Are New Energy Vehicles and Batteries Entering a Downward Cycle?

Overnight, it seems that the discourse of "China's new energy facing internal and external challenges" and "the automotive market under immense pressure" has swept across the entire industry.

Morgan Stanley has twice released forecasts predicting that the Chinese automobile market will experience another downturn next year, with a year-on-year decline possibly reaching 6%. At the same time, bad news has emerged from the new energy industry chain, with price increases in materials such as lithium carbonate, and the cost pressures have already been passed on to the battery manufacturing sector.

There is also news of "wind and crane cries," as the six Gulf countries impose anti-dumping duties on lead-acid batteries produced by China and Malaysia. Readers, confused by the difference between storage batteries and power batteries, take it as yet another example of "China's new energy suffering a heavy blow."

"New Energy Vehicles Entering a Downturn Cycle," similar articles are widespread, making it unclear whether they are expressing concern for the country or selling anxiety.

However, on December 11, news came that the "Two New" policy would be optimized for implementation—large-scale equipment updates and a trade-in program for consumer goods, commonly referred to as "national subsidies" for the trade-in of consumer goods.

Subsidy policies have always acted as a stimulant for the automotive industry. However, there are still voices arguing that a "policy-driven market is not a natural development and will deplete future demand."

Is the Chinese car market, boosted by subsidies, truly lacking in value? Why does the government keep rolling out subsidy policies one after another? The deeper meaning behind this is not as simple as just talking about it.

01 Torn Analysis Report

Morgan Stanley's prediction that "China's automotive market will significantly decline" might become obsolete as soon as it is released.

The original title of this report is "China Autos & Shared Mobility: On the verge of both recession and innovation." Unfortunately, many domestic self-media outlets focus only on "recession" and fail to notice the word "innovation."

According to Morgan Stanley's forecast, China's wholesale automobile sales, excluding exports, are expected to be approximately 29.9 million units in 2025, a year-on-year increase of 9%; in 2026, it is expected to be 28.5 million units, a year-on-year decrease of 6%. The first quarter is expected to see a month-on-month decline of 30-35%. The annual domestic automobile sales revenue is projected to decline by 7%.

What is the basis for this?

The local subsidies originally scheduled to start phasing out in the fourth quarter of 2024 have been withdrawn early this year, and the policy regarding purchase tax compensation in 2026 remains unclear. It's important to note that Morgan Stanley still places the greatest emphasis on policy factors, even suggesting that companies providing their own subsidies may not be able to sustain demand.

Secondly, the rising cost of lithium carbonate and the ongoing price war in the industry create a double whammy.

Actually, Morgan Stanley's forecast for the Chinese automotive market is not that pessimistic because there is still half of the "innovation" content.

For example, Chinese domestic giants will further rise, and the Huawei alliance may capture 8-10% of the market share by 2026. In other words, with HarmonyOS Intelligent Driving and brands deeply tied to Huawei such as Avatr, the total sales next year might reach the level of 2 million units.

Great Wall Motors will continue to grow overseas, with more focus on overseas markets, and exports will account for 20% of its sales.

Although Morgan Stanley expects half of the Chinese automotive stocks it covers to decline, it is optimistic about the future of companies making substantial progress in non-automotive fields such as artificial intelligence, robotics, and humanoid robot technology, including XPeng Motors, Hesai Technology, and Agile Group.

Why is it said that Morgan Stanley's forecast becomes obsolete as soon as it is released?

The biggest premise for the "slump in the Chinese car market" is the "uncertainty of the 2026 subsidy policy." However, within a few hours, the news of "a new round of national subsidies has arrived" came rushing in.

According to relevant reports, the Central Economic Work Conference was held in Beijing from December 10 to 11. The conference outlined the economic work for 2026, emphasizing "maintaining domestic demand as the main driver and building a strong domestic market" while stating that it is necessary to optimize the implementation of the "Two New" policies.

