China’s electric vehicle industry is entering a period of heightened strain as rising raw material and semiconductor costs converge with the withdrawal of policy support and the reintroduction of purchase taxes, according to a recent research note from UBS.
UBS said early 2026 represents a critical inflection point for the sector, with manufacturers simultaneously absorbing the impact of commodity price inflation, surging memory chip costs and a 5% EV purchase tax that took effect in January. The research team led by Paul Gong estimates that production costs for a typical mid-sized smart EV could rise by between 4,000 yuan ($575) and 7,000 yuan, creating uncertainty over how much of the increase can realistically be passed on to consumers.
See also: China’s EV Charging Network Passes 20 Million Plugs as Power Demand Rises
The bank’s analysis assumes that a mid-sized EV uses around 200 kilograms of aluminum and 80 kilograms of copper. Based on recent price movements, aluminum-related costs have increased by about 600 yuan per vehicle, copper by roughly 1,200 yuan, and lithium by between 1,000 yuan and 3,800 yuan over the past three months. These increases reflect renewed pressure on battery materials and vehicle structural components.
Memory chips have emerged as another major cost driver. UBS said industry sources indicate that DRAM requirements for modern vehicles typically range from $25 to $150, with an average intelligent vehicle requiring about $100 worth of memory. Assuming pre-increase DRAM costs of around 700 yuan per vehicle, UBS estimates that a roughly 180% surge in spot prices over the past three months has lifted DRAM costs to about 2,000 yuan per vehicle, adding approximately 1,300 yuan in incremental cost.
See also: China’s EV Shift Deepens Pressure on Foreign Automakers Despite Market Growth
Historically, commodity price increases have tended to be passed through when the entire industry faces similar pressures. However, UBS noted that current conditions — including weaker EV demand following the rollback of stimulus measures and the return of purchase taxes — may limit automakers’ pricing power. With competition intense and margins already thin, the bank estimates that absorbing the full cost increase could be sufficient on its own to erase profitability for some manufacturers.
UBS said that over time, higher prices could encourage suppliers to expand capacity, while softer demand might also help cool commodity markets. In the near term, however, the bank said the cost environment warrants caution toward the sector.
See also: China to Launch National EV Battery Tracking Platform as New Recycling Rules Take Effect
The surge in memory prices has been exacerbated by rapid growth in artificial intelligence and data center investment, which has intensified competition for semiconductor supply. At the same time, a sharp rebound in lithium carbonate prices in recent months has begun to feed directly into EV cost structures.
These pressures are being felt across the industry, including by manufacturers such as Nio, whose founder and chief executive William Li has highlighted rising raw material and memory chip costs as a significant challenge for EV makers this year, particularly as they compete with AI and computing sectors for key components.