China’s reinstatement of a consumption tax on lithium batteries could accelerate the trend of automakers developing in-house battery production, according to Cui Dongshu, secretary-general of the China Passenger Car Association (CPCA).
Writing in an article published on Saturday, Cui said the new tax policy is likely to strengthen the economic case for vehicle manufacturers to produce their own battery cells rather than relying entirely on external suppliers.
Tax Policy Reshapes Battery Cost Structure
China’s Ministry of Finance, General Administration of Customs and State Taxation Administration announced on July 17 that lithium-ion batteries and several other mature battery technologies will be subject to a 2% consumption tax beginning Sept. 1, 2026. The rate is scheduled to increase to 4% from Sept. 1, 2027.
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By contrast, sodium-ion batteries, solid-state batteries and several other emerging technologies will remain exempt from the consumption tax through the end of 2028.
Cui said the policy represents another step in China’s gradual withdrawal of preferential tax treatment for new energy vehicles (NEVs), following earlier adjustments to purchase tax incentives and vehicle and vessel tax exemptions.
He argued that the latest policy particularly favors automakers with their own battery manufacturing capabilities because battery products produced and consumed internally during continuous manufacturing are exempt from the consumption tax, while taxes paid on externally purchased batteries used in production may only be deducted under specified conditions.
According to Cui, the tax creates a cost difference between manufacturers producing their own batteries and those purchasing cells from third-party suppliers.
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Profitability Pressures
Cui also pointed to profitability pressures within China’s automotive industry, arguing that battery costs continue to weigh heavily on vehicle manufacturers.
He cited 2025 Fortune Global 500 data showing that Chinese automakers generated combined profits of US$14.7 billion, while one leading battery manufacturer reported profits of US$7.1 billion.
He noted that China’s automotive industry recorded a sales profit margin of 3.4% during the first five months of 2026, which he described as remaining near historical lows.
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Based on current lithium battery cell prices of approximately 0.35 to 0.40 yuan per watt-hour, Cui estimated that the 2% consumption tax would increase costs by roughly 0.007 to 0.008 yuan per watt-hour, with the full 4% rate resulting in additional costs amounting to several thousand yuan per vehicle.
While the impact on an individual vehicle would be relatively limited, he said manufacturers producing around one million vehicles annually could face cumulative additional costs reaching hundreds of millions of yuan.
“The battery consumption tax effectively draws a new cost divide between automakers that make batteries and automakers that don’t.”
Focus on Next-Generation Batteries
Cui said the temporary tax exemption for sodium-ion and solid-state batteries also provides manufacturers with an opportunity to invest in next-generation battery technologies while reducing early-stage costs.
He said the policy arrives as solid-state batteries move closer to commercialization, with several manufacturers, including CATL and BYD, planning limited vehicle deployments around 2027.
Cui also noted that several Chinese automakers have already invested in internal battery production. BYD manufactures lithium iron phosphate batteries, GWM-backed Svolt Energy is among the country’s major ternary battery producers, and Geely has also expanded its in-house battery development capabilities.
Growing Battery Demand
The policy adjustment comes as China’s new energy vehicle market continues to expand.
According to CPCA data, retail sales of new energy passenger vehicles reached 4.71 million units during the first half of the year, representing 54% of total passenger vehicle sales.
Meanwhile, data from the China Automotive Battery Innovation Alliance (CABIA) showed that cumulative power battery installations totaled 335.6 GWh during the first six months of the year, an increase of 12% compared with the same period last year.
Cui said manufacturers that establish competitive in-house battery development and production capabilities could be better positioned as the industry adapts to the revised tax framework.
“Whoever first builds the capability to develop and produce batteries in-house will gain a cost advantage in this round of tax reform and thus secure a more favorable position in the next phase of market competition.”
Source: CnEVPost