BYD's recently released first-quarter earnings report for 2026 has triggered a strong market reaction, marking the company's most sluggish quarterly performance in six years. Its profits plummeted 55% year-on-year to RMB 4.1 billion, while revenue fell 12% to RMB 150 billion, accompanied by a 30% drop in vehicle deliveries. Back in 2018, BYD Chairman Wang Chuanfu remarked that competition within China's electric vehicle (EV) sector would ultimately benefit consumers and the industry's overall evolution. However, he cautioned that only 10% to 20% of players would eventually defeat their rivals and survive. Since that statement, the New Energy Vehicle (NEV) sector has seen a surge of new entrants, such as Xiaomi and Geely. While an unrelenting and intensifying price war persists, BYD's market dominance is emblematic of the sector. Its rise and fall likely serve as an indicator for the trajectory of China's entire automotive manufacturing industry.
Numerous experts, scholars, and industry practitioners are currently researching the NEV manufacturing sector. The focus of these authorities and academics is largely on industrial and manufacturing-oriented analyses, with abundant data and assessments. Yet, the crux of the matter is that the NEV industry is not fundamentally an industrial issue at all, but rather a sensitive geopolitical one. This is the underlying reason why the state has spared no policy expense to incentivize its growth, even at the cost of sacrificing the internal combustion engine industry. In this regard, experts and scholars who confine their analysis strictly to industrial terms have committed a fundamental error in direction.
If we view reality objectively, the only major manufacturing sector in which China has a genuine prospect of leading and maintaining global competitiveness is the NEV industry. This is the direct result of massive capital injections fueled by a whole-of-nation approach. Other sectors, such as semiconductors or robotics, hold significant prestige and offer some hope of achievement, but current situations suggest they remain far behind the international standard to the point where a meaningful comparison is not yet possible.
It is widely recognized that in the global geopolitical struggle, supply chain strategy currently serves as China's primary strategic lever. It possesses the capacity to pivot and disrupt existing balances of power, thereby elevating China's global strategic standing and compelling other nations to act with caution. A prime example of this is the mobilization of lithium resources to execute blockades and counter-blockades, as well as the implementation of sanctions and counter-sanctions. Consequently, even if purely from the perspective of geostrategic interests, China needs to prioritize the performance of these strategic levers. A rigorous assessment of their long-term prospects and trends is essential to ensuring the continued efficacy of this supply chain strategy.
However, the outlook for this strategic lever appears less than optimistic when one examines the current trajectory of the NEV sector.
The relative strategic utility currently enjoyed by supply chain maneuvering is rooted in globalization. It remains effective only because the tide of globalization has not yet fully receded, and now the global manufacturing apparatus still retains a degree of functional dependence on integrated production systems. Once deglobalization reaches its conclusion, this brand of supply chain strategy will lose its potency. While many observers have noted such a situation, their analytical framing remains flawed. By measuring the issue within a single dimension, they argue that China's advantages in low-cost, systematized production across numerous supply chain nodes are both irreplaceable and sustainable, thereby the country's long-term supply chain can still play the role of a strategic lever.
Yet the issue is not so straightforward. The most obvious flaw in the supply chain strategy is that the primary challenge does not stem from competition within the same dimension; it is not about price war but rather about the potential for a technological revolution and leapfrog development.
The ultimate adversary of any supply chain strategy is technology. Once technological advancement triggers a generational upgrade, the existing supply chain system faces dissolution. The advent of the steam engine rendered the plow-ox obsolete; the rise of the computer consigned the abacus to history; and the emergence of the jet engine fundamentally transformed aviation, as no modern mainstream airline would continue to operate antiquated propeller-driven aircraft. Consequently, because legacy manufacturing supply chains are tailored exclusively to legacy products, a disruptive technological leap naturally inflicts a disruptive impact. This is the most significant vulnerability and inherent flaw of the supply chain strategy.
This challenge has already emerged and is now manifesting. The NEV itself represents a major challenge to the legacy automotive manufacturing sector, whose technological direction is characterized by generational replacement. Manufacturing firms producing gasoline and diesel vehicles are already showing signs of decline; numerous renowned major brands, including Volkswagen, GM, and Ford, as well as BYD and Geely, have reported significant operational losses. The emergence of this phenomenon is no accident. Relative to internal combustion engine vehicles, the NEV industry itself is a technological progress and optimization. Furthermore, because NEV manufacturing possesses a higher degree of industrial digitalization, it is subject not only to intense competition but also to an even more accelerated pace of technological turnover and upgrade.
The technological evolution of NEV has by no means reached a plateau. Even as China's NEV sector rises, Western technological advancements are ushering in a new generation of upgrades that threaten to render existing NEV supply chains obsolete. First, there is the emergence of new battery technologies, including solid-state batteries. While the ultimate victor remains to be seen, this trajectory will determine who commands the post-upgrade future market. Second is the competition over integrated manufacturing costs. While Chinese manufacturing had previously secured a relative advantage, this edge is constantly at risk of being blunted by Tesla, whose mode of high-density production lines have significantly driven down costs, resulting in highly competitive pricing that could potentially marginalize the Chinese NEV manufacturing base. Third is the matter of autonomous driving technology. Tesla maintains a substantial lead in this arena, and should it achieve widespread market adoption, the result will be a revolutionary leap forward. These three technological advancement aspects, i.e., advanced battery chemistry, integrated vehicle manufacturing, and autonomous driving, will leverage generational upgrades to restructure the NEV manufacturing supply chain. Previous supply chain advantages may vanish, existing demand may evaporate, and established markets may be supplanted. Under such circumstances, the supply chain strategy would be rendered ineffective.
How much time remains before this scenario materializes?
This issue will impact a wide array of sectors. Based on average industrial cycles, we estimate a window of three to five years. In other words, China's current advantages within specific segments of the supply chain are likely to erode within that timeframe. Unless China can consistently achieve meaningful breakthroughs in technological advancement, the window of opportunity remains remarkably narrow.
As a strategic lever, supply chain strategy exerts profound influence over international geopolitical competition and the G2 bilateral relationship. China's primary competitor, the U.S., is undoubtedly acutely aware of this dynamic. Consequently, the U.S. orientation in this geopolitical struggle is quite clear, as it seeks to leverage the generational upgrades triggered by technological progress that utilizes intergenerational displacement rather than low-price competition to decisively bypass and defeat the critical supply chain advantages China currently holds. Should that moment arrive, China will find itself stripped of the supply chain strategy as a viable strategic lever, leading to a total collapse of the industrial equilibrium. In such a scenario, there is a high probability that China would be compelled to revert to a strategy of geographic deterrence, pushing international competition toward a state of intense confrontation.
Final analysis conclusion:
To achieve the grand goal of technological self-reliance and a self-sufficient and controllable industrial chain, China's continued technological progress and the ebb and flow of competition are crucial. Achieving and accomplishing this will be extremely difficult, but it is key to its future global standing and influence.
