U.S. and European politicians and auto industry leaders have long claimed that subsidies to Chinese electric carmakers give them a competitive advantage. However, a new report from research firm Rhodium Group casts doubt on this view. The report points out that structural advantages, rather than subsidies, are the key advantage that Chinese electric vehicle manufacturers have over Western automakers.
According to Rhodium, these structural efficiencies, including vertical integration, greater production scale and lower overhead costs, far outweigh the impact of subsidies on Chinese EV makers' profit margins.
While Rhodium did not deny the advantages of Chinese government subsidies, the agency said the cost advantages from subsidies - which Western automakers in China also benefit from - "remain insignificant compared with structural cost advantages."
The report noted that greater vertical integration, where a company controls multiple production links, is the "most important factor" that enables Chinese automakers to lower the cost of electric vehicles without significantly sacrificing profit margins.
For example, BYD produces nearly 80% of its core components independently, more than twice that of Tesla. This allows the Chinese automaker to significantly save on supplier markups on various components, Rhodium estimates. BYD Seal sedans save about $2,369 each in supplier markups compared to a Tesla Model 3.
Therefore, Rongding said that BYD's gross profit margin in 2025 can still reach 20%, higher than Tesla's 18%. Although the Tesla Model 3 sells for about 235,000 yuan (approximately $33,943) in China, it is almost three times the advertised price of 79,800 yuan for BYD’s entry-level Seal model.
According to the Rhodium report, over the past few decades, many Western automakers have "become less vertically integrated by outsourcing key components to specialized suppliers."
While this outsourcing trend is driven by cost pressures and "the belief that suppliers can drive efficiency and innovation at scale," the report found that concerns about vertical integration leading to higher unit costs "have not been borne out in practice."
Rhodium points out that Western notions about the cost-effectiveness of outsourcing are challenged by construction and manufacturing costs in China that are far lower than in Western countries. This allows companies such as BYD to concentrate production domestically, thereby maintaining a significant cost advantage.
However, it will be difficult for Western automakers to return to a vertically integrated model without incurring significant costs.