Spring 2026 brought a paradoxical scenario for China’s automotive sector. On one hand, auto shows dazzled with a plethora of new models, while press conferences heralded groundbreaking technological leaps. On the other, Q1 financial results revealed a stark profit squeeze. Data from the China Passenger Car Association (CPCA) shows that from January to March, the industry generated RMB 2,412.8 billion in revenue, a 0.2% year-on-year decline, with costs climbing 0.7% to RMB 2,140.6 billion. Profits plummeted 18% to RMB 78.4 billion, dragging the automotive sales profit margin down to 3.2%—its lowest in a decade.

This figure pales in comparison to the average 6% profit margin seen across downstream industrial sectors. Today, China’s automotive industry boasts scale in production and sales but struggles to convert that scale into sustainable profits. As leading automakers collectively grapple with "rising revenues without rising profits" or even "declines in both," a critical question looms: Where have the profits vanished?

▍Exchange Rate "Hidden Reefs" Behind the Second Growth Curve

Data from the China Association of Automobile Manufacturers (CAAM) reveals domestic auto sales fell 20.3% year-on-year to 4.823 million units in Q1. Meanwhile, cumulative exports surged 56.7% to 2.226 million units, including 954,000 new energy vehicles (NEVs)—a 120% jump. Overseas markets have emerged as the "second growth curve." A review of Q1 earnings across automakers highlights a shared trend: robust overseas expansion. Customs data confirms China exported 2.312 million complete vehicles in Q1 2026, up 40.9% year-on-year. Amid domestic headwinds, globalization has become the cornerstone strategy to hedge against market weakness and drive revenue growth.

Geely Automobile reported Q1 revenue of RMB 83.8 billion, a 15% year-on-year increase, despite total sales inching up just 1% to 709,000 units. Export-driven growth was pivotal—overseas sales hit 203,000 units, up 126%. Chery Automobile achieved Q1 gross profit of RMB 10.564 billion, a 24.9% rise, with its gross margin expanding from 12.39% to 16.04%. This leap was fueled by structural advantages: exports accounted for 65.4% of its sales. Chery exported 393,000 units in Q1, up 53.9%, with overseas vehicle prices averaging 13.7% higher than domestic models.

Great Wall Motor (GWM) also saw revenue climb 12.7% year-on-year to RMB 45.1 billion, driven by exports. Overseas sales reached 130,000 units, up 43.1%, accounting for nearly half of its total. SAIC Motor demonstrated resilience amid industry volatility, posting RMB 138.52 billion in revenue and RMB 3.03 billion in net profit attributable to shareholders, steady year-on-year. Its Q1 exports surged 48.3% to 325,000 units.

However, automakers with larger export volumes face heightened exchange rate risks. Since April 2025, the RMB’s sharp appreciation has subjected exporters’ profit statements to significant foreign exchange impacts. This short-term disruptor directly eroded reported profits for several leading players. BYD’s Q1 financial expenses soared to approximately RMB 2.1 billion, compared to -RMB 1.908 billion a year earlier—a swing exceeding RMB 4 billion—primarily due to foreign exchange losses.

In essence, financial expenses alone "devoured" a substantial portion of BYD’s paper profits. Geely reported a net foreign exchange loss of roughly RMB 497 million in Q1, versus a RMB 3.028 billion gain a year earlier. GWM, too, felt the pinch: its financial expenses were -RMB 1.028 billion in Q1 2025 but turned positive this year, creating a profit gap exceeding RMB 1.1 billion from this line item alone. Changan Automobile’s financial expense ratio also spiked, with foreign exchange gains/losses becoming a major drag on current earnings.

Yet, this underscores the rapid scaling of Chinese automakers’ global operations. Foreign exchange losses are accounting phenomena, not operational setbacks. Excluding these, core profitability improved year-on-year for many. Huatai Securities research notes that, excluding exchange rate impacts, the combined net profit attributable to shareholders of ten mainstream OEMs actually grew 35% year-on-year in Q1, with net profit per vehicle surging 52%. This suggests the "disappearing profits" narrative obscures reality: temporary accounting fluctuations from global expansion are masking genuine improvements in growth quality.

▍"Burning Money" on R&D to Secure Long-Term Moats

If globalization represents automakers’ "external battlefield" against weak domestic demand, premiumization and technological R&D form the "internal foundation" shaping long-term competitiveness. Q1 earnings also reveal encouraging shifts—multiple automakers are undergoing qualitative upgrades in per-unit revenue and product mix.

