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Breakingviews - Foreign automakers will pay for Chinese EV drive
September 19, 2017 / 5:04 AM / 3 months ago

Breakingviews - Foreign automakers will pay for Chinese EV drive

HONG KONG (Reuters Breakingviews) - China gave the auto industry an electric shock by announcing ambitions to phase out the combustion engine in the world’s largest car market. Details and deadlines are scant, but draft regulations accelerating the development of electric vehicles offer a glimpse of Beijing’s strategy: foreign automakers will pay the price. 

A worker looks on at a BYD assembly line in Shenzhen, China May 25, 2016. REUTERS/Bobby Yip/File Photo

The plan puts global giants in a corner. A new quota system, slated for 2018, requires car companies to make new energy vehicles account for at least 8 percent of total domestic sales. That figure will rise to 12 percent by 2020. Those who miss targets must purchase credits from battery-powered rivals. If the foreign brands don’t ramp up sales, buying credits from greener peers could be pricey. But because a separate subsidy scheme favours locally made cars, selling more EVs means setting up production in China – and sharing technology with Chinese JV partners, inadvertently fostering stronger rivals.

Either way, domestic brands are most likely to reap the benefits. Homegrown heroes like BYD already specialize in EVs. A quota system will earn them truckloads of credits without any tweaks to their business model. Credit pricing mechanisms could be lucrative. A similar scheme in California – thought to be the model for China’s system – let Tesla book $302 million in regulatory credits last year.

Graphic: China's plans to phase out gas guzzlers gave EV stocks a bump: reut.rs/2xNiVaO

The promise of such a pay-off is encouraging market entry. More than 30 local companies have been granted licences to manufacture new energy vehicles in the last 18 months, according to Alexious Lee, an analyst at CLSA. They will make the most of the credit system by focusing mostly or solely on EVs. Not all the newcomers will successfully develop models that appeal to Chinese consumers, but they will intensify competition and pressure margins.

Multinationals could try to earn credits by flogging more eco-friendly models. But that’s hardly an economic option for traditional automakers, especially if production capacity and supply chains aren’t in place. Profits from electric cars can be as little as half those garnered from internal combustion engine autos, according to Germany’s Daimler.

If foreign automakers dare to join the race for EV market share, there’s one more speed bump ahead: Chinese consumer tastes aren’t driven by regulation. Official data shows gas guzzling sports utility vehicles are their favourites. The biggest risk – shared by everyone - is making EVs that nobody buys.

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