China’s auto market has entered 2026 on a softer footing after a strong run in the previous year. After vehicle sales and production in China hit record highs in 2025, with both metrics exceeding 30 million units for the third straight year, first-quarter 2026 vehicle sales in the country witnessed double-digit declines. Demand lost momentum across both electric and traditional vehicle segments. Seasonal disruptions and policy adjustments weighed on buying activity, while broader cost pressures added to the cautious sentiment.
Q1 and March Sales Decline Sharply
China’s retail passenger vehicle sales declined more than 17% year over year, with total vehicle sales falling to about 4.23 million units in the first quarter of 2026, per CPCA, as cited in Yicai Global. The weakness was even more pronounced in the NEV segment. NEV sales dropped 21% year over year to roughly 1.91 million units in the quarter, reflecting the impact of reduced policy support. March data showed a similar trend. Retail car sales fell around 15% year over year to nearly 1.65 million units. NEV sales declined more than 14% to approximately 848,000 units during the month.
What Led to the Slowdown?
One key factor was a shift in the Chinese New Year holiday. The holiday fell in late February, which pushed the typical post-holiday demand recovery into March. As a result, both February and early March saw weaker-than-usual sales activity, distorting year-over-year comparisons.
Policy changes also played a major role. The government scaled back incentives for NEVs, removing the full purchase tax exemption from this year onward. This led to a drop in demand as consumers adjusted to higher upfront costs, particularly affecting EV sales momentum.
At the same time, automakers are dealing with rising input costs. Prices for semiconductors, memory chips and non-ferrous metals have surged, partly driven by global demand linked to the artificial intelligence boom. In addition, higher international oil prices amid geopolitical tensions have increased both production and ownership costs.
These pressures have hit the internal combustion engine (ICE) vehicle segment particularly hard, as higher fuel costs and weaker consumer sentiment further dampened demand.
Exports Emerge as a Bright Spot
While domestic demand remained weak, exports offered a strong offset, led by continued momentum in NEVs.
Passenger car exports jumped 74% year over year in March to about 695,000 units. NEV exports surged 140% to roughly 349,000 units, making up more than half of total shipments, up from 36% a year ago. The strength extended to the first quarter, with NEV exports rising 123.7% to around 908,000 units, reflecting solid overseas demand for Chinese EVs.
BYD Co Ltd BYDDY led the push, exporting 116,882 NEVs in March and recently raising its 2026 export target to 1.5 million vehicles.
Q1 Delivery Snapshot: Mixed Trends Across Key EV Players
China’s leading EV makers reported a mixed set of delivery numbers for the first quarter.
BYD remained the volume leader, selling 695,772 new energy passenger vehicles globally in the quarter. However, this marked a 30% decline year over year, with pure EV sales also falling 25% to 310,389 units.
In contrast, NIO Inc. NIO stood out with strong growth. The company delivered 83,465 vehicles in Q1, up 98.3% from a year earlier, exceeding its guidance range of 80,000-83,000 units. The performance of NIO’s close peers was more subdued. XPeng Inc. XPEV reported deliveries of 62,682 units, down from 94,008 vehicles in the year-ago period. Meanwhile, Li Auto Inc. LI posted 95,142 deliveries, reflecting only a modest increase from 92,864 units last year.
BYD stock carries a Zacks Rank #4 (Sell), XPEV and LI carry a Zacks Rank #3 (Hold) each, and NIO currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Road Ahead
Overall, China’s auto market is facing a near-term reset, with demand likely to stabilize only after seasonal effects fade and consumers adjust to the new policy and cost environment. CPCA expects a gradual pickup from this month as post-holiday activity normalizes. While the second quarter may still remain soft, the market is expected to find its footing thereafter and return to growth in the second half of the year.
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