According to Morgan Stanley's latest view, due to weakening demand and changes in policy direction, China's automotive industry needs to reassess growth pace and profit assumptions. The onset of 2026 may be "colder" than market expectations.
Weakened Demand at the Start of the Year: First Quarter May Decline, Orders Exhibit "Cold Start" Characteristics
Morgan Stanley points out that new car sales momentum has notably slowed, with an expected first-quarter 2026 passenger car sales decline of about 5% to 7% year-on-year. Combined sales for January and February might decrease by more than 15% compared to the same period last year, indicating post-holiday order and delivery schedules are under pressure.
Channel research also shows that at the beginning of the year, orders from several major electric vehicle manufacturers have decreased by about 30% to 40% compared to the previous months, further consolidating the "cold start" assessment.
Automakers Shift Strategies: Reduce Inventory First, Then Rely on New Products
Amidst slowing demand, the report suggests that automakers prefer to digest channel inventory first, preparing for a wave of new product launches after the Lunar New Year, rather than continuing to rely on aggressive price discounts and subsidies to boost short-term sales.
Short-term Underperformance: Favoring Two Main Lines
Morgan Stanley states that although market liquidity improvement might support broader index performance, the automotive sector could underperform in the short term, with stock prices likely to be volatile and pressured before the Spring Festival.
Among its covered targets, the institution favors two types of companies:
- Companies benefiting from intelligent driving themes (such as Hesai Technology, Horizon Robotics, XPeng Motors, WeRide, etc.);
- Automakers with higher European export exposure (such as BYD, Geely Automobile, SAIC Motor), whose technology and regional layout are seen as capable of cushioning some cyclical and political disturbances.
Increased Profit Margin Pressure: Capacity Utilization, Subsidies, and Cost Inflation Combine
The report also highlights rising risks on the profit side: low capacity utilization, higher subsidies, and inflation in major materials and component costs could force automakers to revise down their 2026 profit guidance. Price negotiations on the supply chain side are ongoing, and some component companies may choose to absorb some pressure to avoid order reductions before the peak season.
Morgan Stanley warns that before the industry adapts to the "new normal," the sector may experience one or two quarters of revenue and profit margin contraction, along with cash consumption.
Full-year Outlook: Domestic Weakens, Exports as "Buffer"
For the full year, Morgan Stanley predicts that China's auto sales may end three consecutive years of expansion, declining by about 3% year-on-year in 2026, with domestic sales falling by about 5% to 7%. Export growth is expected at about 16%, which will offset some domestic weakness, highlighting the increasing importance of overseas markets.
The firm also mentions that if Europe adopts a "minimum price" approach rather than tariffs on Chinese electric vehicles, it may be more favorable for Chinese automakers to expand sales in Europe. Meanwhile, given China still emphasizes about a 5% GDP target background, additional stimulus policies remain possible if the industry deteriorates.
