Why BYD mega bubble is set to burst: Perfect storm of domestic market challenges increases pressure on Chinese giants like BYD, Changan, Chery and Geely

Byd Dolphin Surf rolls off the production line

While Australian sales of Chinese vehicles continue to grow at a staggering rate it looks like the country’s car industry, including the world’s largest EV manufacturer BYD, has hit a nasty speed bump due to a perfect storm of challenging market conditions.

According to data from the Chinese Passenger Car Association (CPCA) and China Association of Automobile Manufacturers (CAAM), 2025 was a year of solid growth for domestic production which saw total output rise to 34.5 million units, a 9.4 per cent year-on-year increase over 2024.

And similarly, exports rose to a record 7.1 million vehicles (up 21.1 per cent yoy) confirming China as the world's largest automobile exporter.

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But due to multiple factors including regulatory changes, reduced demand and volatile trade conditions, January numbers told a markedly different story.

As of January 1, 2026 the Chinese Government revised incentives designed to encourage EV uptake and introduced a five per cent purchase tax on ‘New Energy Vehicles’ (EV and hybrid) which were previously exempt.

In 2025 a maximum ¥15,000 (~$3065) subsidy was available to all new EV buyers. But now only cars with a retail value above ¥187,500 (~$38,300) qualify.

At the same time, the CAAM said slowing economic growth in China has put pressure on wages, which combined with rising unemployment, has dampened demand for new cars.

BYD celebrates production of the 15 millionth New Energy Vehicle

The government has also moved to eradicate export of ‘zombie cars’ - new, zero km vehicles road registered to qualify as ‘used’, a move likely to create a medium-term glut of new-car inventory.

And of course, an all-out trade war with the United States has not only contributed to China’s economic slowdown but effectively cut-off access to one of the world’s biggest car markets.

According to China Automotive News, in January China’s new vehicle production dropped 3.2 per cent year on year to below 2.35 million units, with sales down 13.9 per cent.

BYD Export

BYD domestic sales fell off a cliff, down 53 per cent to 110,000 units, with other big players also taking a backwards step, including Geely (-13 per cent), Changan (-33 per cent) and Chery (-40 per cent).

But conversely, exports were up substantially compared to January, 2025.

CPCA data show Chinese vehicle exports rose to 576,000 units (+52 per cent) with close to half being NEVs, that proportion up 13 per cent year-on-year.

BYD China website

BYD Seal - China website

In terms of an annual outlook, the CPCA predicts domestic sales will grow one per cent in 2026 (down from 9.4 per cent growth in 2025) with vehicle exports growing 4.3 percent, compared to 21.1 per cent last year.

Time will tell whether these predictions become reality, but for now, the only way seems to be up for BYD and Chery in particular, in Australia.

With 2025 new-model additions including the Shark 6 ute, city-sized Atto 1 electric hatch and compact Atto 2 EV SUV, as well as the larger pure-electric Sealion 7 and plug-in hybrid Sealion 8 SUVs, BYD’s year-on-year sales for the month of January grew by a spectacular 640.9 per cent.

BYD Car factory

At the same time, Chery more than doubled its January sales (+105.8 per cent), largely thanks to the ongoing success of its Tiggo 4 which comfortably led the small SUV category.