After three consecutive years of upward cycle, China’s auto market is now at a crossroads, and Robotaxi may hold the key to a breakthrough.

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After experiencing three consecutive years of upward cycles, China’s automotive industry now stands at a crucial crossroads. Facing the approaching year 2026, investor sentiment is shifting from optimism to widespread caution and a wait-and-see attitude. Intense market competition and the potential phasing out of subsidies loom over the minds of investors, but this also prompts the market to consider whether any marginal improvements could turn into strong catalysts for the industry.

According to news from the Chasing Wind Trading Desk, Morgan Stanley released a research report on November 26, stating that after a series of meetings with investors in Singapore and China, the firm found that market confidence in China’s auto sector has started to decline.

The core concern for investors is that fierce market competition and subsidy reductions will continue to pressure industry sentiment and may affect the operational performance of original equipment manufacturers (OEMs) and suppliers in the first quarter of 2026. Therefore, analysts are beginning to wonder whether the market is about to reach a critical point.

However, analysts put forward a contrarian view in the report, arguing that the current pessimistic market consensus may mean that any “marginal improvement in sales or policy updates could clearly transform into a major positive catalyst for China’s automotive sector.”

Stimulus Policies May Continue, But Strength Likely to Drop 30% to 50%

For investors, policy direction is the key for predicting the 2026 car market. The report shows that most investors believe that, in order to “mitigate the impact of the 5% purchase tax increase and cyclical headwinds,” nationwide “old-for-new trade-in” programs and local “replacement subsidies” will continue to be implemented next year.

However, investors hold cautious expectations regarding the strength of policy support. They anticipate that implementation rules for local stimulus measures will become more stringent and that the subsidy amount per vehicle will be significantly reduced, with a year-on-year decrease possibly reaching “30-50%.”

As for the timeline for policy release, some investors expect the framework to be announced at the beginning of January next year, but effective implementation may have to wait until after the National People’s Congress in March.

The Game Between Traditional Automakers and New Forces

At the same time, the market is experiencing subtle changes. The report states, “This time, we sensed a slight preference for traditional automakers, but acknowledge that discussions are case by case.” Behind this preference is the market’s low expectations for traditional automakers, their potential restructuring opportunities, and the technological “endorsements” from tech giants like Huawei.

Huawei’s influence is becoming a key variable in reshaping the industry landscape. The report notes that Huawei’s Harmony Intelligent Mobility Alliance (HIMA) or its co-developed brands appeared in more than a third of booths at the auto show. Meanwhile, Huawei is deepening its participation in the transformation of state-owned automakers, cooperating with GAC and Dongfeng Motor to launch new smart vehicle brands.

By comparison, although BYD, Geely, and new automaker forces like NIO, XPeng, and Li Auto are still among the most discussed stocks, investor opinions are more divided. For example, regarding BYD, conversations often start with its sales prospects and global ambitions, but concerns over the company possibly losing market share in China next year “remain an unresolved issue.”

In terms of industry value distribution, the report analyzes that historically, during downward cycles automaker stocks are usually “first in, first out.” This means that although automakers may face increasing profit pressure next year, “suppliers may have to pay the price.”

New Opportunities in the Tide of Intelligence

Although overall market sentiment is cautious, the autonomous driving (AD) and robotaxi fields continue to attract great attention from the market. Morgan Stanley points out that with technological advancements, robotaxi business models that remove safety drivers are becoming feasible, and expects that Chinese authorities will accelerate their implementation over the next 6-12 months.

What excites the market even more is a regulatory breakthrough in high-level autonomous driving. According to “recent channel feedback” mentioned in the report, China is expected to officially release L3-level autonomous driving regulations in the “first half of 2026,” which “may trigger a new wave of enthusiasm for the autonomous driving sector.” Following this trend, suppliers with core technological advantages are seen as likely beneficiaries from the penetration of L2+ and more advanced autonomous driving in China.

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