China’s lithium crackdown and electric vehicle price wars: What investors need to know

China’s clean-tech boom has entered its most complex phase yet. Building on our earlier look at the solar industry, we turn to the two other pillars of the ‘New Three’: lithium batteries and electric vehicles (EVs). Together with solar, these sectors powered China’s rise as the engine of global electrification, but the very dynamics that drove their ascent – scale, speed and cost compression – are now undermining their stability.

Anti-involution¹ has been established as the guiding principle. From upstream lithium supply to battery technology and the world’s largest EV market, Beijing is steering the industry away from survival-of-the-cheapest toward high-quality growth. For investors, the implications go beyond short-term volatility.

The companies most likely to succeed will combine scale with secure resources, technological depth and strong environmental credentials to deliver reliable, bankable solutions in a market where discipline matters more than sheer volume.

Lithium: The first shockwave

The clearest signal came in August 2025, when battery manufacturer CATL’s lepidolite mine in Yichun – China’s so-called ‘lithium capital’ – was abruptly suspended after its license was not renewed. Seven other mines in the region now face similar scrutiny under new rules that classify lithium as a strategic mineral requiring approval from Beijing. Until now, many of these mines were operating under permits meant for extracting ceramic clay. That loophole allowed companies to fast-track lithium production during the boom years without going through the stricter process for mining strategic resources. Under the new law, those mines must apply for full lithium mining licenses, a process that could take six to twelve months, effectively freezing new supply.

“That loophole allowed companies to fast-track lithium production during the boom years without going through the stricter process for mining strategic resources.”

Why the crackdown? Economics and environmental risk.

The lithium ore found in Yichun, known as lepidolite, is among the lowest grade globally. It contains less than 0.8% lithium oxide, compared to more than 6% in spodumene, the hard-rock ore mined in Australia. Low grade means enormous waste: producing one tonne of lithium carbonate from lepidolite generates roughly 170 tonnes of waste. At 2024 production levels, Yichun’s lepidolite mines created more than 20 million tonnes of waste rock in a single year².

Historically, high prices justified this inefficiency. But with lithium carbonate prices collapsing from RMB600,000 (~US$84,500) per tonne in 2022 to below RMB80,000 (~US$11,200) today, the economics have flipped. These mines are deeply loss-making, and continuing to operate them makes little sense in an oversupplied market.

The environmental burden is equally severe. Lepidolite extraction relies on sulfuric acid roasting, which produces large volumes of lithium slag rich in sulphates and fluorides, plus trace toxic metals like thallium. Local firms lack adequate hazardous waste treatment capacity, and Yichun has no integrated disposal infrastructure. Inspections since 2022 flagged contamination in nearby rivers and insufficient pollution control at carbonate plants. In short, continuing to prop up ultra-low-grade, high-impact supply is incompatible with Beijing’s push for ‘high-quality development.’

Batteries: From gigawatt hours to bankable hours

If lithium was the first domino, batteries are the next. Behind the headline figure of 1 terawatt-hour of installed capacity in 2024 lies a harsher reality: much of the supply chain is under severe financial strain. Cathode revenues – the cathode is the part of the battery that stores energy – fell by more than 40% year-on-year. Electrolyte margins – the liquid inside the battery that lets electricity flow – turned negative. Even separators – thin layers that keep the battery’s positive and negative sides apart so it doesn’t short-circuit – once considered resilient, have cracked under pressure. Among 38 listed materials firms, more than half reported losses, highlighting the depth of the squeeze³.

Yet the divergence within the sector is striking. Scale and integration now define survival. CATL and a handful of leaders are pulling away from the pack, maintaining near-full utilisation and strong profitability while expanding into energy storage systems and next-generation chemistries such as sodium-ion batteries, which replace costly lithium with abundant sodium, and Qilin architecture, CATL’s high-density pack design that improves energy efficiency and safety. CATL grew earnings by more than 30% in 2025 and sustained net margins above 15%, underscoring the advantage of technology depth and vertical integration.

Policy is reinforcing this bifurcation. Document 136 – ending fixed-price guarantees and introducing market-based dispatch – has fundamentally changed the economics of storage. Under the old regime, developers could pair solar with low-cost, short-life batteries to meet regulatory requirements without worrying about performance. In a merchant pricing world, that model collapses. High-quality storage systems – built with batteries that last longer and lose very little capacity over time – can now deliver returns of around 30%, while cheaper, short-life systems barely reach 12%⁴. The market is shifting toward reliable, bankable solutions that perform consistently, creating a strong advantage for leading players and leaving smaller, low-quality producers at risk.

