In 2024, NIO founder William Li estimated at the China Electric Vehicle 100 Forum that over the next eight years, roughly 19.4 million new energy vehicles would see their power batteries exit warranty, with potential costs exceeding 1 trillion yuan if each vehicle requires an average of 60,000 yuan for treatment. He stressed that solving battery lifespan issues was urgent, warning that failure to act now would lead to significant consequences in eight years. However, the problem has surfaced earlier and is more complex than anticipated.
Since the beginning of this year, multiple batches of power batteries with short production and delivery periods have experienced concentrated issues. In July, hundreds of GAC Aion AION S ride-hailing drivers reported problems such as sudden power loss during driving, sharp range drops, insulation failures, battery swelling, or leakage. These vehicles, produced between 2022 and 2023, are equipped with CALB 177Ah lithium iron phosphate batteries and have typically traveled 150,000 to 250,000 kilometers. In response to widespread complaints, GAC Aion extended the power battery warranty for related commercial vehicles from 8 years or 150,000 kilometers to 8 years or 300,000 kilometers. CALB also initiated inspections and maintenance, but the cause of the failures remains under investigation, with GAC Aion stating that a statutory recall process has been launched. Media estimates suggest that the total cost of testing, repairs, and compensation for downtime could exceed 600 million yuan.
Earlier this year, Sunwoda Electronic Co., Ltd. signed a 608 million yuan settlement agreement with a company affiliated with Zeekr. Zeekr alleged that battery cells supplied by Sunwoda for the Zeekr 001 WE86 model between 2021 and 2023 had quality issues, leading to a recall involving over 38,000 vehicles. Zeekr subsequently filed a claim for 2.314 billion yuan against Sunwoda at the end of last year. Volvo also recalled over 33,000 EX30 vehicles in markets including the U.S., UK, South Africa, and Australia due to overheating risks in the high-voltage batteries. Battery problems are not confined to Chinese suppliers. Reuters reported that in January, Volkswagen recalled 44,551 ID.4 vehicles in the U.S. for model years 2023 to 2025, with some experiencing overheating risks in high-voltage batteries and others having electrode misalignment in battery modules supplied by SK Battery America. In March, Volkswagen recalled nearly 100,000 ID. series and Cupra Born vehicles in Europe due to non-compliant battery modules. Bentley, under Volkswagen, also recalled some Bentayga plug-in hybrids in China due to internal battery faults, with supplier Samsung SDI.
While the causes of these failures vary and responsibility is not clearly defined, it has become a consensus in the industry that insufficient validation cycles and mileage are significant issues. This reflects the cost of second-tier battery manufacturers and automakers racing to capture market share and reduce costs, leading to imperfect processes. At the same time, domestic and international policies and upstream and downstream operating environments are simultaneously shaking the cost structure of power batteries. For second-tier battery manufacturers that rely on low prices to secure secondary or tertiary supply positions, the space for "exchanging price for volume" is being drastically compressed. The balance of market and regulation is tilting towards higher quality and more stable offerings, accelerating a new round of consolidation in the power battery industry.
Quality issues lead to fines and compensation, while new regulations add costs
The damage from power battery quality problems has directly impacted fines and financial reports. According to its 2025 annual report, Sunwoda recorded estimated liabilities of 2.912 billion yuan due to the Zeekr battery incident and estimated the impact on 2025 net profit attributable to the parent company to be between 500 million and 800 million yuan. The company's main power battery operating entity, Sunwoda Power, posted a net loss of 3.025 billion yuan for the year, with its electric vehicle battery gross margin falling to 4.86%, a decrease of 3.94 percentage points year-on-year. A single batch quality dispute can alter a business segment's annual profit performance. This is particularly dangerous for second-tier battery manufacturers struggling to survive. Data from the China Automotive Power Battery Industry Innovation Alliance shows that in the first half of 2026, CATL and BYD together accounted for 63.18% of domestic power battery installations. The remaining over 30% of the market is fiercely contested by multiple manufacturers including CALB, Gotion High-tech, EVE Energy, and Sunwoda. Automakers need to reduce reliance on leading battery suppliers, creating a survival space for second-tier players. For example, GAC shifted some orders for Aion models to CALB and also cooperated with EVE Energy and Farasis Energy. Lowering prices and compressing margins are the most direct ways for these second-tier companies to win orders. A common practice for second-tier manufacturers is to offer 10%-15% price discounts to secure secondary or tertiary supply positions. However, after quality issues emerged, the market is swinging back towards the leaders. In 2025, CATL's domestic installation market share once fell below 45% but rebounded to 50.1% in the first quarter of 2026.
