Morgan Stanley believes that after a three-year upward cycle, market confidence in China's auto market for 2026 has declined, with concerns that intensifying competition and subsidy cuts will weigh on industry performance. The market expects stimulus policies to continue, but their magnitude may decrease by 30% to 50%. Despite overall cautious sentiment, enthusiasm for autonomous driving technology remains strong, with expectations that L3 regulations could be introduced in the first half of 2026, serving as a potential new catalyst for the industry.
After three consecutive years of an upward cycle, China's auto industry is now at a critical crossroads. As 2026 approaches, investor sentiment is shifting from optimism to widespread caution and wait-and-see attitudes. Intense market competition and the potential reduction of subsidies loom as concerns for investors, prompting the market to consider whether any marginal improvements could translate into significant catalysts for the industry.
According to information from the Storm Chaser Trading Platform, a research report released by Morgan Stanley on November 26 revealed that following a series of meetings with investors in Singapore and China, confidence in investing in China's auto sector has started to wane.
At the core of investors' concerns is the expectation that fierce market competition and subsidy cuts will continue to weigh on industry sentiment and may impact the operational performance of original equipment manufacturers (OEMs) and suppliers in the first quarter of 2026. As a result, analysts have begun to consider whether the market is approaching a tipping point.
However, the analysts presented a contrarian view in the report, suggesting that the current pessimistic market consensus might mean that any 'marginal sales improvement or policy update could definitively transform into a major positive catalyst for China’s auto industry.'
Stimulus policies may continue, but their magnitude is expected to decrease by 30-50%.
For investors, policy direction is crucial to forecasting the auto market in 2026. The report indicates that most investors believe that nationwide initiatives such as trade-in programs and local replacement subsidies will continue next year to 'alleviate the impact of a 5% purchase tax increase and cyclical headwinds.'
However, investors remain cautious about the scale of these policies. They anticipate stricter implementation rules for local stimulus measures and a notable reduction in per-vehicle subsidies, with year-on-year declines potentially reaching '30-50%.'
Regarding the timeline for policy announcements, some investors expect the framework to be released in early January next year, while effective implementation may not occur until after the National People's Congress in March.
The game between traditional automakers and new forces
At the same time, subtle changes are occurring in market sentiment. The report notes, "This time, we sense a slight preference for traditional automakers, but acknowledge that discussions are case-by-case." Behind this preference lies the market's low expectations for traditional automakers, their potential restructuring opportunities, and the technological "endorsement" provided by tech giants like Huawei.
Huawei’s influence is becoming a key variable in reshaping the industry landscape. The report highlights that Huawei's Harmony Intelligent Mobility Alliance (HIMA) or its co-developed brands appeared in over one-third of the booths at the auto show. Meanwhile, Huawei is further participating in the transformation of state-owned automakers through collaborations with GAC and Dongfeng Motor to launch new smart vehicle brands.
By contrast, despite $BYD COMPANY (01211.HK)$ 、 $GEELY AUTO (00175.HK)$ and $NIO Inc (NIO.US)$ 、$XPENG-W (09868.HK)$ 、 $LI AUTO-W (02015.HK)$ New electric vehicle makers such as Nio, XPeng Motors, and Li Auto remain the most discussed stocks in the market, but investor opinions are increasingly divided. For instance, discussions about BYD often begin with its sales outlook and global ambitions, but concerns over a potential loss of market share in China next year remain “an unresolved issue.”
In terms of profit distribution across the industrial chain, the report analyzes that historical cycles indicate that OEM stocks are typically "first in, first out" during downturns. This means that although OEMs may face increasing profit pressures next year, "suppliers may have to bear the cost."
New Opportunities Amid the Intelligentization Wave
Despite overall cautious market sentiment, the fields of autonomous driving (AD) and robotaxis continue to attract significant attention. Morgan Stanley points out that, with technological advancements, the business model for robotaxis without safety drivers is becoming feasible, and it predicts that Chinese authorities will accelerate its implementation within the next 6-12 months.
Even more anticipated by the market is a regulatory breakthrough for higher-level autonomous driving. According to "recent channel feedback" mentioned in the report, China is expected to officially release L3 autonomous driving regulations in the "first half of 2026," which "could spark a new wave of enthusiasm for autonomous driving clusters." Under this trend, suppliers with core technological advantages are believed to benefit from the increasing penetration of L2+ and higher-level autonomous driving in China.
Editor/Liam