Morgan Stanley mentioned that the subsidy in the fourth quarter of 2024 consists of 150 billion yuan in ultra-long-term special government bonds used for the trade-in of consumer goods. In 2025, the government issued an additional 300 billion yuan in ultra-long-term special government bonds, not only doubling the amount but also expanding the coverage of consumer goods to include three categories of digital products—mobile phones, tablets, smart watches and bands—and four categories of home appliances—microwave ovens, water purifiers, dishwashers, and rice cookers.

According to data from the Ministry of Commerce, the effects of the national subsidy are significant. From January to November 2025, the trade-in of consumer goods drove sales of related products exceeding 2.5 trillion yuan, benefiting over 360 million people. Among them, over 11.2 million cars were traded in, over 128.44 million home appliances were replaced, more than 90.15 million new digital products were purchased with subsidies, over 12.91 million electric bicycles were traded in, and more than 120 million home renovation and kitchen and bathroom items were renewed.

Morgan Stanley's assertion was disproven before it could be realized.

Subsidies can be a good remedy rather than a spring medicine.

Hayek's followers always lament government intervention, arguing that it disrupts natural growth. They even compare subsidies to "aphrodisiacs," suggesting that once the effects wear off, they cause endless harm.

This is a typical example of dogmatic thinking.

The first point is that economic development and deployment work need to be phased.

Before the release of Morgan Stanley's pessimistic report, senior financial figures had already predicted regarding the subsidy policy in the automotive industry that "subsidies will definitely come."

Industry analysts point out that over the past decade, in order to upgrade industrial technology, a large amount of capital expenditure has been focused on production and research and development, which has suppressed consumption. However, with the rise of the domestic manufacturing and technology sectors, the country will allocate more budget to boost consumption. "Focusing only on local debt without making phase distinctions is purely a stereotype."

The second point is that, from the perspective of the essence of value changes, both the price war in the automotive industry and subsidies have underlying causes.

If we look back before 2015, the government had restrictions on price wars in the automotive industry. However, why did the price war commence significantly after 2020, especially starting in 2022, with Tesla and Citroën C6 leading the way, and the government no longer intervening?

This is because the global economy has been dragged down by the COVID-19 pandemic, and there has been no significant technological progress to enhance productivity for many years, leading to a decline in consumer purchasing power and confidence. In order to align car prices with purchasing power and consumer confidence, and to maintain industry liquidity and operational vitality, car prices must be reduced.

The two main strategies for price reduction are: 1. Subsidy policy, where the state bears the discount. 2. The manufacturer and the supply chain bear the discount themselves.

The third point is that the market's lag and blindness mean that it is necessary for the state to manage the flow of value in order to drive rapid industrial development.

Indeed, the profits in China's new energy sector are currently slim, but it has achieved a technological and brand-level leapfrogging.

Why are electric vehicles' profits low? Gasoline vehicles have amortized costs over 140 years, while electric vehicles have only risen in the market for a few years.

Gasoline cars have high profits; why can't it be because the actual costs are low and don't match the current pricing? Then why can't gasoline car manufacturers reduce their prices by 20-50% based on the current pricing to easily beat electric cars?

Ultimately, electric vehicles, or the new energy strategy, are driven by the state to promote the upgrading of national industries, while gasoline vehicles remain a profit channel primarily led by capital and business owners.

The fourth point is that we can closely examine the sales trend of the Chinese automotive market over the past twenty years.

From 2009 to 2011, the "Car to the Countryside" initiative combined with the "Old for New" subsidy policy for home appliances and cars marked the beginning of a rapid growth phase in China's annual automobile sales, which exceeded ten million units.

The tax reduction policy for small displacement vehicles has also repeatedly driven the upward trend in the auto market.

Since 2014, the exemption of vehicle purchase tax for new energy vehicles, along with the current "Two New" policies, has promoted the growth of automobile consumption.

Every policy not only boosts sales but also drives long-tail benefits through the growth of industry scale and the increase in job opportunities. When have you ever seen an "aphrodisiac" that can be used repeatedly and still be effective each time? From a strategic macro perspective, this is undoubtedly a good remedy.