The market and regulators are casting the same vote: quality priority over price for power batteries. Automakers still need multi-supplier systems to diversify risk and lower costs, but the era of battery manufacturers securing orders solely through low prices is ending. Domestic regulators have implemented the "strictest battery safety standards", raising compliance costs. On July 1, the mandatory national standard "Safety Requirements for Power Batteries for Electric Vehicles" (GB 38031-2025) took effect. The new standard upgrades requirements from "alarm 5 minutes before thermal runaway" to "no fire or explosion for 2 hours after thermal runaway, while retaining alarm signals and ensuring smoke does not harm occupants". It also adds a bottom impact test and safety verification after 300 fast-charging cycles. Ministry of Industry and Information Technology research indicates that about 78% of companies already have the technical reserves, 14% can meet the standard within the transition period, and 8% may not achieve compliance until 2030 or later. Industry insiders estimate that meeting the new regulations will increase battery system costs by 15% to 20%. Data capability has thus become a new fixed cost. According to a report from 24chao Industrial Research Institute, a leading company invested over 200 engineers for 6 months to complete data collection from over 260 core suppliers for a single carbon footprint report. If leading companies need such investment, the compliance cost is even harder for second-tier companies with weaker data and financial capabilities to spread. These rules essentially require companies to invest first before qualifying for orders. Leading companies can use scale to spread fixed investments, but second-tier companies struggle to follow suit. The more compliance costs there are, the narrower the profit margin left for them.
Survival crisis looms for low-margin companies
Beyond compliance costs, upstream price increases, weakening downstream demand, and the withdrawal of policy incentives are also squeezing power battery companies. Sunwoda's financial report shows that in the first quarter of this year, net profit attributable to the parent company was 114 million yuan, a year-on-year decline of 70.49%; non-recurring net profit was a loss of 1.2738 million yuan. Sunwoda's securities department explained to the media that one of the main reasons for the performance decline was the change in the export tax rebate rate, which had a "small tens of millions of yuan" impact on profits. Leaders also feel the cost pressure but have a wider buffer. CATL's semi-annual report shows that in the first half of this year, CATL's power battery system revenue was 192.125 billion yuan, a year-on-year increase of 46.02%, but gross margin fell to 20.63%, down 1.78 percentage points year-on-year, as costs grew faster than revenue. However, supported by scale and diversified businesses like energy storage, the group's net profit attributable to the parent company still reached 43.284 billion yuan, a year-on-year increase of 41.98%. The situation varies within the second tier. EVE Energy reported Q1 2026 revenue of 20.68 billion yuan and net profit attributable to the parent company of 1.446 billion yuan, representing year-on-year growth of 61.61% and 31.35%, respectively. The company then forecasted H1 net profit attributable to the parent company to increase by 95% to 110% year-on-year, mainly driven by energy storage batteries. Energy storage demand is providing a second growth curve for some manufacturers, but it also means that the ability to shed dependence on a single power battery business and low-price orders is beginning to determine differentiation among second-tier players.
