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China’s secret weapon in the electric car race

Based on Anjani T. publication on Bloomberg, Chinese automobile manufacturers seem to have found the secret to survival against their foreign rivals.

Electric cars had been known as China’s new-energy vehicles and its manufacturers do rush to meet the requirements of China’s policy to promote electric cars. The locally-owned automakers have been busy accumulating credits for how many electric cars they make and for cutting fuel consumption in their combustion engine vehicles. For the big manufacturers, they need a certain number of these credits to comply with the country’s regulations. At least ten new-energy vehicle credits are required for every 100 combustion engine cars made.

The statistics published earlier showed that out of the 22 million domestic cars made last year, the industry as a whole managed to get 17.5 credits per 100 cars, well ahead of the requirements for this year and next. But the difference between local and foreign manufacturers is stark.

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Chinese brands such as the Warren Buffett is backed BYD co., Geely automobile holdings ltd. And SAIC motor corp. scooped up 96% of the new-energy vehicle credits. However, foreign automobile manufacturers have struggled. As the SAIC motor Corp. made more than 300,000 of these types of credit which is equivalent to half its total car production, its joint ventures with Volkswagen AG and General motors co. generated just 20,000 to 30,000 of them, equal to slightly more than 1% of their production. Foreign automakers that have been much slower to make the shift away from combustion engines in China than the domestic companies were short on fuel consumption credit too.

Almost based on California’s zero-emission regulation, China’s system stipulates that companies with a yearly output of at least 30,000 units must earn new-energy vehicle credits equivalent to at least 10% of their production and imports of conventional cars. It will rise to 12% next year.

According to UBS analysts, they are worth zero in theory for now since there is an oversupply of these credits. However, that does not mean they are worthless to the industry. The electric car credit can be used to offset any shortage of fuel consumption credits which makes them potentially very useful or even crucial to the foreign car manufacturers given their relative slowness in moving to an electric vehicle in China.

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Obviously, the hoarding of credits by the large domestic manufacturers may give them more bargaining power in the next stage of development in China’s car industry. They could use their stash as leverage with foreign partners as the latter try to increase their holdings in local joint ventures. After new rules deleted the cap on overseas ownership last year, BMW AG has raised its stake in its local venture. Daimerler AG and Volkswagen are considering the same.

The automobile manufacturers in the western part of the world certainly would not want to be held back by their inability to generate enough credits or ramp up electric car production fast enough in their quest to conquer one of the few large markets where electric cars are a central government focus. Notwithstanding the sharp slowdown of late, it has also been a source of growing profits and bigger margins.

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Using more stringent requirements on subsidies, the pace of new-energy vehicle credit-gathering will show but local manufacturers will probably maintain their lead and foreign car makers need to respond.

 

Originally posted 2019-04-15 14:32:07.

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