In the Smart EV Era, Who Killed the Auto Industry's Profits?

An Industry Shockwave of Vanishing Profits

From 2024 to the present, a deeply unsettling data point has continued to sting the entire automotive supply chain — China's average auto industry profit margin has fallen below 5%, with some new energy vehicle brands even "losing money on every unit sold." Compared to the golden era of the internal combustion engine age, when double-digit profit margins were commonplace, the smart EV era's auto business seems to be turning into a grueling journey of "selling at a loss just to stay relevant."

So who exactly "killed" automotive profits? The answer isn't a single culprit, but rather a systemic crisis woven together by technological transformation, market competition, and business model restructuring.

The First Blade: Price Wars Become a Meat Grinder

Since Tesla first swung the price-cutting axe in 2023, China's new energy vehicle market has been mired in a protracted price war. BYD stormed the ICE vehicle heartland with its "EVs cheaper than gas cars" slogan, forcing every brand to follow suit with price cuts. Second-tier brands like Leapmotor and Neta resorted to near-cost pricing strategies to fight for market share.

The price war is essentially a "prisoner's dilemma." No company wants to voluntarily slash prices and erode profits, but once someone fires the first shot, everyone has no choice but to follow. According to statistics, over 200 models in the Chinese market participated in price cuts or launched limited-time promotions in 2024, with average reductions exceeding 15%. Profits were ground to dust in round after round of price warfare.

The Second Blade: The Bottomless Pit of the Intelligence Arms Race

If the price war is the external killer of profits, then investment in intelligent technology is the internal black hole devouring them.

Today, a competitively viable smart EV needs to be equipped with advanced autonomous driving systems, AI large-model-powered cockpits, over-the-air (OTA) continuous upgrade capabilities, and a host of other intelligent features. Behind these capabilities lie astronomical R&D investments:

• Autonomous Driving: The R&D cost for a single advanced autonomous driving solution runs into billions of yuan, with LiDAR, high-performance computing chips, and massive data training all indispensable
• AI Cockpit: Integrating large language models and enabling multimodal interaction requires continuous investment in computing power and data resources
• Software Ecosystem: OTA upgrades, app stores, cloud services, and other ongoing operational costs represent a long-term expenditure

Xpeng Motors' R&D spending exceeded 7 billion yuan in 2024, while NIO's cumulative R&D investment has surpassed 50 billion yuan. These massive investments are difficult to amortize through sales volume in the short term, directly compressing companies' profit margins. Intelligent technology has become a lose-lose dilemma of "die waiting if you don't invest, die trying if you do."

The Third Blade: Hidden Costs from Supply Chain Restructuring

In the ICE era, the mature supply chain system had been refined over decades, with cost control pushed to the extreme. But in the smart EV era, the entire supply chain is undergoing dramatic restructuring.

As the most critical component of an electric vehicle, batteries once accounted for over 40% of total vehicle costs. Although lithium carbonate prices have fallen sharply from their 2022 peak, the rapid iteration of battery technology — from lithium iron phosphate to semi-solid-state to solid-state batteries — means companies must constantly chase the technological wave, with depreciation losses from obsolete production lines becoming sunk costs.

At the same time, the "de-globalization" trend in the chip supply chain is also driving up costs. High-end autonomous driving chips depend on a handful of suppliers like NVIDIA, leaving limited bargaining power. Automakers have begun developing chips in-house for supply chain security, but this is yet another track requiring tens of billions in investment with a long payback cycle.

The Fourth Blade: The Cash-Burning Game of Channel Transformation

Traditional automakers relied on dealer networks, shifting inventory pressure and sales costs onto the channel. But the direct-sales model pioneered by Tesla changed the industry's rules, with NIO, Li Auto, Xiaomi, and other brands opening experience stores in prime commercial districts to bring their brand image directly to consumers.

The direct-sales model delivers better user experience and brand control, but it also means companies must bear the hefty costs of store rent, personnel, and inventory risk themselves. A brand experience store in a prime commercial district of a first-tier city can easily command annual rent of several million yuan. When sales volume cannot cover channel costs, every store is "burning money."

Where Did the Profits Go? — Redistribution Along the Value Chain

Profits haven't vanished into thin air — they've shifted and been redistributed.

Upstream Winners: NVIDIA has profited handsomely from autonomous driving chips, while CATL maintains robust profit levels in the battery sector. Core technology suppliers have captured the richest profits along the industrial chain.

Platform Winners: Huawei has entered the automotive industry through its smart car solutions (HI mode and Smart Selection mode), carving out considerable value as a technology enabler. AI technology suppliers like Baidu Apollo and DJI Automotive are likewise taking their share of the pie.

Consumer Winners: Fierce competition has allowed consumers to enjoy better products at lower prices. Autonomous driving features that once required a 300,000-yuan vehicle are now standard on models in the 150,000-yuan range.

In other words, automotive industry profits are migrating from the vehicle manufacturing segment toward upstream core technologies and downstream user ecosystems at both ends.

Breaking Through: From Aggressive Expansion to Lean Management

Facing the profit squeeze, companies need to execute a strategic pivot from aggressive expansion to lean management. This pivot encompasses at least three dimensions:

1. Cost Reduction Through Technology, Not Price Cuts

True cost advantages come from technological innovation, not simply stripping down configurations. BYD has achieved cost control capabilities far superior to its peers through vertical integration, commanding the entire battery, motor, and electronic control supply chain. Tesla has dramatically reduced manufacturing costs through its gigacasting technology. The deep application of AI technology across R&D design, manufacturing, and quality inspection is becoming a new engine for cost reduction and efficiency gains.

2. Software-Defined Profits

When hardware profits approach zero, software and services become the new profit source. Tesla's FSD subscription, NIO's BaaS battery leasing, and Li Auto's paid OTA upgrades are all exploring the "acquire customers with hardware, profit from software" business model. The integration of AI large models into vehicles is also opening up new possibilities for personalized paid services.

3. Global Expansion as a Breakthrough

The domestic market's cutthroat competition has reached its limits, making overseas expansion a critical path for finding profit growth. Emerging markets in Southeast Asia, the Middle East, and Latin America have strong demand for smart EVs, with competitive intensity far lower than in China. China's auto exports exceeded 6 million units in 2024, with overseas market profit margins generally higher than domestic ones.

Outlook: Only Survivors Earn the Right to Talk About Profits

The profit crisis of the smart EV era is fundamentally the "growing pains" of an industry transformation period. Historical experience shows that every technological revolution goes through a brutal shakeout phase where profits are compressed and players are eliminated, but the companies that ultimately survive will enjoy outsized returns from post-consolidation industry dynamics.

Currently, AI technology is fundamentally reshaping the automotive product form and business logic. From autonomous driving to AI cockpits, from smart manufacturing to user operations, AI is not merely a cost item but a future profit creator. Whoever can first translate AI capabilities into differentiated experiences that consumers are willing to pay for will find an oasis in the profit desert.

What "killed" automotive profits was never a single enemy, but the structural conflict between old-era business models and new-era competitive rules. Only companies that embrace change, practice lean management, and drive an efficiency revolution powered by AI will weather this profit winter and welcome the true spring of the smart electric vehicle era.