China: Main competition intensifies – changing rules put pressure on foreign firms' electric vehicle plans

December 2016

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A series of regulatory changes is raising questions about the ability of foreign companies to compete effectively in China’s automotive sector in the coming years. The latest change – draft rules on batteries for electric vehicles (EV) released by the government on 22 November – has disrupted at least one foreign battery maker’s plans to invest in the sector in China. The Ministry of Industry and Information Technology (MIIT) issued draft standards for 2017 that raise the minimum annual production capacity required to qualify for government subsidies to 8GW, a forty-fold increase from the most recent 2015 regulations. Domestic media reported that so far only two Chinese producers have the capacity to meet these requirements, with another one likely to be able to meet them by 2017.

A South-Korean company is reportedly considering delaying plans to build an electric vehicle battery plant in China because of the proposed regulatory changes. Two major South Korean EV battery-makers in late June said they had not received Chinese government certification (necessary to obtain subsidies that cover up to 40% of production costs) while 31 domestic manufacturers’ applications had reportedly been approved.

Beijing likely to boost support for domestic EV companies through regulation

The battery draft standards are likely part of a government campaign widely perceived among foreign manufacturers to support the competitiveness of domestic companies in the EV space. Chinese automakers have largely struggled to compete with their foreign peers in conventional-fuel vehicles, both in China and abroad. The government therefore wants to help local companies become more competitive in the EV sector by introducing technical specifications that reflect technological solutions being pursued by Chinese companies, rather than the approaches favoured by their foreign competitors.

Revisions to EV-related regulations favouring local companies, either real or perceived, are likely to prompt opposition from foreign manufacturers and their governments. Beijing and local governments have said they will reduce direct financial support to encourage EV production, in part to improve overall quality through industry consolidation. However, foreign companies have claimed that changing rules – both for EV subsidies as well as EV production licences – hurt foreign manufacturers, for instance by requiring foreign auto companies to make extremely detailed technical blueprints for EV cars and components more publically available. German Minister for Economic Affairs and Energy Sigmar Gabriel in October raised concerns that German companies were effectively being barred from China’s EV market with Chinese Minister of Industry and Information Technology Miao Wei during a visit to Beijing.

Upcoming changes

The 13th Five-Year Plan (FYP) for National Social and Economic Development signals that Beijing will offer substantial regulatory, if not also direct financial, support to Chinese companies capable of contributing technological advancements in the EV sector. Further industry and environment-related FYPs to be released in the coming months will signal what regulations and guidelines are likely to change in the coming years and how foreign automotive companies will need to adapt their China strategies.

Government efforts to boost the EV sector will also have significant impact on the traditional-fuel vehicle industry. Further changes to emissions requirements for automakers’ fleets or direct restrictions on the production of traditional-fuel vehicles are likely to be proposed and revised in the next two years as the government increases its environmental protection efforts. The evolving regulatory environment will make it more difficult for foreign automakers to time their adjustments to production plans and supply chains in China.

Julia Coym Senior Analyst for Greater China and North Asia based in Shanghai

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