China’s EV policy keeps automakers guessing

This is a story I wrote for Wards Auto. Reposting here.  The media writes about China’s NEV policy is such a shallow way. For example, I didn’t even get into it here but the whole eight percent requirement for automakers doesn’t really mean eight percent of all the cars they produce.  There are “multipliers” applied to the PEVs and fuel efficient models produced that mean one BEV, for example, will count for more then one unit. Like California’s ZEV rules, however, trying to understand China’s policy would make my head explode.  Also, as I note in this story exactly what the policy will be is as yet undecided.

Here is my story:

SHANGHAI — China wants electric vehicles to account for a significant portion of the vehicles sold in this country in the future, and it wants automakers to produce a growing number of those vehicles.  That much is clear.

What isn’t so clear is exactly what the market wants, and what the policies related to EV production will be. That forces automakers to adopt somewhat unfocused future product plans.

Take Ford Motor Co.  It plans to eventually offer electrified versions of every model produced at Changan Ford, its joint venture with Chongqing Changan Automobile Co.

Seventy percent of its models will be electrified by 2025, Trevor Worthington, vice president of product development at Ford Asia Pacific says at the Shanghai auto show.

The “vast majority” will meet the Chinese government’s definition of an electric vehicle, he says.   “In order to compete in the world’s largest market, you have to be there with the right product at the right time,”

The problem can be knowing just what the right product will be.  For example, “I don’t know that anyone understands the Chinese customer (battery) range demands,” Worthington says.

Just before the April show, Ford announced it would begin producing a plug-in hybrid vehicle, the Mondeo Energi, at Changan Ford in 2018. It will also bring to market within five years an all-new fully-electric SUV with a range of more than 450 miles, Ford announced.

Ford Mondeo Energi PHEV will begin production in China in 2018.  

Carrot to stick

Then there is the issue of shifting government policies.

Sales of battery electric vehicles in China rose 9.7 percent in the first four months of 2017 to 72,895 vehicles. Plug-in hybrid electric sales fell 27.4 percent to 17,507 vehicles, according to the Chinese Association of Automobile Manufacturers.

Hefty government subsidies underpinned much of that demand. Chinese drivers haven’t shown any real passion for electric vehicles unless accompanied by cash.

But in January, the government announced it will phase out those subsidies. They are expected to be eliminated by 2021.  At the same time, Beijing still says it wants electrified vehicles to account for 20 percent of passenger vehicle production and sales in 2025.

In place of the purchase subsidies, China’s central government is planning a carbon credits program similar to California’s Zero-Emission Vehicle program.

China is switching from using a carrot to using a stick to promote electric vehicle sales, says Jason Forcier, CEO of battery maker A123 Systems,

“It is going to shift the burden (for creating demand) to the manufacturers,” he tells Wards Auto during the Shanghai auto show.

Auto makers will likely be forced to produce electric vehicles at a loss to meet the government requirements, he says.

In theory, the carbon credits the automakers receive will offset the losses, says Robin Zhu, senior analyst in Hong Kong at investment research firm Sanford C. Bernstein.

“But you essentially go from a system where there are government subsidies to a system where OEMs cross-subsidize each other via the credits system,” he says.

All automakers face the same cost issues, says Worthington. “You have to be ready to go.”

In any case, the policy is likely to change, pretty much everyone agrees. That often occurs here.

Government mandates “are in flux,” says Worthington. “You don’t always know what is going to happen.”

Says Forcier: “It wouldn’t be shocking to me if we get to the end of this year and this policy gets updated. It happens in China a lot, and it happens rapidly.”

Indeed, exactly what form China’s ZEV mandate will take is as yet unknown. Two government offices, the National Development and Reform Commission and the Ministry of Industry and Information Technology, have each published their own version.

Bernstein, in a November 2016 report, calls it “a riddle, wrapped in a mystery, inside an enigma.”

The industry consensus now, says Zhu, is that the EV credits target will be delayed by either a significant phase-in period or lower 2018/2019 quotas.

“It is a source of frustration” for automakers,” he says.