The pending new Chinese Automotive Policy

In late May 2018, an internal draft of the Administrative Regulations on Investment in the Automotive Industry (Fa Gai Ban Chan Ye [2018] No.567, “Draft Automotive Policy” or “Draft”) of the National Development and Reform Commission (“NDRC”) leaked out to the public. The draft has not yet been officially put in the public consultation process. However, it is expected that a new automotive policy will soon be promulgated and that it will replace and supersede the current Automotive Industry Development Policy (Ministry of Industry and Information Technology (“MIIT”) and NDRC, amended on 18 Aug 2009), Administrative Measures on New Establishment of Pure Electric Passenger Vehicle Enterprises (NDRC and MIIT, 2 Jun 2015) as well as the NDRC and MIIT’s Opinions on Improving the Administration of Automotive Investment Project. (NDRC and MIIT, 4 Jun 2017).

The Draft Automotive Policy provides for the following highlights:

Restrict Combustion and Promote New Energy

The Draft underpins the central government`s intention to restrict capacity expansion in the production of fuel based vehicles and to instead promote the qualified investment in the new energy vehicle (“NEV”) sector.

Prohibited fuel based vehicle projects

Would the Draft be promulgated without change, the following projects would be PROHIBITED:

• Establishment of a new production units for fuel based vehicle;
• Establishment of additional fuel based vehicle production capacity beyond the current existing one by current passenger car and commercial vehicle production units;
• Establishment of body-shops (except body-shop using new materials);
• Establishment of new special purpose vehicles (“SPV”) OEM for regular transportation use or trailer OEM;
• Establishment of chassis and CBU manufacturing capacity of SPV manufacturers;
• Trans-provincial relocation of existing fuel vehicle OEM not in accordance with respective national development plan;
• Transfer of shares or change of shareholdings in non-performing (i.e. so called “Zombie”) fuel vehicle OEMs.

Capacity expansion of existing fuel based vehicle OEMs and Key Auto Parts manufacturers Restricted

An expansion of the production capacity of an existing fuel based vehicle production unit would not only require the concerned OEM to fulfill several thresholds regarding capacity utilization, NEV production volume, R&D investments, export volume and average fuel consumptions, etc., but the location (province) where such additional capacities shall be build would also need to meet various conditions including that the utilization of the production capacities in that province¹  is already above the national average.

The establishment of new manufacturing capacities for Key Auto Parts would be examined in particular against the technical advance as regards energy saving, intelligence and overall performance of the envisaged products as well as the capacity utilization situation of the concerned province.

Investment in pure electric vehicle (“PEV”) projects

Strict requirements regarding selection of location or qualifications of the investors for PEV projects so as to prevent purely opportunistic would apply as well as repetitive investment unnecessarily blowing up and overheating this specific segment. For instance, a province should not introduce any additional PEV project if existing PEV projects in such province have not been completed or the required minimum production volume of the existing PEV projects (i.e. no less than 100,000 units per annum in terms of passenger vehicle and no less than 5,000 units per annum in terms of commercial vehicle) has not been achieved. In addition, the shareholder of a PEV manufacturing enterprise shall also meet various criterions such as have IP ownership, R&D capability, financial means, production capacity and market power in respect of key parts. The investor will be committed to completion of the project and fulfillment of the production volume. Moreover, PEV investors are required to manufacture the PEV under its own registered trademarks/brands only.

The Draft no longer differentiates domestic and foreign investment

The special restrictions regarding foreign investment in the automotive industry (e.g. the “2+2” and participation restriction) of the current regime are not repeated in the Draft, i.e. if promulgated the new Automotive Policy would equally apply to all investment projects whether purely domestic or entailing foreign investment. This intention echoes the principle of national treatment as well as of the current FDI administration regime to work with further shortened foreign investment negative list. The pending removal of special restrictions on foreign investment in the automotive sector has been put in schedule recently².

Key developing fields

Little of a surprise, the Draft promotes investments of private capital and enterprises with technology competence into the following three automotive fields:

• NEV: including innovative material of vehicle body/parts, high-performance and advanced control system and battery, advanced technology and instruments regarding inspection/recycling of battery.
• Intelligent vehicles: including key generic technologies such as complex environmental perception, innovative intelligent terminal, intelligent computing platform, key parts such as vehicle sensor, chips, CPU, operational system, wireless communication equipment.
• Energy saving vehicles: including high-efficient engine, advanced automatic transmission and hybrid power system.
  
  

Outlook

Multiple policy goals are reflected in the Draft Automotive Policy such as fostering the NEV industry while maintaining the prosperity of the automotive industry as a whole; generally encouraging private investment in the sector while at aiming at preventing opportunism and overcapacity.

If the Draft will be promulgated without changes, the new Policy would bring opportunities for investors in particular in the innovative segments such as NEV, intelligent driving and energy saving vehicles. Challenges for the combustion engine vehicle players would increase. With all the restrictions and measures put in place, one could expect more consolidation and merger and acquisitions of automotive OEMs on one hand and further clustering of the industry in certain geographical areas in China, in particular with regard to the combustion engine segment.

Finally it reads like a signal to the foreign players to engage into the development of NEVs (esp. PEVs) as well as autonomous driving systems.

Footnotes

(1) As provided in the Draft Automotive Policy, the automotive capacity utilization rate of the respective province in the last two years should be higher than the average rate of China.

(2) Please refer to our previous newsletter “Chinese auto industry fully open up to foreign OEMs?”.