Battery makers should cut production and take some rest to cope
In the closing days of 2025, China's battery industry confronts a reckoning long embedded in the logic of subsidy-driven growth: when the state withdraws its hand, markets must learn to stand on their own. The head of China's passenger car association has warned that domestic electric vehicle sales could fall by at least 30 percent in early 2026 as tax incentives expire, while export markets — squeezed by European stagnation and American trade barriers — offer no compensating lifeline. What unfolds in the months ahead will test whether years of industrial expansion have built genuine resilience, or merely the appearance of it.
- A 30% collapse in domestic green vehicle sales is expected the moment government tax incentives expire at year's end, hitting battery makers with sudden, severe demand destruction.
- Commercial EV buyers rushed to capture final subsidies, creating an artificial year-end spike that will make the early 2026 drop look even steeper by comparison.
- Chinese battery exports to the EU grew only 4% in 2025, and US shipments actually fell 9.5% — meaning no foreign market is positioned to absorb the domestic shortfall.
- America's AI-driven energy storage boom, which might have been a lifeline, is effectively closed off by US policy restricting tax credits for projects tied to Chinese manufacturers.
- Industry leaders are advising battery makers to cut production and brace for volatility, signaling that survival through this period depends on discipline rather than growth.
China's battery industry is heading into 2026 with a warning it cannot ignore. Cui Dongshu, secretary general of the country's passenger car association, has laid out a stark forecast: as government tax incentives for electric vehicles expire, domestic demand will fall off a cliff — down at least 30 percent in early 2026 compared to the final quarter of 2025. Commercial electric vehicles will fare even worse, after businesses rushed year-end purchases to capture the last available subsidies. For battery manufacturers that have spent years scaling up capacity, the arithmetic is brutal.
The export picture provides no cushion. China's shipments to the European Union — its largest overseas market — grew just 4 percent in 2025, a modest figure that signals saturation rather than momentum. More telling is the United States, where Chinese battery exports fell 9.5 percent despite an AI-fueled boom in energy storage demand. The reason is regulatory: American policy now bars investment tax credits for projects involving Chinese manufacturers, effectively locking them out of one of the world's fastest-growing markets.
The subsidy phase-out was a deliberate policy choice — a signal that China's EV market should learn to sustain itself. But the transition has arrived sharply rather than gradually, catching an industry built for expansion and leaving it facing underutilized factories and thinning margins. Whether this proves a painful but temporary adjustment or the opening of a longer reckoning with overcapacity will depend on how quickly demand — at home and abroad — finds its footing.
China's battery industry is bracing for a sharp contraction in the first half of 2026. The warning came from Cui Dongshu, secretary general of China's passenger car association, who laid out the problem plainly: as government tax incentives for electric vehicle purchases expire at year's end, domestic demand will crater, and exports won't make up the difference.
The numbers tell the story. Cui expects green vehicle sales to plummet at least 30 percent in early 2026 compared to the final quarter of 2025. That's not a modest slowdown—it's a cliff. Commercial electric vehicles will fall even harder, he said, after a rush of year-end purchases by businesses trying to capture the last of the available subsidies and tax breaks. For battery makers, the math is unforgiving. With domestic orders drying up, they have little choice but to cut production and weather the downturn.
The export picture offers no relief. China dominates global battery manufacturing and has been riding a worldwide surge in demand for batteries that power electric vehicles and grid storage systems. But that tailwind is weakening. Exports to the European Union, China's largest overseas market, grew just 4 percent in 2025 compared to the year before. More troubling: shipments to the United States fell 9.5 percent. That decline is significant because it suggests something counterintuitive—the artificial intelligence boom in America, which has driven enormous demand for energy storage infrastructure, is not translating into orders for Chinese batteries.
Cui attributed the U.S. export drop to rising trade barriers. American policy now restricts investment tax credits for projects involving what Washington calls "foreign entities of concern"—a category that includes Chinese manufacturers. That regulatory squeeze, combined with the domestic subsidy cliff, leaves the industry with few options. Cui's advice to battery makers was blunt: cut production, take time to adjust, and prepare for volatility.
The timing matters. China's government engineered the subsidy phase-out deliberately, signaling that the EV market should mature without permanent government support. But the transition is proving sharp rather than gradual. Battery makers, which have expanded capacity to meet years of surging demand, now face the prospect of underutilized factories and weakened cash flow. The question hanging over the industry is whether this is a temporary dip—a painful but manageable adjustment—or the beginning of a longer period of overcapacity and margin pressure. For now, the answer depends on how quickly exports can recover and whether domestic demand stabilizes once the initial shock passes.
Notable Quotes
Demand for new energy batteries will drop drastically from the end of this year, so battery makers should cut production and take some rest to cope with the fluctuations.— Cui Dongshu, secretary general of China's passenger car association
The Hearth Conversation Another angle on the story
Why does the loss of subsidies hit so hard all at once? Couldn't the market absorb a gradual phase-out?
The subsidies were the primary reason people bought electric vehicles in the first place. When you remove the financial incentive, you remove the reason for many buyers to upgrade. It's not like they're switching to a different EV—they're delaying the purchase or skipping it entirely.
But China is supposed to be the global battery leader. Can't they just export their way out of this?
That's what you'd think, but the numbers don't support it. The U.S. market is actually shrinking for them, and Europe's growth is anemic. The AI boom everyone talks about is happening in America, but it's not buying Chinese batteries.
Why not? Shouldn't energy storage for data centers be a huge opportunity?
It should be, but U.S. policy is deliberately blocking it. The investment tax credit restrictions are designed to keep Chinese manufacturers out of that market. It's a trade war playing out in the supply chain.
So what happens to all those battery factories if demand really does drop 30 percent?
They either cut production and lay off workers, or they run at a loss. Neither option is sustainable for long. That's why Cui is telling them to prepare now—this isn't a surprise, but it's going to be painful.
Is this temporary, or is the battery boom actually over?
It's probably temporary, but the industry won't know for months. If domestic demand bounces back once the shock wears off, and if exports stabilize, they recover. If not, you're looking at a structural overcapacity problem that could take years to work through.