This is the real reason why Chinese electric vehicles are undermining their Western rivals

Politicians and auto industry leaders in the United States and Europe have long argued that state-sponsored subsidies for Chinese electric vehicle makers have distorted global competition.

A new report from research firm Rhodium Group disputes that assessment, saying that structural advantages – not subsidies – are a key factor giving Chinese electric vehicle makers an edge over Western automakers.

These structural efficiencies include vertical integration, greater production scale and lower overall costs, which offset the effects of heavy state subsidies on Chinese EV makers’ profit margins, according to Rhodium.

Since 2009, Chinese authorities have disbursed more than $29 billion in tax breaks and subsidies to manufacturers of consumer electric vehicles, according to estimates by MIT Technology Review.

These subsidies were “critically important in China’s early development of electric vehicles,” according to Bo Chen of the National University of Singapore, particularly for its startups to gain access to much-needed financing.

“(Unlike) China, the US capital market provides sufficient financial support to companies like Tesla,” said Chen, a senior researcher at the university’s East Asia Institute.

China’s dominance in the electric vehicle industry suggests that Beijing’s approach has paid off.

These subsidies, coupled with a spirit of innovation and rapid development, have allowed Chinese electric vehicle makers to leapfrog traditional automakers in the West, said Tu Le, founder of automotive consultancy Sino Auto Insights.

While Rhodium did not dispute the advantages conferred by China’s state subsidies, the firm said the cost advantages gained from the subsidies, which Western automakers operating in China also benefited from, “remain small compared to the structural cost advantages.”

According to the report, greater vertical integration, in which one company controls multiple stages of production, is the “most important factor” allowing Chinese automakers to reduce the costs of electric vehicles without significantly sacrificing profit margins.

BYD, for example, produces almost 80% of its main components in-house, more than double that teslaaccording to Rhodium estimates, which will allow the Chinese automaker to realize considerable savings on supplier profit margins on several components.

This allows BYD to save about $2,369 in supplier margins per unit of its Seal sedan compared to the Tesla Model 3, according to the report.

Consequently, BYD was able to earn a gross profit margin of 20% in 2025, compared to Tesla’s 18%, even though the Model 3 sells for around 235,000 yuan ($33,943) in China, almost triple the 79,800 yuan that BYD advertises for its base model Seal, Rhodium said.

However, Leon Cheng, head of the mobility practice at management consulting firm YCP, cautioned that vertical integration is not a uniform feature across China’s auto industry.

“(Among) Chinese electric vehicle manufacturers, only a few, such as BYD, (do) this,” Cheng said. “There are a lot of legacy automotive players; they don’t really have this vertical integration.”

The report identified BYD and Leapmotor, an electric vehicle startup partially owned by Stellantis, as clear outliers in terms of vertical integration. Leapmotor produces about 60% of its components in-house and saves about $816 per model of its B01 sedan compared to Tesla’s Model 3, according to Rhodium.

Batteries, which account for one of the largest expenses in electric vehicle production, are produced in-house by BYD and Leapmotor, greatly reducing overall production costs for both automakers, Cheng said.

Cheng also cautioned against taking the Rhodium report’s calculations at face value, as it is difficult to determine the exact cost advantages of Chinese manufacturers from profit-and-loss calculations alone.

Chinese automakers are known to rely on extended payment terms with their suppliers, allowing them to delay cash outflows and maintain higher levels of working capital, Cheng said.

Those longer payment cycles can also make profit margins appear wider in the short term, he added.

Other analysts echoed Cheng’s view. “Vehicles made in China benefit from structural efficiencies that are often underestimated. Longer payment terms to suppliers improve working capital flexibility, while lower labor costs… reduce production overheads,” said Chris Liu, senior analyst at Omdia.

“These embedded supply chain benefits play a substantial role in driving affordability, beyond the impact of direct state subsidies,” Liu added.

While not universally applied by all Chinese manufacturers, vertical integration “is simply more common (among) Chinese companies,” said Sino Auto Insights’ Le.

According to the Rhodium report, many Western automakers have “reduced vertical integration by outsourcing major components to specialized suppliers” over the past few decades.

While this outsourcing push was driven by cost pressures and a “belief that suppliers could deliver greater efficiency and innovation at scale,” the report found that concerns about higher unit costs due to vertical integration “do not hold up in practice.”

According to Rhodium, Western assumptions about the cost efficiency of outsourcing are being challenged by significantly lower construction and manufacturing costs in China. That allows companies like BYD to keep production concentrated domestically and maintain a significant cost advantage.

However, it would be challenging for Western automakers to return to vertical integration without incurring significant costs.

Outsourcing has created a deep interdependence between legacy OEMs and component suppliers, according to YCP’s Cheng.

Some expenses may not be purely financial either. Bringing back in-house production of components could also lead to mass layoffs among suppliers, Cheng said.

— CNBC’s Dylan Butts contributed to this report.