The era of focusing solely on automobile sales figures is drawing to a close, as future investment value in the automotive industry chain will hinge on companies with a “second growth curve.”
On October 12, Morgan Stanley published a research report highlighting that high-quality electric vehicles (EVs) have become industry standards, and the true innovation opportunities in the automotive industry chain lie in breakthroughs within the AI ecosystem. The report introduces the “3A” opportunities vital for the future: Autonomous Driving, AI Embodiment, and AI Data Centers (AIDC).
If traditional vehicle sales companies achieve substantial breakthroughs in the “3A” areas, they could potentially tap into an additional market value of $2-3 trillion. The report expresses confidence in firms like XPeng Motors and lidar supplier Hesai Technology, which have made specific breakthroughs in the AI field.
While improved market conditions prevail, cyclical pressures remain. The report anticipates that the fourth quarter of 2025 will witness boosted sales due to a "purchase rush" ahead of the expiration of stimulus policies and the arrival of numerous new models, predicting a quarter-over-quarter increase of 19%. As a result, the forecast for total car sales in China for 2025 has been raised by 6% to 29.9 million units, reflecting a year-over-year growth of 9%. The forecast for new energy vehicles (NEVs) has also been revised upward by 2% to 15.2 million units, indicating a year-over-year increase of 24%, with the penetration rate expected to hit 51%.
It is projected that the share of pure electric vehicles within total NEV sales will remain around 63% in 2026. However, the report maintains its predictions for 2026 unchanged, forecasting a 5% year-over-year decline in vehicle sales due to two main reasons: firstly, the 2025 sales have preemptively satisfied some demand; secondly, the purchase tax for new energy vehicles is set to increase to 5% in 2026.
The report underlines that government subsidy policies will still hold uncertainties in the coming year. Nonetheless, NEV sales are expected to see an 8% year-over-year increase, while export sales are projected to grow by 4%. By 2026, the wholesale sales of NEVs in China are anticipated to reach 16.5 million units, representing an 8% year-over-year increase.
Analysts emphasize that concerns over the cessation of stimulus policies may lead investors to overlook strong automotive performance in the fourth quarter and instead seek new investment opportunities to hedge against cyclical risks in the automotive industry during the first half of 2026.
Morgan Stanley notes that as electric vehicle homogenization accelerates, high-quality EVs have become the norm, and true innovation and valuation differences will emerge through AI applications. Automotive companies must embark on a “second act,” reshaping themselves as broader participants in the AI ecosystem. These opportunities are encapsulated in “3A”:
- **Autonomous Driving**: Generative AI is accelerating the mainstream adoption of Level 2+ intelligent driving and autonomous taxis (Robotaxis) through simulation training, reduced technical costs from East-West collaboration, and gradual regulatory support. Mainstream applications are expected to commence in developed markets by 2026. - **AI Embodiment**: The automotive supply chain inherently holds advantages in developing humanoid robots. There is substantial overlap in computing power, algorithms, and bill of materials (BoM) costs between autonomous vehicles and humanoid robots. Some Chinese auto manufacturers aim to commercialize and mass-produce humanoid robots starting in 2026, which could become the next “must-have” following electric vehicles and flying cars (eVTOL).
- **AI Data Center Ecosystem (AIDC)**: The massive computing power requirements for humanoid robots and autonomous driving will drive demand for AI data centers. Automotive component manufacturers, especially those with technological expertise in areas like cooling systems and high-speed connectors, are gradually entering the AIDC ecosystem.
The report forecasts that by 2030, smart electric vehicles could add between $2-3 trillion in market value for auto companies, which represents ten times the total addressable market (TAM) for smart driving globally in that year.
While vehicle sales may remain the primary revenue source, non-vehicle business revenue growth from autonomous taxis, flying cars, humanoid robots, and potential recurring income from licensing and services will present new profitability opportunities for automotive firms. As the industry enters a new technological transformation, stock valuations will increasingly undergo a "sum-of-the-parts" (SOTP) reassessment, attracting investors from technology, media, and telecommunications (TMT) sectors. Startups and tech enterprises with first-mover advantages are expected to command valuations far exceeding those of traditional car manufacturers.
Additionally, since the end of 2024, the yield on 10-year treasury bonds has fallen below 2%, compared to approximately 4% in 2017. Thus, Morgan Stanley’s strategy team has revised the risk-free rate used for valuating the Chinese automotive industry down from 4% to 3%.
Given these factors, analysts predict that, beyond rising earnings expectations, the valuations of both complete vehicle manufacturers and component enterprises in China will receive favorable support over the next 6 to 12 months.
**Investment Preferences Based on the “3A” Framework** The report outlines a clear order of investment preferences:
1. **Preferred Cross-Industry AI Firms**: Strongly favor companies making significant and effective breakthroughs in non-automotive sectors, particularly in AI and humanoid robotics, naming XPeng Motors and Hesai Technology. 2. **Optimistic on Leading New Forces in Car Manufacturing**: The report maintains a positive outlook on new forces such as XPeng, Li Auto, and NIO, believing that their quicker model iterations, leading intelligent driving technologies, and potential “3A” opportunities will support long-term growth.
3. **Observing Delayed Recovery State-Owned Enterprises**: For investors focused on the automotive sector, state-owned car manufacturers like SAIC Motor and Dongfeng Motor are considered attractive due to better safety margins they provide in 2026.
The report emphasizes that although the adoption of new technologies requires time, their effects will soon be felt in investor perceptions, strategic actions (such as mergers and acquisitions), and importantly, stock valuations. Moreover, Morgan Stanley stresses that not all companies will successfully navigate the transformation, as it requires repositioning of capacities, reusing technologies, organizational development, and reinvestment in distribution and sustainability. Only a few companies willing to take risks in seeking success in AI disruptions can be expected to do so. Investors should also remain vigilant about the potential of weak demand in early 2026 and how price wars may affect the quality of year-end sales rebounds.