Investing.com -- Weakening demand and policy-driven shifts are forcing Chinese auto manufacturers to rethink growth and profitability assumptions, according to Morgan Stanley.
"A meaningful sales drop and persistent anti-involution push have disrupted auto OEMs' original sales plans for 2026," analysts led by Tim Hsiao wrote in a Thursday note, setting the tone for a difficult start to the year.
New car sales momentum has faded sharply. Morgan Stanley expects passenger vehicle sales to fall 5-7% year on year in the first quarter of 2026, with January and February sales combined likely down more than 15% from a year earlier.
Channel checks show early-year order intake at major electric vehicle makers has fallen 30-40% month on month, underscoring a "cold start" to 2026.
This slowdown is pushing manufacturers to prioritise de-stocking ahead of accelerated model launches after the Lunar New Year, rather than relying on aggressive price discounts and subsidies.
While improving liquidity has helped keep broader equity indices supported, Morgan Stanley expects the auto sector to underperform in the near term, with shares likely to oscillate and drift lower ahead of the Lunar New Year.
Within its coverage, the bank sees relatively better positioning among companies exposed to the smart driving theme, including Hesai, Horizon Robotics, XPeng and WeRide.
It also highlights exporters to Europe such as BYD, Geely and SAIC Motor, where technical and geographic tailwinds are seen as helping offset cyclical and political pressures.
The margin outlook is also deteriorating. Analysts expect automakers to lower their 2026 profitability guidance as lower utilisation rates, higher subsidies, and "meaningful cost inflation across all major materials/components" weigh on earnings.
Pricing negotiations with suppliers are ongoing, and some component makers may absorb part of the pressure to avoid order cuts ahead of peak season. Even so, the bank cautions that the sector may face one to two quarters of revenue and margin contraction alongside cash burn before adjusting to what it calls a "new normal."
For the full year, Morgan Stanley forecasts China auto sales will end a three-year expansion streak, falling about 3% year on year in 2026, including a 5-7% decline in domestic volumes. Export growth of roughly 16% is expected to partially offset domestic weakness, with overseas markets becoming increasingly important.
"Overseas sales are back in the spotlight as the potential to set minimum prices on China's BEVs instead of tariffs would be constructive for Chinese EVs' sales expansion in Europe," the analysts said.
With China's 5% GDP target still in focus, they add that further stimulus remains a possibility should auto sector conditions worsen.