China is placing a huge bet on what it calls “new energy vehicles,” which it defines as those powered by a battery, a plug-in hybrid powertrain, or a fuel cell. As of January 1, 2019, 10% of all cars manufactured by a foreign or domestic car company must be a NEV. The goal will ratchet up to 12% in 2020 and every year thereafter until approximately 20% of all new cars made in China are NEVs.
Actually, there are some details of the plan that require some clarification. First, the requirement only applies to companies that make more than 30,000 vehicles a year. Look for a significant number of companies cranking out just 29,987 cars a year to develop. Second, battery electric and fuel cell cars get extra credit under the plan depending on how far they can go on battery power alone. So a company that sells lots of long range BEVs can meet the demands of the system even if the actual number of vehicles it builds is less than 10% of its total.
Companies that fail to meet the target will be required to buy NEV credits from other companies which exceed their quota. If there are no credits available, they will have to pay fines to the government. In an extreme case, the government can order a company to cease production. The program is modeled after the ZEV program created by the California Air Resources Board more than a decade ago.
Ramping Up The Pressure
“The pressure is mounting,” Yunshi Wang, director of the China Center for Energy and Transportation at the University of California – Davis, tells Bloomberg. “This could be a model for other countries; it could be a game changer globally.” Last May, BNEF claimed, “This is probably the single most important piece of EV legislation in the world,” because it will force all global manufacturers — or those with global pretensions — to confront the reality of building zero emissions vehicles.
At over 22 million new vehicles a year, the Chinese car market is the largest of the world, which makes it vitally important to global car companies. 40% of all new VWs produced last year were sold in China and more than half of all BMWs. Every major car company has a presence in China, so the rules of the game there will have a direct and immediate impact on the cars they make for other markets. China is now the tail that wags the dog in the world of auto manufacturing.
Detroit Falling Behind
If that’s so, why are all those companies clamoring to the US government to loosen emissions standards? It is well known that building cars to conform to varying standards costs manufacturers more money. Jointly, they could save a ton of cash if there was one global standard. Chinese customers may not be in love with pickup trucks the way Americans are, but they clearly prefer SUVs to any other style of vehicle just as people in America do. Couldn’t GM, and Ford, and Chrysler use the knowledge they gain from making SUVs with electric motors for China to make similar cars for the US?
Bloomberg observes, “The message coming from the world’s largest emitter of greenhouse gases [the United States] is clear: Even as President Trump withdraws support for alternative fuels, attempts to gut mileage requirements, and begins the process of pulling out of the Paris Agreement on climate change, China is dead serious about leading the way to an electrified future.”
It suggests such leadership will make it a dominant force in vehicle manufacturing going forward. The implication is the US will continue to decline in importance in the industry. “For global car makers, it’s increasingly clear that policymakers in Beijing, not Washington, are in the driver’s seat,” it says.
US Takes A Back Seat
“Trade wars are easy to win,” brags the Jackass In Chief. He’s right. What is difficult is predicting the winner. According to Maersk, the world’s largest transoceanic shipping company, American imports grew about 10% in the third quarter after the Trumpster imposed a range of tariffs on Chinese made goods. On the other hand, American exports fell by up to 30% in the same quarter. There may be any number of explanations for those numbers but they beg this question, “Are we winning yet, Donald?”
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