[SMM Analysis] Has the Reduction of the VAT Export Rebate Rate for Lithium Batteries to 6% Become a Response to "Anti-Involution"?

On January 9, 2026, China's Ministry of Finance and the State Taxation Administration announced that, from April 1, 2026, to December 31, 2026, the VAT export rebate rate for battery products would be reduced from 9% to 6%; starting January 1, 2027, the VAT export rebate for battery products would be abolished.

The introduction of this policy appears to reduce export subsidies for the battery industry. However, at a deeper level, the policy implies multiple intentions behind industrial transformation. This article presents only a personal interpretation of the policy; readers should not take it as definitive guidance.

Before formally analyzing the policy's intentions, we must first clarify in which segment the reduction in the rebate rate results in decreased earnings.

I. Customer Self Pick-Up: Tax Burden Shifted to the Customer (This is the predominant method for battery exports)

Under the self pick-up model, the export responsibilities of battery enterprises are relatively reduced, and the tax burden is shifted to the customer. However, although battery producers are not directly responsible for tax issues, this model still has significant impacts on both parties.

1) The Customer Bears the Tax Burden:

For customers, the reduction in the VAT export rebate rate means they need to bear more tax costs. The rebate decreases from the original 9% to 6% (from April 1, 2026, to December 31, 2026), increasing the tax burden on enterprises, which directly leads to customers having to pay for these additional expenses. For customers reliant on Chinese battery suppliers, this change will directly increase the procurement costs of products, thereby affecting their overall profits. In the short term, this policy adjustment may stimulate a new round of export rush for Chinese batteries.

a. Cost Increase Pressure: Particularly in overseas markets, customers may need to adjust product pricing to account for the increased tax costs or seek alternative suppliers to replace existing battery producers. For small and medium-sized customers, the increased costs may lead to reduced market competitiveness, especially in regions with intense price competition.

b. Demand for Price Reduction: After customers bear the tax portion, they may request battery producers to lower product prices to offset the increased tax burden. As battery producers face their own cost increase pressures (including raw material and production costs, etc.), they may not compromise on pricing. If battery producers do make pricing concessions, they must seek other cost control measures while maintaining profitability.

2) Strategic Adjustments by Battery Enterprises:

For battery enterprises, although they do not directly bear the tax issues, the customers' demands for price reductions and market pressures cannot be ignored. Battery producers may need to:

a. Enhance product added value: While ensuring product quality, increase the technological content and added value of products to maintain competitiveness in the high-end market. For example, develop more efficient power batteries or ESS batteries, focusing on NEVs or large-scale ESS projects.

b. Optimize supply chain management: To cope with customers' price reduction demands, battery producers need to further optimize supply chain management, reduce production costs, and increase R&D investment to enhance product competitiveness through technological innovation.

3) Market pressure and customer relationship management:

Battery producers need to strengthen customer relationship management to ensure the provision of price-competitive products while maintaining long-term cooperative relationships with customers. By establishing stable supply chains and favorable long-term cooperation agreements, battery producers can reduce market uncertainty caused by short-term price fluctuations.

II. Battery Producers Shipping Overseas Independently: Tax Pressure Directly Impacts Profits

Compared to the customer self pick-up model, under the model where battery producers ship overseas independently, they bear higher tax costs as they are responsible not only for domestic VAT but also for handling tax issues during the export process. This means battery producers will face direct cost pressure, which may affect their profit margins and market pricing strategies.

1) Battery producers bear the tax burden:

Under the model where battery producers ship overseas independently, producers must bear the increase in tax costs, which directly impacts their pricing strategies. With the tax rebate rate dropping from 9% to 6%, battery producers will pay more VAT, but these costs are not borne by customers. This change directly compresses producers' profit margins.

a. Cost increase and price adjustments: Battery producers must consider how to pass on the additional tax burden to customers. With prices already near the global market floor, producers may find it difficult to address cost increases through simple price hikes. Therefore, producers must make greater efforts in production efficiency, technological innovation, and operational cost control.

b. Tax complexity in international operations: For battery producers operating across borders, dealing with VAT and tariffs becomes more complex due to varying tax systems and policies in different countries. Tax compliance issues not only increase operational costs but may also cause delays and compliance risks in cross-border transactions, further affecting producers' market responsiveness.

2) Ongoing market competition pressure:

Price competition among battery producers in the international market will intensify. Especially in the face of the price and technological advantages of top-tier enterprises, battery producers need to enhance their competitiveness in multiple aspects:

a. Technological Innovation and High Value-Added Products: In addition to price adjustments, battery producers must increase the market appeal of their products through technological innovation. For example, improving battery energy density, charging speed, and lifespan, as well as developing more environmentally friendly battery technologies.

b. Cost Optimization: Battery producers also need to optimize production processes, reduce resource waste, and lower production costs. By scaling up production and automating production lines to improve efficiency, they can alleviate cost pressure.

Personal Interpretation: The "Capacity Reduction" and "Anti-Involution" Effects of Tax Cuts and Subsidies:

Beyond short-term tax adjustments, the deeper goal of this policy shift is to address the issue of involution in the battery industry. China's battery sector, particularly in power batteries and ESS batteries, has experienced years of excessive competition. Low-price competition, technological imitation, and over-reliance on policy subsidies have made it difficult for many small and medium-sized enterprises to stand out, leading to a lack of technological innovation. In this context, the government aims to indirectly raise battery prices by lowering tax rebate rates, forcing the industry to reduce low-end capacity and shift toward higher-technology, higher value-added products. However, some industry insiders worry that excessive policy adjustments in the short term may exacerbate market instability, especially as the lithium battery industry's capacity still needs gradual digestion. Overly rapid capacity clearance could impose unbearable burdens on enterprises, further impacting the industry's healthy development. For the government, balancing the relationship between "capacity reduction" and "industry stability" to ensure healthy industrial growth will be a core challenge in future policy regulation.

This goal of "capacity reduction" has precedents in other industries such as PV and chemicals, where involution is severe. Although such short-term "pain" is inevitably a prelude to long-term industrial structure optimization, for the battery industry, balancing short-term cost pressures with long-term strategic objectives will be key to a successful transformation. China's battery industry is currently in a phase of intense price competition and relatively small technological gaps. To capture market share, enterprises often resort to price cuts, and this involution has gradually affected the healthy development of the entire industry. By reducing fiscal support for low-end capacity, the government hopes that "natural selection" through market competition will eliminate enterprises lacking technological innovation and reliant on low-price strategies, thereby driving the industry toward high-quality, high-technology, and sustainable development.

SMM Lithium Battery Analyst Yang Le +86 13916526348