Local automakers are hoarding the country’s “new-energy vehicle” credits, giving them leverage when renegotiating joint ventures with western rivals.
Chinese carmakers may have found the secret to survival. Their foreign rivals should beware.
As manufacturers rush to meet the requirements of China’s policy to promote electric cars (known in the country as “new-energy vehicles”), locally-owned automakers have been busily accumulating credits for how many electric cars they make and for cutting fuel consumption in their combustion engine vehicles. As a big carmaker, you need a certain number of these credits to comply with China’s regulations. 1 At least 10 new-energy vehicle credits are required for every 100 combustion engine cars made, or thereabouts.
Chinese carmakers may have found the secret to survival. Their foreign rivals should beware.
As manufacturers rush to meet the requirements of China’s policy to promote electric cars (known in the country as “new-energy vehicles”), locally-owned automakers have been busily accumulating credits for how many electric cars they make and for cutting fuel consumption in their combustion engine vehicles. As a big carmaker, you need a certain number of these credits to comply with China’s regulations. 1 At least 10 new-energy vehicle credits are required for every 100 combustion engine cars made, or thereabouts.
Loosely based on California’s zero emission regulations, China’s system stipulates that companies with a yearly output of at least 30,000 units must earn new-energy vehicle credits equivalent to at least 10 percent of their production and imports of conventional cars. This will rise to 12 percent next year.
For now, since there’s an oversupply of these credits, they are worth zero in theory, according to UBS analysts. But that doesn’t meant they’re worthless to the industry. The electric car credits can be used to offset any shortage of fuel consumption credits, which makes them potentially very useful (maybe even crucial) to the foreign carmakers, given their relative slowness in moving to electric vehicles in the country.
Indeed, the hoarding of credits by the large domestic manufacturers may give them more bargaining power in the next stage of development in China’s car industry. They could use their stash as leverage with foreign partners as the latter try to increase their holdings in local joint ventures. After new rules removed the cap on overseas ownership last year, BMW AG has raised its stake in its local venture. Daimler AG and Volkswagen are considering the same.
Target Shooting
China has set itself aggressive targets for electric car sales per its 2025 plan for automobiles.
The western carmakers certainly won’t want to be held back by their inability to generate enough credits or ramp up electric car production fast enough in their quest to conquer one of the few large markets where electric cars are a central government focus. Despite a sharp slowdown of late, it has also been a source of growing profits and fatter margins.
With more stringent requirements on subsidies, the pace of new-energy vehicle credit-gathering will slow but local manufacturers will probably maintain their lead. Foreign carmakers need to respond.
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