Upstream raw material price increases are a pressure point for power battery profits. For example, battery-grade lithium carbonate rose from 70,000 to 100,000 yuan per ton in the second half of 2025 to 150,000 to 200,000 yuan per ton in the first half of this year. Yang Hongxin, Chairman of SVOLT Energy, told media that bulk raw materials like lithium carbonate, copper, and lithium hexafluorophosphate can be partially passed down to downstream companies through linkage agreements, but non-linked costs such as separators, graphite, and processing fees often have to be absorbed by battery companies themselves. "We cannot quickly pass all of it downstream," he said. Downstream demand is also cooling. Data from the China Automotive Power Battery Industry Innovation Alliance shows that domestic power battery installations in Q1 2026 fell by 4.1% year-on-year, the first decline in a first quarter in five years. This is attributed to a decline in overall automotive market sales. China Association of Automobile Manufacturers data shows that domestic auto sales in the first half of the year were 9.921 million units, down 21.1% year-on-year. Policy costs are also accumulating. On July 17, the Ministry of Finance, General Administration of Customs, and State Taxation Administration announced that consumption tax would be reinstated on primary lithium batteries and lithium-ion batteries from September 1, 2026, at a rate of 2% from September 1, 2026, to August 31, 2027, rising to 4% from September 1, 2027. The same tax rate places vastly different pressures on different companies. Leading companies, with stronger procurement and bargaining power, can share or pass on the cost to automakers. A 2% consumption tax might erode less than one percentage point of their profits. If second-tier manufacturers raise prices, they risk losing orders; if they absorb the cost, their already low profits will shrink further. According to a static estimate by the Economic Observer, for a small-to-medium battery cell company with a 2025 net profit margin of 3.2%, a 2% consumption tax would consume over 40% of its profits, while a 4% tax rate could represent an amount exceeding its current annual profit. Therefore, the reinstatement of the consumption tax not only adds a cost but also amplifies the existing profit gap between leading and second-tier companies, accelerating the elimination of weaker players.
Export incentives are also decreasing. The Ministry of Finance and State Taxation Administration stipulated that the VAT export rebate rate for battery products would be reduced from 9% to 6% effective April 1, 2026, and completely abolished from January 1, 2027. Export rebates are a significant profit source for power battery exports. This reduction directly impacts companies' viability. However, for second-tier manufacturers, building overseas factories requires even larger capital investment, making both paths more challenging for cash flow. Furthermore, the question of who bears the rising costs is amplifying profit allocation conflicts between battery manufacturers and automakers. Cui Dongshu, Secretary-General of the China Passenger Car Association, believes that auto profit is being "eaten up" by battery manufacturers. Data from the China Passenger Car Association shows that auto industry profit in the first half of 2026 fell 20% to 195.4 billion yuan, with a profit margin of only 3.8%. In contrast, in the first quarter of this year, CATL's net profit attributable to the parent company alone exceeded the total profit of seven leading automakers by 3.2 billion yuan. Cui Dongshu pointed out that the average export price of Chinese lithium batteries fell from 142,900 yuan per ton in 2024 to 104,800 yuan per ton in the first half of 2026, while domestic battery prices remained relatively firm. Combined with different payment terms arranged by battery companies with upstream and downstream partners, automakers are in a weak position in profit distribution. Therefore, he advocates for automakers to accelerate in-house development and manufacturing of batteries to regain control over costs and the supply chain. From the battery manufacturers' perspective, they also bear costs. Amid rising raw material prices, CATL's average selling price for power batteries in the first half of the year remained largely unchanged, leading to a 1.78 percentage point decline in gross margin. Stable pricing can be interpreted by automakers as a leading supplier maintaining bargaining power, or by battery manufacturers as them absorbing some costs for the downstream. However, it is important to note that power battery profits are highly concentrated at the top; not all battery companies are siphoning auto profits. Financial reports show that in the first quarter of this year, CATL's gross margin was 24.82%, while second-tier manufacturers like EVE Energy and CALB had gross margins hovering around 15%, lower than many automakers. Sunwoda's electric vehicle battery gross margin was only 4.86%. Faced with pervasive compliance costs, raw material price increases, and tax bills, the bargaining power disadvantage for second-tier power battery manufacturers compared to leaders is only becoming more pronounced, with profit gaps continuing to widen. With battery problems frequently exposed, consumer trust in second-tier manufacturers is plummeting. Automakers can no longer afford to choose solely based on "low prices". The industry consolidation is proceeding at an unprecedented pace.
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