China’s ambitious national New Energy Vehicle (NEV) mandate is contributing to global automakers reconsidering their long-term electric vehicle (EV) strategies. The mandate, which formally came into effect this April, sets targets of 10 percent and 12 percent EV penetration in the passenger vehicle market by 2019 and 2020 respectively. International automakers, which have relied heavily on the Chinese market, are adapting to the new mandate in order to maintain sales in the world’s largest vehicle market.
International automakers are adapting to the new mandate in order to maintain sales in the world’s largest vehicle market.
Chinese consumers purchased more than a quarter of the approximately 90 million vehicles sold worldwide in 2017. Although only around 2 percent of the approximately 27.5 million vehicles sold in China in 2017 were EVs, the figure below demonstrates the speed with which China has emerged as the global leader in battery electric vehicle (BEV) and plug-in hybrid vehicle (PHEV) sales.
Chinese EV sales growth has been fueled by an aggressive suite of generous federal and municipal subsidies, numerous non-financial incentives, and other policy interventions. China has also emerged as a leader in installed charging infrastructure for EVs. At the close of 2017, China boasted more than 210,000 charging poles and more than 230,000 private chargers. By comparison, according to the U.S. Department of Energy, there are currently 18,058 charging stations and 50,344 public charging outlets in the United States. Even though the United States lags behind China in overall EV volumes, the growth rate in sales has been impressive with a 22 percent annual rise in 2017, and even higher numbers so far this year.
The NEV mandate in China is an ambitious “next step” in addressing vehicle particulate emissions in China’s war on pollution and an attempt to achieve China’s intended nationally determined contribution to the Paris climate agreement.
The mandate applies to BEVs, PHEVs, and fuel cell electric vehicles (FCVs). The policy allocates credits to the three vehicle types based on range and on the type of vehicle, so that more advanced vehicles will receive more credits. Furthermore, it stipulates that companies that manufacture or import more than 30,000 vehicles in the Chinese market will have to comply with a dual credit scheme that ties NEV and corporate average fuel consumption (CAFC) credits. Companies will be able to buy or sell credits in order to meet their individual requirements. CAFC credits are bankable, but NEV credits must be used between 2019 and 2020.
The NEV policy will require the production of between 2.2 million to 8.7 million new EV passenger cars between 2017 and 2020.
Companies that are unable to meet their mandated credit amounts under this system, which resembles a combination of U.S. CAFE standards and individual state ZEV mandates, will be unable to attain approval for new vehicles from the Ministry of Industry and Information Technology (MIIT). By linking the CAFC and NEV policies, Beijing intends on giving manufacturers flexibility in meeting standards. A report from the International Council on Clean Transportation says that the NEV policy will require the production of between 2.2 million to 8.7 million new EV passenger cars between 2017 and 2020, and estimates that EVs will reach 4 percent penetration in China’s passenger vehicle market by 2020.
The impact on international automakers
China is in a position where its national policies can significantly affect the business decisions of the international car companies. The size of China’s vehicle market gives the country substantial leverage over the multinational corporations competing for market share.
The size of China’s vehicle market gives the country substantial leverage over the multinational corporations competing for market share.
Currently, international automakers are required to establish 50-50 joint ventures with Chinese automakers (many of which are state owned) or pay a hefty 20 percent import tariff. This restriction has led to many state-owned companies enjoy profits without marketing their own branded vehicles. Recent trade tensions between the U.S. and China have led the Chinese to announce that they will lift joint venture requirements for EV manufacturing this year, for trucks and commercial vehicles in 2020, and in 2022 for all other conventional cars. This change may seem like a significant concession, but with the exception of Tesla Motors, automakers are mostly exploring new partnerships in order to meet the NEV credit requirements rather than preparing to abandon their Chinese partners.
The NEV mandate has caused a number of new joint venture announcements in the past year. Ford and Anhui Zotye, Volkswagen and Anhui Jianghua Automobile Group, and Renault-Nissan and Dongfeng Motor Corp are three such recent ventures aimed at producing mandate compliant vehicles.
Several executives at automotive companies have commented on how the NEV mandate is causing them to invest in EVs earlier than planned. Matt Tsien, the president of GM China, commented that there will be a “dramatic ramp-up in terms of required volumes after the mandate takes place” and that “an issue that all OEMs are going to be working on is how quickly we can drive scale and the continued cost of electrification down as the volumes ramp up.” Another GM executive, Mary Barra, noted that China’s conventional automobile phase-out is the reason “why [GM] is investing so heavily in electrification.” Barra announced that GM will make at least 10 plug-in models available to the Chinese market by 2020. Toyota’s China Chief commented that “it’s the state’s support which is really driving the attention and demand for EVs.” Volkswagen responded to the mandate with an $83 million investment to produce a worldwide fleet of 300 EV models. The Chinese EV mandate is forcing global automakers to respond in kind, both because of the size of the Chinese market and because the local Chinese brands currently stand to gain the most from the credit system.
GM will make at least 10 plug-in models available to the Chinese market by 2020.
One of the stated goals of the NEV mandate is to “promote the healthy development of the automotive industry,” both domestically and internationally. Reports both from Roskill and from Bloomberg New Energy Finance note that domestic Chinese manufacturers like BYD, BAIC, Geely, SAIC, and Zhejiang Haoqing will benefit the most from the policy.
In addition to reducing oil consumption, mitigating local particulate emissions, and reducing carbon dioxide emissions, there is evidence that the NEV mandate is aimed at helping the Chinese auto industry dominate the domestic market and grow internationally. The “Made in China 2025” industrial policy intends for eventually 80 percent of all new energy vehicles in the domestic market to be Chinese products by 2025. Merics reports that, in order to accomplish this without violating WTO rules, “the responsible ministries and state-owned policy institutes [have been directed to] use internal or semi-official documents to communicate local content targets to Chinese enterprises in industries such as aviation and electric vehicles.”
The mix of support for domestic industrial policy and local infighting poses a serious threat to international automakers.
That type of uncompetitive state support is occurring at the same time as municipal conflicts over local EV champions are happening. One academic piece on EV uptake in China highlights that several localities have created subsidies that support only their local producers. The mix of support for domestic industrial policy and local infighting poses a serious threat to international automakers. After all, if Chinese companies are producing 70 percent of the approximately nine million new EVs required by the Chinese market by 2020, global automakers could find themselves investing in a market that have restrictions and limited access.
Beijing’s NEV mandate is significantly affecting the global EV market. At present, state support is driving consumer purchases. In this short run, these policies encourage the rise of a global EV industry and reduce oil dependence. However, there is a real risk that nationalistic industrial policy may shut U.S. automakers and others out of the market, and may even empower Chinese manufacturers to attain an unfair advantage in the international auto market.