Stimulus Policy to Make China NEV Market Great Again

By Sven-Michael Werner, Serena Du

05-2020

In less than a decade China's new energy vehicles (NEV) market has become the largest in the world. In 2018 more than a million NEVs were sold in China, more than three times the number sold in the US. However, sales volume of new energy vehicles (NEV) in China were already in a slump after the government cut subsidies in 2019. The coronavirus is now resulting in a sharp fall for the overall vehicle market, including NEVs. The drop in NEV sales is prompting Beijing to consider bringing back incentives, starting with local sources.

To continue the developments of NEV, Chinese government has recently issued more stimulus benefit to increase the market share of NEV and to make sure the fledgling sector can overcome the unexpected challenges of sales drop worsen by the outbreak of the COVID- 19 epidemic which stated to affect business in China from early February this year.

Already before the COVID-19 crisis, the long-term plan to develop the NEV market has been laid out in the Circular of State Council Auto Industry Adjustment and Recovery Plan (2009) and Development Plan for Energy-saving and NEV Industry (2012-2020). The plan has been implemented top down through the encouraging policies issued by respective ministries and committees in the past including

  • financial subsidies to both manufacturers and end-users and exemption of taxes and expenses;
  • granting positive credits of producing NEV to set off the negative credits of producing combustion engine vehicle under dual credits mechanism,
  • removing the shareholding and joint venture limitation for foreign NEV manufacturers to stimulate the domestic market by increasing competition.

This is partly a recession of the withdrawal of certain government supportive benefits, primarily of a slash in subsidies based on the Notice to Improve the Application of Financial Subsidies for Promotion of NEV issued in March 2019. This withdrawal has indeed caused most of the decline in NEV Sales in Q2 – Q4 of 2019.

Taking into account above reaction of the market, industry experts have increasingly voiced their comments and asked to shift the government-driven sales growth to market-driven development. The Ministry of Industry and Information Technology (MIIT) in April issued the draft to revise the No. [2017] 39 Notice of Regulation on Access Review for New-Energy Vehicle Manufacturers and Products ("Access Review") to relax the starting threshold for NEV manufacturing but tighten up the product-end standard.

The draft revision has deleted the Section 1 of the requirements on design and development capability in Appendix I Access Review of Notice No. 39. The Access Review will focus more on the remaining criteria in Appendix I about the capacity for production, product conformity, after-sale service and safety assurance as the overall technical guarantee on the NEV products. Also, NEV manufacturers which suspend production for at least 12 months should be published by the MIIT. However, the amendments double to a period of 24 months, keeping in line with the stipulation of the Measures for the Administration of On-road Vehicle Manufacturers.

In terms of product standards, the draft revision updated four technical standards, and added six new standards to improve the overall angles of products review.

The changes to lower the market access threshold came after the State Council's decision in late March to extend subsidies for NEV to 2022 to correct the oversteering.

Therefore, the stage is set for rest of the NEV market in China. In the following you find the key requirements for foreign investors to enter Chinese NEV market.

1. Foreign Investment Limitation

Such limitation has been lifted in 2018 based on the Special Administrative Measures for Access of Foreign Investment (Negative List), consequently foreign invested NEV producers can set up wholly owned manufacturing entity and is no longer subject to the following limitations applicable to fuel consumption vehicle only as below:

  • Except for special vehicles and NEV, at least 50 % shares of a manufacturer producing vehicles shall be held by Chinese shareholders. (Such shareholding limits will be removed for commercial vehicles in 2020, for passenger car in 2022.)
  • Except for special vehicles and NEV, a single foreign investor may establish up to 2 JVs to manufacture the same type of vehicles. (In 2022, limits on the restriction of 2 JVs will be eliminated as well.)

2. Investment Approval in Car Manufacturing for both Foreign and Domestic Entity

In 1994, the Chinese government designated a number of industries as ‘Pillar Industries’ intended to drive the growth of the national economy; the automotive industry was chosen as one of these industries. Therefore, in 1994, National Development and Reform Commission ("NDRC"), by its economic planning function, published the Auto Industry Development Policy to promote car manufacturing. In December, 2018 the NDRC circulated another related policy document called the Administrative Rules on Auto Industry Investment.

It is worth noticing that under the Access Review by MIIT, NEV refers to vehicles using new types of power systems and being fully or mainly reliant on new types of energy for automobiles, including 1) plug-in hybrid electric vehicles (including extended range electric vehicles), 2) battery electric vehicles, and 3) fuel cell vehicles.

However, under the Administrative Rules on Auto Industry Investment issued by NDRC, the investment approval on NEV may be different between 1) plug-in hybrid electric vehicle and the other two types of NEV vehicles for the hybrid is deemed as fuel consumption vehicle whereas the other two types are deemed as pure electric vehicle for NDRC approval.

Under the Administrative Rules on Auto Industry Investment, it is prohibited to set up any new stand-alone hybrid NEV manufacturing entity. As for the pure electric vehicles, contrary to the Access Review by MIIT, NDRC will require a R&D institution featuring a professional R&D team with the experience and capabilities in:

  • conceptual design, system and structural design;
  • vehicle control system, vehicle power battery system, vehicle integration and lightweight research and development and corresponding test verification;
  • body and chassis manufacturing, vehicle power battery system integration, vehicle assembly, etc.;
  • the main technical indicators of the developed products have reached the industry leading level.

We foresee that the NDRC may lower the threshold on these R&D requirements case by case to encourage new foreign investment and the supervision on final product quality other than the manufacturing capability should be strengthened. NEV manufacturers' capacities to guarantee the consistency of their products and the after-sales services will be more highlighted in the future.