JPMorgan Throws Three Buckets of Cold Water

September's "Golden September and Silver October" should have been the liveliest time for the car market. But with the data from the China Passenger Car Association released, many were pulled back to reality from the beautiful hopes of high-speed growth.

January–September, domestic passenger car cumulative retail sales reached 13.334 million vehicles, a year-on-year decrease of 21.7%. In September, national passenger car retail sales were 1.702 million vehicles, a year-on-year drop of 24%. New energy vehicle retail sales were 1.141 million vehicles, with penetration rate reaching 67.1%, almost taking up two-thirds of the market. Yet sales volume actually fell 12%. Top manufacturers accounting for over 70% of market sales had September retail target month-over-month growth of less than 10%.

At this moment, JPMorgan across the ocean also took action, releasing a 52-page industry report titled "2027 Policy Headwinds, Profitability Risks, and Exit Strategies".

From the name alone, it is evident that they are throwing buckets of cold water at the most critical time.

Where Does the Increment Come From?

The report immediately drops a big move. JPMorgan predicts that domestic passenger car retail sales in 2026 will be 18.96 million vehicles, down 21% from 2025. In 2027, it will drop another 5% to 18.01 million vehicles.

Based on current China Passenger Car Association data, if there are no major policy changes by year-end, this data is still within a reasonable range.

Luckily, the surging overseas exports have temporarily propped up the industry's overall size. Data is most convincing: domestic auto manufacturer export volumes will surge from 6.04 million vehicles to 9.7 million vehicles, an annual increase of 61%. With the offset of a decline in the domestic market and growth in the external market, 2026 total vehicle wholesale volume will only decrease slightly by 5%, seemingly stable and calm.

JPMorgan predicts that balance will be completely broken in 2027. Overseas export growth will cool down suddenly to 20%, while the domestic domestic market continues to bottom out. The dual growth engines will lose speed simultaneously.

On the other hand, from an industrial structure perspective, the new energy penetration rate has already reached a historical high of 67.1%. Further increasing the new energy penetration rate no longer equals the entire automotive market continuing high-speed growth. The incremental volume brought by the rapid expansion of the new energy market in the past will stagnate starting from next year.

For all automotive manufacturers and supply chain enterprises, 2027 is certainly not a year of repair, but the year of decisive battle for existing stock where the weak are eliminated.

Regarding the 2027 market trend, the report divides into two scenarios: policy floor support means demand remains flat; no policy stimulus means demand drops 5%.

In the past few years, an important proposition in the automotive industry was whether new energy vehicles can replace fuel vehicles? Now an increasingly important new proposition is, how many cars can the entire market accommodate? Where is the future incremental volume? Even the issues of total demand and total supply.

This also leads to the report's second core issue — going overseas.

New markets can digest excess capacity, new markets can bring entirely new increments. From internal involution to external expansion, it has become the common choice for all automotive manufacturers.

In JPMorgan's view, the logic of Chinese auto exports has ushered in a qualitative shift — from the early stage of "purely pursuing shipment scale" fully moving towards "sustainable and profitability expansion of overseas market share", where electrification technology constitutes the core driving force.

JPMorgan points out that in the first 7 months of 2026 (excluding the Chinese domestic market), the overall share of Chinese vehicle manufacturers in the global overseas market rose to 8.2% (6.4% for the same period in 2025); cumulative passenger car exports reached 5.35 million units, a year-on-year increase of 72.5%.

In the European new energy market, the market share of Chinese brands in the first 7 months of 2026 had risen to 19% (BYD single brand rose to 7.5%), among which plug-in hybrid models were even more exaggerated.

In the first 7 months of 2026, Chinese vehicle manufacturers' share of the overseas PHEV market was 44%, BEV market 23% (report scope). Inside Europe, Western Europe PHEV was about 36%, while Eastern Europe excluding Russia even reached 64%.

44% and 64% are no longer the appearance of "new entrants", but the posture of "disruptors". But extreme growth inevitably leads to extreme restrictions, which is the unchanging law of global industrial competition.

Encirclement, Arrows Ready on the Bow

Based on experience from the past few years, automotive manufacturers have already found a solution: if it is too competitive domestically, go overseas.

But exports can alleviate the contradiction between domestic demand and supply, but cannot solve it completely. Overseas is not another larger domestic market. This breakthrough path is being blocked layer by layer and tightened step by step.

The EU's "Industrial Acceleration Act" (IAA) binds subsidies and local content requirements, landing earliest by mid-2027; export tax rebates reduction is viewed as a potential chip in China-EU negotiations, with the time window pointing to the second half of 2027; and there are proposed plans awaiting implementation, suggesting voluntarily limiting the share of Chinese brand hybrid models in the EU to 15%.