03 Batteries with Limited Price Increases, Cars with Unlimited Potential

When "new energy vehicles encounter the prisoner's dilemma" cannot be directly argued, critics will search for various evidence from the industrial chain.

The initial action was taken by the six Gulf countries.

In December 2025, the Gulf Cooperation Council (GCC) Ministerial Committee officially approved the imposition of final anti-dumping duties on lead-acid starter batteries originating from or exported from China and Malaysia.

This marks the conclusion of the anti-dumping investigation launched in August 2024 and has become one of the most significant trade remedy measures taken by Gulf countries against Chinese battery products in recent years. The six Gulf countries believe that related products from China and Malaysia are flooding the market at prices below normal value, severely impacting the local industries of the GCC.

However, the clause targets components rather than entire vehicles, specifically lead-acid batteries instead of lithium-ion power batteries. The direct impact on the entire new energy industry chain and the automotive industry is very limited.

After that, there was a strong tone of "lithium battery prices will rise significantly."

A leading company in the diaphragm industry announced an adjustment to the price of its wet diaphragm products, with an increase of 30%. Following this, Dega Energy announced a 15% price increase for its battery series starting December 16, and Funeng responded to investors, saying "the rise in lithium battery prices is an industry trend." In just a few days, it seems that lithium battery prices are set to soar.

However, Mo Ke, the founder and president of Real Lithium Research, pointed out that this round of price increases in the lithium battery industry chain has a relatively limited impact on end-market new energy vehicles.

Firstly, if the demand for the entire vehicle is itself suppressed, it will actually lead to a weakened impact of battery costs. Secondly, car manufacturers will mitigate risks through price agreements, self-research, and other methods. Thirdly, the price increase in the industry chain involves multiple links, starting with the first wave from lithium carbonate, followed by the second wave of lithium hexafluorophosphate, VC, etc., and the third wave of related electrolytes. The positive electrode materials using lithium carbonate represent the fourth wave, and non-lithium related materials like separators and anodes form the fifth wave. When it comes to the batteries, due to the long chain and multiple buffers, the price increase is lower than the rise in upstream material costs.

The most obvious example is that the current price of battery-grade lithium carbonate is 94,000 yuan per ton, which has been hyped by some opinions as "doomsday level." However, four years ago, lithium carbonate once rose to a high of around 600,000 yuan per ton, yet it did not lead to a surge in the prices of batteries and electric vehicles.

Cui Dongshu, the Secretary-General of the China Passenger Car Association, pointed out that at the beginning of 2026, due to the reduction in car purchase tax incentives, demand in January and February will be relatively weak. This will inevitably lead to a slowdown in battery demand, further affecting the supply and demand expectations for lithium carbonate. At the end of 2022, the price of lithium carbonate reached a high of nearly 600,000, followed by a significant decline at the beginning of 2023.

Therefore, the price of lithium carbonate is not expected to experience a significant supply-demand gap in the future, which will contribute to the reduction of new energy vehicle costs in 2026 and stabilize the growth of new energy vehicles in 2026.

04 Downward Cycle Pseudoproposition

The statement "New energy vehicles are entering a downward cycle" is a false proposition if we conduct an in-depth analysis.

First of all, the definition of a downward cycle is often extremely vague and subject to conceptual confusion.

What is a down cycle? Does it mean a reduction in the sales volume of new energy vehicles, a decrease in market share, or just a slowdown in growth? From beginning to end, there is no rigid definition or quantifiable indicators to be seen.

We all know that subsidy policies can release some demand in advance, leading to a "high-low" curve. However, is the third phase upward or downward? Without policy intervention, does natural development trend upward or downward? We should look beyond the phase of a policy-driven market.

Despite the potential long-tail effects of policies, if one is exploring the fundamental "upward and downward logic," it is necessary to extend the observation period.

In other words, whether new energy vehicles can sustain overall growth for decades or even a century cannot be concluded based on a year or two of regression caused by policy changes. Moreover, there is currently no actual data indicating a regression in new energy vehicles.

Secondly, new energy vehicles align with the evolutionary framework of "human-energy control."

