China Sends a Jolt Through Auto Industry with Plans for Electric Future

Source: By Yoko Kubota and Trefor Moss, Wall Street Journal • Posted: Tuesday, October 3, 2017

China will force auto makers to accelerate production of electric vehicles by 2019, a move that will ripple around the globe as the industry bends to the will of the world’s largest car market.

The move is the latest signal that officials across the globe are determined to phase out traditional internal combustion engines that use gasoline and diesel fuels in favor of environmentally friendly vehicles powered by batteries, despite consumer reservations. The U.K. and France are aiming to end sales of gasoline and diesel vehicles by 2040. India has a goal to sell only electric vehicles by 2030.

In the U.S., the head of California’s Air Resources Board recently suggested the state could move to eventually replace vehicles running on combustion engines in the nation’s largest auto market with electric cars or those running on other renewable energy. The state has long been a front-runner in setting ambitious future targets for auto makers including sale of zero-emission vehicles.

China’s long-awaited plan, announced on Sept. 28, calls for gradually escalating quotas for pure-electric cars, plug-in hybrids and fuel-cell cars, as Beijing seeks to curb air pollution and nurture a domestic green-car industry.

Anticipating China’s new rules, Ford Motor Co., the Renault-Nissan Alliance and Volkswagen AG have all set up new joint ventures with local car makers in recent months that will specialize in pure-electric cars.

In April, General Motors Co. said it would build 10 electric vehicle or plug-in hybrid models in China by 2020 with its joint-venture partner, SAIC Motor Corp., at existing factories in the country.

“China has triggered the world-wide electric-car festival,” said Takaki Nakanishi, an automotive analyst who heads Nakanishi Research Institute in Tokyo. “The adoption of electrification regulations is speeding up globally.”

In a partial victory for foreign-car manufacturers, China agreed to delay implementation until 2019, instead of next year as originally envisioned in draft proposals. The production quotas will be enforced through a credit-score system in which auto makers will gain points for production of pure-electric, plug-in hybrid and fuel-cell cars.

In the first year, most local and foreign auto makers must earn points equivalent to 10 percent of vehicles they produce in China and import into the country, the Ministry of Industry and Information Technology said. That rises to 12 percent in 2020. The plan applies to car makers that produce or import 30,000 cars or more annually.

Auto makers had said they would be hard-pressed to build the needed manufacturing infrastructure by next year.

In another concession, the Ministry of Industry and Information Technology, which oversees the auto industry, said even if targets aren’t met in the first year, auto makers won’t be punished, which means that actual enforcement starts at the end of 2020.

However, even in its watered-down form, the quota system is a daunting prospect for car manufacturers who must now retool factories and rush electric vehicle concepts into production.

“Even though the 2018 quota has been scrapped, this is still not an easy hurdle for us,” said Keitaro Nakamura, a China-based spokesman for Japan’s Honda Motor Co. Honda, which sold 1.25 million vehicles in China in 2016 — none of which were electric cars or plug-in hybrids — plans to start selling made-in-China pure-electric vehicles in 2018.

China is notorious for air pollution in its major cities, which the government says it is committed to reducing. The new quotas, the government said, are meant to further “alleviate energy and environmental pressures.” China recently said it plans to eventually ban traditional gasoline and diesel vehicles, but hasn’t set a timetable.

Foreign auto makers that build cars in China must do so through joint ventures with Chinese partners to avoid steep tariffs. Along with the deadline for implementation, foreign auto makers were concerned that the mandates would essentially force them to give away proprietary technology to their Chinese partners.

Chinese officials have denied claims that the plan was aimed at appropriating foreign technology, but the plan’s introduction comes amid heightened scrutiny of China’s trade practices. In August, U.S. Trade Representative Robert Lighthizer launched an investigation into Chinese policies on intellectual property and technology transfer. China’s auto sector is one of those in Lighthizer’s crosshairs.

While foreign auto makers have been struggling to interpret Beijing’s intentions in the months since the draft rules first appeared, Chinese auto makers, many of them state- run, have long been privy to Beijing’s plans, said Kenneth Jarrett, president of the American Chamber of Commerce in Shanghai.

“That has given them an unfair advantage in what should be a competitive market with a level playing field,” he said.

The same rules apply to Chinese auto makers, but most of them, at the government’s behest, already produce electric vehicles, and will easily likely meet the requirements, according to industry experts.

After the release of the draft rules, foreign car makers had started planning for China’s move.

Volkswagen says its new venture with JAC Motors will be ready to produce 80,000 to 100,000 pure-electric cars next year — potentially enough to earn sufficient credits for the entire Volkswagen group.

General Motors expects to sell about 150,000 electric vehicles and plug-ins in China annually by 2020, which likely would clear the new requirements. “GM looks forward to working with the government to increase acceptance of NEVs [new energy vehicles],” the company said in statement.

Ford in August said it was pursuing a joint venture with Chinese auto maker Anhui Zotye Automobile Co. to build and sell electric cars in China. The deal is subject to regulatory approval. The Dearborn, Mich., car maker plans to start building its first electric car in China, the Mondeo Energi plug-in hybrid, next year.

Auto makers will face a second challenge, said Jing Yang, an associate director at Fitch Ratings: selling these cars. “The major problem is finding a market for them,” said Yang.

Some auto makers are also setting up ride-sharing services, or striking deals with fleet operators, to ensure the electric vehicles the government is forcing them to build will have a home.