Geely’s performance exemplifies this trend. While Q1 revenue rose 15%, sales increased just 1%, signaling "stable volume, rising prices." The average selling price per vehicle jumped 18.3% year-on-year to RMB 112,000, with core net profit per unit reaching RMB 6,429—up 30% and a five-year high.

Gui Shengyue, CEO of Geely Automobile Holdings, declared on the earnings call: "The record-high core profit in Q1 is just the beginning." This growth stems from Zeekr, Geely’s premium brand, which sold 77,000 units in Q1, up 86%, at an average price of RMB 295,000. Geely’s core net profit attributable to shareholders hit RMB 4.56 billion, up 31%, with a core net margin of 5.4%. Generating profits close to BYD’s level with revenue below RMB 83.8 billion, Geely’s Q1 "comeback" underscores that profit quality trumps revenue scale.

Seres capitalized on the premium positioning of its Aito brand to lead in gross margin. Q1 revenue hit RMB 25.75 billion, up 34.5%, with net profit attributable to shareholders of RMB 750 million. NEV sales reached 78,500 units, up 43.9%. Targeting the premium market above RMB 300,000, Aito propelled Seres’ Q1 gross margin to 26.24%—topping all listed automakers.

While premiumization signifies "climbing upward," R&D investment represents "rooting downward." A subtle yet critical trend in Q1 reports is the near-universal ramp-up in R&D spending. BYD’s Q1 R&D expenses soared to RMB 11.3 billion, exceeding its net profit by RMB 7.2 billion and accounting for nearly 7.5% of revenue—far above the industry average of 3-5%. To date, BYD’s cumulative R&D investment has surpassed RMB 250 billion.

Chery’s Q1 R&D spending reached RMB 2.85 billion, up 25.5%, roughly matching its gross profit growth. Seres invested RMB 1.79 billion in R&D, up 70.7%—a remarkable growth rate. Geely’s R&D expense ratio surged from 28.5% a year earlier to 44% in Q1, impacting nearly RMB 1 billion in reported profits. Management’s intent is clear: proactively raising expense ratios to solidify profit quality and fuel future growth.

This strategy of "trading profits for moats" strains short-term financials but is vital for long-term resilience. In March, BYD unveiled its second-generation Blade Battery and flash-charging technology, achieving an industry-first 5-minute charge from 10% to 70%—a testament to how technological reserves rapidly translate into product competitiveness. The Beijing Auto Show’s flurry of flagship model debuts by various brands reflects the culmination of R&D investments.

Q1 has shown signs of market stabilization. According to CPCA data, retail passenger vehicle sales reached 1.384 million units in April, with the NEV penetration rate historically breaching 60% to hit 61.4%, accelerating the structural "oil-to-electric" shift. Meanwhile, amid AI computing power demand, rising non-ferrous metal prices, and sustained high upstream costs, over 15 domestic automakers have implemented substantive price hikes.

This suggests the year-long price war may temporarily pause, driven by cost and supply-demand dynamics, directly repairing automakers’ gross margins. Cui Dongshu, Secretary-General of the CPCA, recently noted that the "May Day" holiday and regional auto shows are stimulating purchase demand, with May sales and production expected to continue their gradual recovery.

Looking ahead to Q2, multiple positive signals have emerged. First, collective price hikes by automakers are poised to further restore profitability and improve gross margins. Second, as Europe, Southeast Asia, and other markets enter traditional sales peaks, coupled with the RMB exchange rate stabilizing after sharp fluctuations, foreign exchange losses’ impact on profits is likely to diminish, with overseas operations contributing more significantly to overall earnings.

Critically, new technologies and products are entering their delivery and launch phases. In April alone, at least 40 new models were launched, pre-sold, or unveiled in China’s auto market, with over 10 debuts/launches scheduled for April 22. The latest MIIT announcement of road vehicle production approvals includes heavyweight models like the Zenith V800, XPENG G9L, Yijing X9, GAC Trumpchi Yue7, BYD Sealion 08, and all-new LIXIANG L6. Accelerated new model launches and deliveries, alongside robust overseas growth, are set to further stimulate domestic demand.

Of course, Q2 faces uncertainties. The strength of domestic terminal demand recovery remains to be seen, and the Matthew effect will intensify industry differentiation. Automakers lacking clear advantages in technology, branding, and channels will confront harsher survival challenges. However, as the price war pauses and value competition begins in earnest, China’s auto market is poised to shed the irrational "sell one, lose one" dynamic and gradually transition to a healthier trajectory.

Layout | Yang Shuo

Image Sources: Major Automakers, Qianku.com