Facing the Policy Change, What Are German Car Makers Afraid of?

At this Guangzhou Auto Show, 19 new energy vehicle (NEV) models (excluding two non-plug-in hybrids) were launched, accounting for 24% of the total number of newly launched cars, and both local and foreign brands released their new NEV strategies. It seems that the NEV market has never been in better fettle. However, the seeming prosperity still cannot mask the OEMs’ concerns and doubts, because according to the requirements provided in Interim Measures for Parallel Management on Corporate Average Fuel Consumption and New Energy Vehicle Credits (Draft for Comment) issued by Ministry of Industry and Information Technology (MIIT) on September 22nd, from 2018 to 2020, the credits for NEV sales should account for 8%, 10% and 12% of total car sales, and any auto maker who cannot meet this target should either cut its production or buy credits from others who have a surplus. German media think that this proposal will “put much more pressure on German auto makers” and that it is a kind of “ecological patriotism”. In fact, German auto makers are not the only ones who are worried.

Q: At this Guangzhou Auto Show, I interviewed many Chinese and foreign auto makers. When asked whether they could meet the 8% target for NEV credits in 2018, they either talked vaguely or told me it was impossible. Executives from German auto makers had the strongest reaction, just as German Media did. What do you think?

A: German auto makers are market leaders, so it is not hard to understand why they speak so frankly. Technically speaking, German auto makers have no problem in producing NEVs, and in fact they have technological strengths in making lightweight cars. Plug-in hybrids have been in their product portfolio for some time. In addition, Mercedes-Benz, Audi and Volkswagen will all launch battery electric vehicles with a range of more than 500km. But the thing is, even with the most advanced technologies they might still not have enough time to achieve the target. This year the new policy has just been issued, and already next year a manufacturer enterprise will be expected to reach the 8% target. By means of comparison, in California, U.S.A., which was the first place to implement such policy, the first-year target was 2.5%.

Any auto maker that has substantial sales, but did not plan any substantial volume of NEV products, will have to add more NEV models to its portfolio if it wants to hit the target. But this is likely to take at least 2-3 years to develop, including the time spent on R&D for the local adaptation of introduced models, and even after the new cars are launched, the auto maker will have to expend time and effort on marketing and promotion, without knowing how strong market demand will be. So 8% is actually a mission impossible, especially for German auto makers, who are rigorous in their development process and emphasize product safety, reliability and durability. Any auto maker that dares to claim that it will be able to develop and launch a NEV model from scratch by next year has to be talking nonsense.

No one, not even the German auto makers, disagrees with this policy, nor has anyone ever said that the target cannot be achieved. What they are trying to say is that the policy should be predictable and operable, and give car markers enough time to be prepared. You cannot expect anyone to make a great leap forward within too short a deadline; otherwise it will be too costly.

Q: You are right. Speaking of policy predictability, according to some German auto makers, previously they used batteries manufactured by mainstream international battery suppliers like Samsung and LG in domestically produced NEVs, but as these batteries are no longer included in the “White List” entitled to subsidies issued by MIIT, they have had to replace them with alternatives that are on the “White List” and spend another 2 or 3 years doing all kinds of tests and road tests to ensure product safety, reliability and durability. This is too costly.

A: The battery “White List” is not directed against German auto makers alone. Local auto makers like SAIC, Dongfeng, Chang’an, Chery and Changcheng were also using LG Chem and Samsung SDI as their suppliers, so they might all have to change their suppliers and pay a great price for it.

In response, the authority explains, “This NEV subsidy policy adjustment will raise further requirements for battery suppliers and products. It will not simply tie subsidies to the battery catalogue.”

But the question is – what does “it will not simply tie subsidies to the battery catalogue” actually mean? To me, it sounds like “subsidies will still be tied to the catalogue.” This kind of expression lacks transparency and certainty and confuses people. In the end, auto makers still have to make the safe but very costly choice.

Q: Some executives of auto makers think that the greatest challenge lies in the question “to whom will the NEVs be sold?” What do you think?

A: In China, the NEV market is led by government or policy, whose purpose is to save energy and protect the environment. There is no doubt about the importance of NEVs, especially today, when smog has never been so serious. However, the market demand for NEVs has always been problematic. It has to develop in its own way, and that is why the NEV sales targets set by the authorities have never been achieved, however ambitious or otherwise they were. Last year, 206,800 new energy passenger vehicles were sold, and from January to October this year, 240,000 were sold, far below the planned targets. As for how many will be sold in 2018, it still remains to be seen. There are just too many uncertainties that can affect market demand. In addition to the unsettled policy, charging infrastructure is also a big problem. A friend of mine working in CCTV bought a Denza electric car. It took him three months and a lot of personal connections to finally get a charging pile installed in his residence. The property management told him it was the first as well as the last charging pile in this area. I wanted a Denza, too, but then I gave up the idea because the property management wouldn’t let me install the charging pile.

Q: Some executives are even predicting that if the policy is finalized as-is, a lot of factories will close and workers will be laid off. Will it be that serious?

A: If an auto maker can neither reach the credit target nor buy any credit from the market, I’m afraid the only choice it will be left with is to reduce its production and lay off its workers. However, in reality, it needs a process to build charging infrastructure and carry out market promotion and also to cultivate the credit trading market. Now this is only a draft for comment. I believe in the finalized version, the authority will postpone the deadline for the 8% target, possibly to 2020.

Q: Some auto makers are worried that this credit policy will encourage enterprises to produce low-quality electric vehicles so that they can make a fortune by selling credits, which will seriously poison the market. Any thoughts on that?

A: This worry is not groundless. Some Chinese enterprises seem to have a natural “gift” – they can always find loopholes in a good policy and take advantage of them. The electric vehicle subsidy fraud was just one of the many such examples. Now it is the credit policy. The authorities must take the necessary precautions and develop and implement relevant standards and trading rules to prevent inferior electric vehicles from getting the credits and entering the market. At the same time they must be aware of any corruption in the review and approval process; otherwise, this policy will do nothing but help unscrupulous enterprises to shift the target of their fraud from government finance to companies, and throw the credit trading market into total disarray. This will be totally against the original intention of the policy maker, and both consumers and stakeholders will pay a heavy price. As media, we have to sound the alarm beforehand.

In summary, if a government wants to implement an effective policy, it must make it predictable, transparent and operable.