The market, crowded with more than 90 models, is about to get even tighter with at least 20 new models of both Chinese and foreign brands launched in April, squeezing pricing and margins at home and driving exports, analysts and executives said.
EV makers in China have followed Tesla's bold price cuts by lowering prices for their own electric SUVs, cannibalizing sales of internal combustion engine vehicles as the price gap between the technologies narrows, analysts said.
The trend will spread abroad with growing exports of China-made electric SUVs.
"We are going to see a lot of Chinese exports because of the ultra-competitive market in China. It's actually going to be a pressure release valve," said Tu Le, founder of Beijing-based advisory firm Sino Auto Insights.
The market for SUVs has boomed in China over the past decade and now represents almost 40 percent of all cars sold, with 400 SUV models of all fuel types.
Almost as many China-made utility vehicles were sold in 2022 as light vehicles of any type in Europe last year, or more than 11 million.
The popularity of electric SUVs and crossovers has exploded since Tesla delivered the domestically produced Model Y two years ago in China, making it one of the fastest-growing segments in the world's largest auto market.
Both domestic and foreign brands were represented among the new models rolled out at the Shanghai auto show in April.
Legacy automakers such as Volkswagen Group, BMW and Toyota are counting on new electric SUVs to bolster China sales.
Chinese EV startups Xpeng and Nio have six SUV models and the EV-only brands launched by Chinese state-owned car companies, such as GAC's Aion, are also pushing full-electric utility vehicles.
They will compete with 93 existing electric SUV and crossover models in a market that saw 1.5 million sales in 2022, with the top 10 brands making up 84 percent, a Reuters analysis of data from China Association of Automobile Manufacturers shows.
There were 76 electric SUVs in 2020 before Tesla started producing Model Ys in China, with average annual sales amounting to just 3,000 units.
Despite recent minor price hikes, Tesla's Model Y is still 20 percent cheaper in China than in early October, when the U.S. automaker grappled with rising inventory.