Everyone thinks they know why Chinese electric vehicles are so cheap, and almost everyone is wrong.
Western carmakers’ share of China’s EV market fell to just over a third last year from two-thirds in 2020, according to a study by New York-based independent research firm Rhodium Group. During this period, Chinese original equipment manufacturers were able to bring down prices drastically.
Take rival sedans BYD Seal and the Tesla Model 3. Between 2022 and 2025, BYD Seal’s sticker price was slashed from $30,198 to $24,190, while the $32,909 Model 3 barely budged, dropping by a measly $221 — this despite Tesla making cars in Shanghai since 2019.
State subsidies are perceived as the big advantage but that’s not all that sets Chinese manufacturers apart. The February 19 report found Chinese state subsidies account for just 5% of BYD’s $4,700 per-vehicle cost gap with Tesla, with scale, cheaper talent, and in-house manufacturing making up the rest.
Most foreign brands already manufacture locally in China, yet still can’t compete on price. The gap stems from deeper vertical integration, greater scale, and lower overheads that Western rivals would struggle to match without clashing with their own governments’ industrial policies, the report found.
“Beyond government support, Chinese OEMs’ ability to price consistently below Western peers is driven by structural advantages: deeper vertical integration, greater scale, and lower overhead costs, including significantly cheaper R&D,” the Rhodium report said.
There’s no denying outsize subsidies go to local manufacturers, with BYD topping the list. When Tesla received Chinese state aid before 2021, disclosed grants amounted to roughly 2% of net income. Since then, Tesla has reported zero subsidy income while BYD’s has risen sharply from 26%of net income in 2024 to 35% in 2025, data shows.
From a big-picture perspective, “subsidies matter, but less than often assumed,” Rhodium said.
Chinese manufacturers incur substantially less expense per vehicle on research and development, as well as selling, general, and administrative costs, according to the report. BYD actually has higher absolute R&D spend, but the cost spreads across many more vehicles, and Chinese engineering talent is cheaper and more varied.
Chinese OEMs also squeeze savings from extended supplier payment terms that contrast sharply with Western peers’ payment cycles. Rhodium estimates the practice of delaying supplier payments provides a cost advantage of roughly $214 per vehicle for BYD and $83 for Geely, assuming these firms would otherwise need to borrow to shorten payment terms.
In-house manufacturing of major components, preferential financing, and unpaid licensing add further savings, the report found. Yet Western firms face structural barriers because their home governments encourage domestic manufacturing under different regulatory frameworks, according to the Rhodium analysis.
“Closing the cost gap would require Western OEMs to follow a difficult path — investing more deeply in China to build local R&D and supplier ties, while cutting costs and jobs at home,” the report states. “That strategy increasingly puts automakers at odds with Western governments whose industrial policies are geared toward protecting domestic auto employment and value creation.”
