China shifts electric vehicles strategy from price wars to innovation race

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According to Wood Mackenzie’s latest report “Value over volume: anti-involution to revitalise China's EV and battery supply chain”, Beijing must once again address ‘nei juan’ (involution). A uniquely Chinese term describing unsustainable competition, where companies engage in practices like excessive discounting or overcapacity expansion, nei juan can lead to industry stagnation and economic difficulties.

“China has launched comprehensive ‘fan nei juan’ (anti-involution) initiatives across the EV sector,” said Yingchi Yang, Research Analyst at Wood Mackenzie “The government is taking a more nuanced approach for EVs, combining market-driven adjustments with regulatory guidance to eliminate low-quality capacity while preserving the sector's growth trajectory.

“With automotive margins having fallen to just 3.9% in Q1 2025 and EV prices dropping 5.8% year-on-year, these measures aim to stabilize profitability and redirect capital toward high-tech areas such as solid-state batteries, vehicle intelligence, and autonomous driving technologies” said Alasia Zhang, Research Analyst at Wood Mackenzie.

Supply chain segments show divergent responses: The battery sector faces severe overcapacity with industry-wide capacity utilization at just 41%. Unlike the heavy-handed steel sector reforms of 2015-2016, China's EV anti-involution strategy emphasizes market forces over mandated cuts. This will see consolidation through new safety standards taking effect in 2026 rather than forced production reductions.

Cathode materials’ responses vary by chemistry maturity: LFP cathode markets will see policy-accelerated consolidation among a highly fragmented landscape of players, with top five producers strengthening their market control while focusing on high-compaction-density materials. The ternary cathode sector has already self-corrected through market forces, with the top 5 producers now controlling half of output. Consolidation will come as the market shifts to high-nickel chemistries for solid-state batteries.

Anode industry faces regulatory reshaping: Overcapacity and price declines have challenged the market since 2022. New legislation will aim to regulate expansion and support technologically innovative companies.

Lithium addresses structural imbalances: With substantial lithium chemical oversupply contrasting sharply with mineral concentrate deficits, initiatives will focus on recycling investment, stricter EIA approvals, and supply chain diversification.

According to the report, rather than mandating cuts, these initiatives leverage market mechanisms and quality standards to eliminate wasteful competition while preserving China's competitive edge in the global EV transition. The approach recognizes that EVs remain in a growth phase with rising global demand, requiring a more sophisticated response than traditional overcapacity solutions.

“The success of these anti-involution measures will be critical for China's EV industry competitiveness globally, as the approach must balance eliminating destructive competition while maintaining the innovation momentum needed to lead the global energy transition” concluded Yingchi.