The United Kingdom and France have announced that sales of gasoline and diesel vehicles will no longer be allowed in their countries by 2040, and the Indian government has indicated its intention to only allow electric vehicles (EVs) to be sold in India by 2030. However, China raised the bar yet again for automakers when it announced late last month its proposal to implement aggressive new quotas for the production of New Energy Vehicles (NEVs), which include battery electric vehicles (BEVs), plug-in hybrids (PHEVs) and fuel-cell cars.
On September 22, China’s Ministry of Industry and Information Technology (MIIT), which oversees the auto industry, proposed for public comment a Temporary Management Regulation for Corporate Average Fuel Consumption (CAFC) and New-Energy Vehicle Credits. The proposal was made in the context of China’s intention to phase out its subsidy program for NEVs in 2021. The combination of credits and dis-incentives in the new proposal are designed to improve the fuel efficiency of traditional-fuel vehicles, as well as to promote the deployment of NEVs in China. China’s proposal would require automakers to produce fleets with a Corporate Average Fuel Economy of 42 miles per gallon by 2020, and 54.5 mpg by 2025, with a goal of generating a market for more than five million new-energy cars in the 2016 to 2020 period.
Production quotas under the proposal will be enforced through a credit-score system in which automakers earn super credits for the production of NEVs and energy saving vehicles, defined as conventional-fuel vehicles with fuel efficiency equivalent to 81 miles per gallon. Each auto company will be subject to a specific annual CAFC target, depending on the curb weights and the mix of the vehicles in its fleet. An auto company’s CAFC target and actual CAFC will be calculated by sales-weighting each car model’s specific fuel consumption standard and its actual, certified fuel consumption.
Companies that fail to hit their targets will be compelled to purchase credits from companies with excess credits or be subject to MIIT-imposed penalties. If a company cannot purchase enough credits to bring it into compliance, it must submit a production plan that generates enough credits to make up the deficit in the prior year. If a company fails to meet CAFC targets after trying all possible methods, MIIT could deny approval for new models that cannot meet specific fuel consumption standards, and/or suspend the production of certain of the company’s high-fuel-consumption models until the company is in compliance. Companies that do not follow MIIT’s rules could be blacklisted in China.
With subsidies scheduled to be phased out in 2021, favorable local policies toward EVs will be the only tool left to encourage consumer demand for EVs. Therefore, greater price parity between EVs and internal combustion engine cars will be necessary. Currently, the battery pack in a typical EV costs about $14,000, compared to the $4,000 cost of an internal combustion engine. Because it is questionable whether battery costs will fall sufficiently to offset the loss of the consumer subsidy, automakers in China may be forced to lower prices — and profit margins — in order to sell the EVs they will be required to manufacture in China under the new rules.
Sales of EVs in China are forecasted to grow 30% to 680,000 units in 2017, with a 46% increase projected for 2019. UBS, a global securities firm, estimates that global EV sales will reach 14.3 million units in 2025, with China accounting for 4.8 million of the total. If UBS is correct, China is well on its way to meeting its EV targets.