In addition, local content, battery procurement rules, minimum selling prices, quotas, European manufacturing certification, carbon emissions fleet regulations are layered on top of each other, continuously raising the threshold for going overseas.

Localization has become the only key to survival for going overseas.

In JPMorgan's report, different landing paths for domestic automotive manufacturers are listed: BYD focuses on heavy-asset full industry chain self-construction, planning Thailand, Hungary, Brazil, to build a solid foundation for breaking through Europe; Chery mixes layout, self-built + joint venture + KD assembly multiple models in parallel, with 2027 overseas capacity planning over 630,000 vehicles; Geely uses light-asset cooperation, binding with local enterprises to share capacity; Leapmotor and XPeng leverage overseas giants for contract manufacturing and channel resources, cutting into the European market at low cost.

But localization is never a shortcut. Huge expenditures, long ramp-up, labor barriers, approval challenges, high energy prices, union games, every gate is a life-and-death test.

In Morgan's perspective, barriers force enterprises to invest heavily in building overseas factories. The sustainably worsening profitability status cannot support heavy-asset investment. It may affect corporate profit margins. The report also mentioned a few auto manufacturers, so details will not be repeated here.

It is worth noting that the 1986 Japanese car overseas expansion is incredibly similar to today's situation. European countries once locked up Japanese models through share quotas and import limits, forcing Toyota, Honda, and Nissan to implement localization and build factories, exchanging heavy assets for survival space.

Back then, France set the Japanese car share cap at 3%, Italy allowed only 2,000-4,500 vehicles annually, and the UK limited about 11% share; Open markets without a domestic automotive industry (Belgium, Denmark, Ireland, Greece) saw Japanese brands rapidly occupy 20-40% share.

Europe canceled all Japanese car import quotas on December 31, 1991, paving the way for the European single market.

History never repeats itself, but it always rhymes.

For automotive manufacturers, 2027 must preset a tax hike scenario for European business. All overseas expansion plans can no longer harbor illusions of low-price breakthrough.

Profitability Crisis Lurking

Current automotive profitability has long been determined overseas. Chery's over 90% of profit comes from overseas, Geely's overseas profit ratio approaches half. The overseas market has become the last profit fortress for automotive manufacturers to resist domestic involution.

If demand decline is a visible risk, then profit bleeding is an invisible yet more fatal internal injury within the industry.

This year, the capital market's profit expectation for domestic automotive manufacturers has been overall revised down by over 40%.

But market pessimism is still not thorough enough. JPMorgan's prediction is even stricter. Their self-developed profitability model is another 10%-11% lower than the market consensus expectation.

Quietly continuing price wars at the terminal, a cost crisis is also approaching unseen.

JPMorgan Semiconductor Team warns that in 2027, DRAM and NAND storage chip price increases may break through 20%. Today's smart cars are already walking smart terminals. Cockpits, domain controllers, and intelligent driving systems highly rely on storage chips. The pressure from chip price hikes must be fully transmitted to the vehicle end. Superimposed with fluctuations in bulk commodities such as copper and aluminum, and exchange losses brought by the strengthening of the RMB, automotive gross margins are being continuously eroded, and profit space is being compressed.

In the past, automotive manufacturers relied on negative cash conversion cycle days, occupying supplier and dealer funds to operate with light assets. Now this cushion is rapidly drying up. BYD's cash conversion cycle days turned from -18 days to +11 days, Geely narrowed from -37 days to -6 days, and Chery shrank from -52 days to -23 days.

Automotive manufacturer fund maneuvering space has shrunk significantly. Downstream dealers are even more difficult to move. Zhongsheng, a top group, turned free cash flow negative in the first half of 2026 and can only maintain operations by clearing inventory at a loss.

The breakthrough answer for the domestic market is deep integration on the supply side. JPMorgan also pointed out the recent business synergy integration of FAW and GAC, believing this is a clear policy signal. In the future, domestic inefficient capacity, weak brands, and homogenized enterprises will eventually be accelerated out of the market.

In JPMorgan's perspective, the Chinese automotive industry is in a key turning period of "domestic contraction, overseas blockade". In 2027, the industry faces multiple pressures superimposed, such as weak demand, rising costs, policy uncertainty, and trade barriers.

JPMorgan's investment advice is concentrated in: preferring heavy trucks over passenger cars; focusing on attractive valuations and high profitability visibility targets in passenger cars such as Chery Automobile, Sinotruk, GAC Group; while downgrading ratings for previously popular targets such as BYD, Geely, Leapmotor, and XPeng.

This also reflects the capital market's return from "growth narrative" to "profitability quality".

Perhaps the buckets of cold water poured by JPMorgan can also make the industry logic clearer next year.

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