The inevitable transition to new energy vehicles essentially lies in the fact that electrified vehicles are better suited to the underlying logic of energy control.

Electric vehicles accelerate quickly because electric drives can easily increase the output energy per unit by several times or even orders of magnitude compared to internal combustion engines. Additionally, the precision of control is several levels higher. Simple Hall effect sensors or one or two levels of control can achieve electric drive regulation, without the need for the complex and expensive transmission systems required by internal combustion engine vehicles.

Moreover, although it is possible to distinguish between the first half of electric vehicle development and the second half of intelligentization, in reality, electrification and intelligentization of automobiles are integrated.

If we want to achieve high-speed internal communication response in cars and support more functional applications for high-level intelligence, the car itself needs to be electrified to solve challenges such as power supply, thermal control, and response speed. Currently, Huawei and Bosch can address the challenges of L2+ level intelligent technology in fuel-powered cars, but what about future development? The Audi A5L fuel car uses two Huawei LiDAR sensors, which might appear to be due to the premium Audi brand, but I believe it could actually be because the fuel car architecture hinders response speed, necessitating the addition of sensors and computational redundancy.

The adaptability and compatibility of cars with intelligent technologies is as follows: pure electric vehicles > range-extended > plug-in hybrid > hybrid > pure fuel. The more advanced the intelligent technology, the more this holds true.

Thirdly, many doubts about new energy vehicles are simply unfounded.

Many opponents of new energy vehicles often mention "pollution from coal-fired power" and "pollution from battery recycling."

It is possible that these opponents have never visited a modern thermal power plant and do not know how clean thermal power generation is today. An insider from the thermal power industry told C Times, "Those traditional pollutants, such as carbon, can now be captured and are considered valuable. How could they possibly be discharged as pollutants?"

Coincidentally, starting from the recycling of lead-acid batteries by companies like Tianneng, Chaowei, and GEM, the expansion has moved to the recycling of lithium-ion batteries. CATL's subsidiary, Brunp, has achieved a battery recycling capacity of 120,000 tons per year, equivalent to the batteries of 200,000 to 300,000 electric vehicles. This indicates that there is already a good battery recycling capability in China.

As of 2024, based on current data, a domestic battery recycling capacity of 4 million tons per year has been established, capable of handling the recycling of batteries from ten million new energy vehicles.

As for the data in 2023 showing "only 20% battery recycling," it is outdated. Moreover, facing a recycling capacity of 4 million tons of batteries, "not doing" is not the same as "unable to do," and the blame should not be placed on new energy vehicles.

Fourth, we need to have a strategic understanding of energy.

It is necessary to reduce the dependence on oil as fuel to meet domestic and global energy demands. For nations, this is a strategic security need. Beyond borders, using oil as fuel is excessively wasteful, as olefin cracking and polymerization materials form the foundation of modern industries such as industrial, medical, and textile sectors.

The storage-to-extraction ratio of coal and natural gas is higher than that of oil. Why do we consume oil as fuel? Clearly, thermal power and green electricity are abundant, and a significant portion of green electricity is underutilized during peak periods, which is why energy storage is being vigorously developed for peak shaving and valley filling.

A simple phrase like "pressure relief" feels too superficial.

Then there is the issue of usage costs, electric vehicles.

In addition, the transition to new energy (energy control magnitude) and intelligence (precision and efficiency of energy control) in automobiles can leverage "new infrastructure." Supporting facilities, new channels, new ecosystems, etc., whether for domestic upgrades or international expansion, all hold immeasurable strategic significance.

"Without development, digging the road repeatedly" is a form of satire. However, new energy vehicles actually have practical value that can leverage larger projects, but are currently limited by temporary factors such as technology (for example, battery energy density limits driving range, which can be gradually addressed by solid-state batteries and optimized materials) and funding. These constraints will continue to improve.

Although we oppose a sudden and explosive one-size-fits-all approach, such as disregarding the "soft landing" for workers in traditional industries and forcibly violating market principles to advance, this is a matter of steps, not direction.

To develop new energy vehicles, anyone who tries to obstruct this direction is certainly going against the tide.