China's phased battery consumption tax will widen the cost gap between integrated automakers and battery-dependent rivals, reshaping competition in the industry.
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China's 2% battery tax pressures smaller makers, favors CATL
China's reinstatement of a consumption tax on lithium batteries will accelerate market share consolidation toward top-tier producers like CATL while squeezing second- and third-tier manufacturers, analysts said.
"Automakers that do not make power batteries can never become world-class carmakers," Cui Dongshu, secretary-general of the China Passenger Car Association, said in an article published Saturday.
The tax, announced July 17 by the Ministry of Finance, the General Administration of Customs and the State Taxation Administration, imposes a 2% levy on lithium-ion batteries from September 2026, rising to 4% a year later. Sodium-ion and solid-state batteries are exempt through the end of 2028. Goldman Sachs estimates CATL's earnings downside at just 1% to 6% under a scenario where it passes on half the tax burden, supported by overseas revenue exceeding 30% of total sales and a 2025 unit net profit of RMB109 per kilowatt-hour — surpassing the combined total of other peers.
For smaller players like CALB and REPT BATTERO, the impact is far more severe. Under the same 50% pass-through scenario, Goldman Sachs projects earnings downside of 8% to 41% during 2026 to 2028. If the tax cannot be passed on at all, the downside widens to 15% to 82%. The policy effectively draws a new cost divide between automakers that make their own batteries and those that buy externally, Cui said.
The Cost Divide Between Integrated and Outsourced Production
Automakers that produce batteries in-house can avoid or deduct the consumption tax, while those relying on external procurement will bear the cost passed on by battery manufacturers, Cui said. Lithium battery cells currently trade at around 0.35 yuan to 0.40 yuan per Wh, meaning the 2% tax adds roughly 0.007 yuan to 0.008 yuan per Wh. For an automaker producing 1 million vehicles annually, the cumulative added cost could reach hundreds of millions of yuan, he estimated.
BYD is already a dominant force in lithium iron phosphate batteries. Great Wall Motor-backed Svolt Energy ranks among the leaders in ternary battery installations, and Geely has invested in in-house power battery development with some models already in mass production, Cui noted.
Cui described the current profit imbalance as "too dire to look at." According to the 2025 Fortune Global 500, Chinese automakers on the list posted a combined profit of $14.7 billion, while a leading battery company alone took $7.1 billion. CATL's 2025 net profit of 72.2 billion yuan ($10.7 billion) exceeded the combined profits of 13 A-share listed automakers, he said. China's auto industry posted a sales profit margin of just 3.4% in the first five months of 2026, still at a historic low.
A Policy Window for Next-Generation Technology
The tax exemptions for sodium-ion and solid-state batteries provide automakers with a policy window to invest in next-generation technologies, Cui said. At a critical stage when solid-state batteries are moving from laboratories to mass production, the exemption lowers upfront investment costs. CATL, BYD and several other manufacturers plan to achieve small-batch vehicle installations around 2027.
The policy shift comes as China's new energy vehicle penetration rate continues climbing. NEV retail sales reached 4.71 million units in the first half of 2026, accounting for 54% of total passenger vehicle sales, according to CPCA data. Cumulative power battery installations hit 335.6 GWh in the same period, up 12% year over year.
Cui believes the policy adjustment marks the formal opening of the curtain on "equal treatment for fuel and electric vehicles," as tax incentives for NEVs are being phased out in stages. Batteries account for at least about 25% of a vehicle's price, making core power battery capabilities key for automakers to build long-term competitiveness, he said.
For investors, the tax reform reinforces CATL's competitive moat. The company's overseas business contribution exceeding 30% and industry-leading unit profitability provide a buffer that smaller peers lack. CATL shares rose 2.1% on Monday, while CALB dropped 8% and REPT BATTERO fell 0.9%. Whoever first builds the capability to develop and produce batteries in-house will gain a cost advantage in this round of tax reform and secure a more favorable position in the next phase of market competition, Cui said.
This article is for informational purposes only and does not constitute investment advice.