“Document 136 – ending fixed-price guarantees and introducing market-based dispatch – has fundamentally changed the economics of storage.”

EVs: The toughest nut to crack

If lithium was the first shockwave and batteries the second, EVs are the most complex and politically sensitive part of China’s clean tech reset. China produced over 12 million electric vehicles in 2024 – more than 70% of global output – but that dominance has come at a cost: severe oversupply and a relentless price war⁵.

Local government intervention has amplified the problem. Provinces raced to attract automakers with land, subsidies and tax breaks, creating redundant projects and delaying consolidation. Today, China has 169 EV brands, half with less than 0.1% market share⁶ – a level of fragmentation reminiscent of the early US auto industry. Margins tell the story: in the first half of 2025, only two listed EV firms earned more than RMB10,000 per vehicle, while carmakers like Nio lost roughly RMB100,000 per unit⁷. Even BYD, the sector leader, reported its first profit decline in three years.

“Today, China has 169 EV brands, half with less than 0.1% market share – a level of fragmentation reminiscent of the early US auto industry.”
 

Competition has shifted from engineering to gadgetry. Li Auto pioneered the ‘refrigerator-TV-sofa' formula – cars equipped with home-style features like full-screen dashboards, in-seat massagers and smart appliances. The idea struck a chord with domestic consumers and was quickly copied across the industry. The upside is clear: these features help automakers hit breakeven faster, since EVs need far fewer units to cover fixed costs compared to traditional automakers.

But the downside is structural. This mode of competition offers no lasting advantage. To stay visible, brands churn out new models at ever-shorter intervals, diluting product lines and abandoning older models with little maintenance or software updates. Even BYD now carries a sprawling portfolio, with classic models undermined by constant refreshes.

For customers, the cycle is corrosive. Price cuts and rapid model turnover erode trust, vehicles depreciate faster and owners are left without updates. New launches cannibalise residual values almost immediately, making buyers more cautious and ironically slowing demand – deepening the oversupply problem. The price war, born of excessive competition, reinforces this behaviour by conditioning consumers to expect ever-lower prices.

“The price war, born of excessive competition, reinforces this behaviour by conditioning consumers to expect ever-lower prices.”

What this means for investors

Anti-involution represents a structural reset for China’s clean-tech industries and carries profound implications for investors. Consolidation across batteries and EVs is set to accelerate, with markets converging around a few global giants and specialised leaders. Competitive advantage will hinge on technical standards, ESG compliance and bankability, while overseas expansion becomes essential as domestic headwinds persist.

Volatility will remain, and the shakeout will be painful, but companies with scale, secure resources, technological depth and strong environmental credentials are positioned to emerge stronger. The era of hyper-cheap hardware is giving way to a market defined by reliability, sustainability and financial resilience – setting the stage for China to consolidate its clean-tech leadership and shape the next phase of the global energy transition.

“Volatility will remain, and the shakeout will be painful, but companies with scale, secure resources, technological depth and strong environmental credentials are positioned to emerge stronger.”

¹ Introduced in China around 2021, the anti-involution policy emerged from concerns over “involution” – a term describing wasteful, zero-sum competition that erodes efficiency and profitability. Initially targeting education and technology, it now extends to industries like solar to curb redundant capacity, foster innovation and align growth with sustainability and systemic needs.
² Jianyue Car Review, ‘Unresolved lithium slag and unabated tailings make Yichun lithium mines "besieged on all sides.”’, (zhuanlan.zhihu.com), August 2025.
³ Global Tiger Finance, ‘The lithium battery industry's "anti-involution": From price wars to "rational prosperity"’, (news.qq.com), July 2025.
⁴ Jack Lu, Adam Jonas and Stephen C Byrd, ‘China's Emerging Frontiers: CATL: Powering the Cleantech World; Resume A, Initiate H at OW’, June 2025.
⁵ International Energy Agency, ‘Global EV Outlook 2025’, (iea.org), May 2025.
⁶ Norihiko Shirouzu, ‘China auto market price war stokes fears of industry shake-out', (reuters.com), May 2025.
⁷ City Report, ‘NIO loses 100,000 yuan on every car sold, while Dongfeng earns just 67 yuan per vehicle! 18 listed automakers disclose first-half results, with BYD ranking first across all three key indicators’, (news.qq.com), September 2025.