without the traditional rings—has reportedly sold only around 1,000 units per month since launch and does not rank among the top 100. For both companies, the real test will come with new model launches in 2026–27.
Broader implications
What these efforts suggest is that any credible turnaround will depend on deeper localization: more China-based R&D, greater reliance on Chinese suppliers, and more vehicles developed and produced in China.
The consequences extend well beyond the firms involved—and beyond China itself. The declining competitiveness of Western OEMs, combined with their localization push, is already reshaping trade flows. Chinese imports of cars and auto parts are falling sharply, hitting Germany and Japan in particular. As companies such as Volkswagen and Toyota rebuild their China operations, a growing share of profits is reinvested locally rather than repatriated, and both plan to export China-developed vehicles to third markets.
This leads to a final implication: Vehicles developed and produced in China by Western OEMs may increasingly compete with cars made in Germany, Japan, Thailand, or Slovakia. In doing so, they will challenge not only Chinese rivals but also their home-country production bases, unless market access barriers are raised further, through higher tariffs or other trade defenses such as local content requirements, or even outright restrictions on China-made products, as seen in the US under the ICTS rules.