Yahua Consulting: Are international auto giants producing electric vehicles in China to cope with future credit policies?

Thread Content

In July 2017, Daimler and BAIC signed a framework agreement in Germany; the two parties agreed to invest 5 billion yuan (approximately 655 million euros) together to establish a production facility for electric vehicles as well as a battery factory at Beijing Mercedes-Benz, in order to manufacture electric vehicle models under the Mercedes-Benz brand. In June 2017, the joint venture project for new energy vehicles between Jianghuai Volkswagen was officially launched in Hefei. The total investment in this project is 5.06 billion yuan, with the two parties sharing equal shares of 50:50, and it is planned to be completed and put into operation by the end of 2018. Upon completion, it will have an annual production capacity of 100,000 pure-electric passenger vehicles. Previously, in May 2017, Jianghuai Automobile stated that the project had received approval from the National Development and Reform Commission. In June 2017, the Shenyang Environmental Protection Bureau stated that the high-voltage battery project at the BMW Shenyang Engine Plant was officially entering its final stages. According to previously released information, the project is expected to go into official operation within this year. Public information indicates that the total investment in BMW’s high-voltage battery center project is 324 million yuan, which is primarily used for manufacturing high-energy battery packs for the G38 model (the next generation of the BMW 5 Series), with an annual production capacity of 33,000 sets. In July 2016, SAIC GM announced that it would invest 1.72 billion yuan in building a lithium battery assembly plant in Jinqiao, Shanghai, in order to localize the battery systems for its new energy vehicles. Once completed, this plant will also supply lithium battery packs for General Motors’ new energy vehicles produced around the world. Why are international automotive giants making significant investments in new energy vehicles and the production capacity for related battery packs in China? Is it to address the upcoming new energy vehicle credit policy? Yahua Consulting believes that it is, but not entirely. Research by Yahuazheng Consulting shows that there are mainly two reasons why international automakers are investing in new energy vehicles. Firstly, it is the strategic planning for the future trends in automotive power. Currently, Europe **has already formulated development roadmaps for new energy vehicles. France plans to completely ban the use of internal combustion engine vehicles (including gasoline and diesel cars) on roads starting in 2040 ； Germany had also proposed a ban on the sale of traditional fuel vehicles by 2030 ； Norway, on the other hand, has announced that it aims to ban the sale of fuel-powered vehicles by 2025 ； The UK also plans to ban gasoline and diesel passenger cars from roads across the British Isles by 2040, allowing only hybrid and electric vehicles to be used on roads. Volvo states that starting in 2019, it will make electric vehicles the core of its business, and in the future Volvo will produce only three types of vehicles: fully electric cars, plug-in hybrid cars, and mild hybrid cars. Another important reason is to counter China’s points system. On June 13, 2017, the Ministry of Industry and Information Technology issued the \"Draft Measures for the Parallel Management of Average Fuel Consumption of Passenger Vehicle Manufacturers and New Energy Vehicle Credits\" for public comment. Regarding the points for new energy passenger vehicles, this Management Method provides detailed calculation methods for the points of three types of passenger vehicles: pure electric, plug-in hybrid, and fuel cell vehicles. To encourage the development of high-performance new energy vehicle products, the scoring for new energy passenger vehicles is determined based on the driving range under pure electric operation; the longer the driving range, the higher the score for that vehicle model. The Management Measures stipulate that for the 2018–2020 period, passenger vehicle manufacturers are required to have new energy vehicle credits accounting for 8%, 10%, and 12% of their total credits respectively; the credit requirements for periods after 2020 will be determined and announced by the Ministry of Industry and Information Technology. Furthermore, this credit can be obtained by producing or importing new energy vehicles, or by purchasing them. If the integral is negative and not offset, the production or import of certain conventional fuel passenger vehicle models will be suspended. Yahua Consulting believes that the implementation of this points policy will have the following impacts on automobile manufacturers. In December 2016, four ministries jointly issued the \"Notice on Adjusting the Financial Subsidy Policies for the Promotion and Application of New Energy Vehicles.\" The Notice states that the subsidy standards and caps at the central and local levels for 2019–2020 will be reduced by 20% based on the current standards. The incentive policy will help maintain the competitiveness of new energy vehicle manufacturers amid the decline in subsidies for such vehicles. Taking BYD as an example, public data shows that in 2016 the company sold over 45,000 hybrid vehicles and over 32,000 pure electric vehicles. Calculated using a score of 2 points for hybrid vehicles and 3 points for pure electric vehicles, BYD’s total score for new energy vehicles has now exceeded 180,000 points. If all of them are sold at a rate of 1 point = 5,000 yuan, BYD would earn over 900 million yuan, which would significantly help cover the shortfall caused by the decline in subsidies. For international automotive giants that produce large numbers of conventional fuel vehicles, under the points system, if a company’s production volume in 2018 was 1 million units, it would need 80,000 points for new energy vehicles that year; this requires producing 25,000 pure electric vehicles with a range of 200 kilometers, or 40,000 plug-in hybrid vehicles. By producing electric vehicles in China, points can also be earned, which allows for the continuation of the production and sales of traditional fuel-powered vehicles while avoiding the high costs associated with purchasing points.