The Chinese automotive sector is undergoing a profound transformation that is challenging BYD’s traditional production model, built on a rigid vertical integration starting from batteries and extending to in-house development of semiconductors and software.
As highlighted by a new report from The Economist, after years of explosive growth, Wang Chuanfu’s company must face a market rapidly shifting focus from pure hardware to software, AI, infotainment, and autonomous driving.
Competitors, more open to partnerships with tech companies, are gaining ground, while BYD is showing the first signs of difficulty: declining sales, falling net profit, and the temporary loss of leadership in the domestic market.
Roots in Batteries
The Economist’s analysis begins with an anecdote. For years, visitors to BYD’s Shenzhen headquarters have witnessed a highly symbolic spectacle. Behind a thick protective glass wall, a drill first pierces a conventional electric car battery, which immediately explodes into flames, and then one of BYD’s iconic “Blade Batteries,” which remains intact.
This demonstration embodies the company’s deep identity, founded and grown precisely around batteries. Wang applied to the automotive industry the same vertical integration philosophy that had already guaranteed him success in the energy sector, controlling every stage of the supply chain, from lithium processing to the design of semiconductors and proprietary artificial intelligence models.
On May 28, BYD unveiled a new chip developed entirely in-house, proclaimed as the most powerful in the world for autonomous driving systems.
The Advantages of Vertical Integration
Thanks to almost total control of the production chain, BYD has managed to contain costs even when many competitors saw them rise sharply.
A prime example is the Seagull, a good-quality compact electric car offered in China at about $10,000.
Integration fosters innovation speed: engineers from different divisions work closely on the same problems, reducing downtime and encouraging creative solutions.
When supply bottlenecks stalled rivals, BYD was able to accelerate instead, launching new models frequently and covering very different price ranges.
The company operates with distinct brands: the core BYD for the mass market, the premium Yangwang, and Denza, known for original solutions such as the ability to move sideways like a crab to facilitate parking maneuvers.
Successes and Early Signs of Slowdown
This strategy produced extraordinary results for many years: revenues have increased tenfold over the last decade, reaching $116 billion last year. In 2025, BYD sold more electric cars than Tesla, and Wang ranks among China’s richest entrepreneurs, with an estimated fortune of around $25 billion.
However, significant cracks have appeared in recent months. In 2025, net profit declined for the first time after four consecutive years of growth. In April, sales registered the eighth consecutive month of decline compared to the same period the previous year.
In the first two months of 2026, Geely temporarily overtook BYD as the largest seller of electric vehicles in China, although BYD later regained the top spot.
Software and Entertainment in the Spotlight
The Chinese automotive sector is changing its face. Younger customers, in particular, tend to prioritize large entertainment displays on the dashboard and the overall digital experience, rather than traditional technical features such as engine performance or battery range. This shift in priorities is rewarding those able to offer advanced and updatable software ecosystems.
Many of the new successful players, such as Xpeng and Li Auto, originated from entrepreneurs in the digital world rather than heavy industry managers, bringing with them a mindset oriented towards rapid innovation and integration of AI technologies.
More traditional manufacturers are responding by forging strategic alliances with tech giants. Volkswagen, for example, has acquired software expertise directly from Xpeng, accelerating its development in intelligent driving. Huawei, the Chinese tech giant, is providing advanced software platforms and infotainment systems to as many as five automakers, contributing among other things to the launch of Maextro, a luxury brand by JAC capable of selling vehicles over $100,000.
Geely, in particular, is showing itself to be especially active: it has struck agreements with StepFun for autonomous driving technology development, with iFlytek for cutting-edge voice recognition systems, and with Thundersoft for a computational platform destined for AI models.
Thanks to these partnerships, BYD’s rivals can quickly access frontier technologies, update their systems with greater flexibility, and respond agilely to the expectations of younger customers.
The Risks of Autonomous Driving
Unlike its competitors, BYD continues to develop almost all key technologies internally. Max Zhang, who works on the autonomous driving team, explains that this approach allows them not to depend on external suppliers for future updates, maintaining full control as an absolute priority.
However, in the field of autonomous driving, the most evident limits of such an integrated model are emerging. Errors are more difficult to correct quickly, and the company has pushed the technology onto even economical models before it was fully mature.
This has attracted direct criticism, such as that from Huawei’s Yu Chengdong, who argues there is a vast difference between “good enough” systems and truly safe systems. In response, Wang announced that BYD will be the first automaker in the world to financially cover losses resulting from accidents caused by autonomous driving.
Are Batteries Enough on Their Own?
BYD continues to focus on batteries as a differentiating element. Its most advanced charging technology allows vehicles to reach nearly full capacity in about ten minutes, while extreme tests demonstrate excellent performance even at temperatures of -30°C. Although rivals like CATL are catching up on many fronts, the company is confident it can maintain a technological advantage.
However, according to The Economist, it is becoming increasingly difficult to stand out solely through batteries in an industry now rapidly moving towards software, AI, and in-car user experiences.
BYD remains a formidable giant but faces a delicate challenge: adapting to a deeply transforming Chinese automotive landscape, where innovation speed, strategic alliances, and software superiority are becoming decisive factors for success.
