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Analysis-China's green car credit scheme turns up heat on carbon-emitters

Stock MarketsApr 18, 2021 05:20PM ET
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2/2 © Reuters. Ford Mustang Mach-E EV at a launch event in Shanghai 2/2

By Yilei Sun and Tony Munroe

SHANGHAI (Reuters) - A policy shift by China's government is ratcheting up pressure on automakers to hasten development of green vehicles or pay rivals such as Tesla (NASDAQ:TSLA) Inc and Chinese startups for green credits.

Regulators are putting more teeth on a system of tradable green car credits to wean the industry off a decade-long policy of subsidies which has helped create some of the biggest companies in the industry.

The system gives automakers credits for selling electric or fuel-efficient vehicles that can offset penalties on their more carbon-intensive models.

The shift has happened fast, catching some global automakers and state-owned Chinese manufacturers flat-footed.

Volkswagen AG (OTC:VWAGY), for example, only began counting the cost of Chinese green car credits in 2020 when executives realised they needed more to comply with the requirement for the year, sources familiar with the matter said.

The German automaker, which aims to be a world leader in electric vehicles, had to buy credits from U.S. rival Tesla for its China venture with state-owned FAW Group, sources told Reuters.

FAW-Volkswagen, which sold 2.16 million cars last year, was the biggest negative credit generator in 2019 thanks to its popular gasoline sport-utility vehicles.

Volkswagen (DE:VOWG_p) told Reuters it was "strategically targeting to be self-compliant" with the rules in China, and would buy credits if required. It declined to comment further.

China has had a green-car credit system since 2017 but fuel-efficiency standards tightened significantly last year and many manufacturers failed to comply, according to preliminary 2020 credit data published by MIIT.

Electric vehicle sales were lower in 2020 than policymakers had expected, explaining the credit deficit, Haitong International analyst Shi Ji said.

"We suggest automakers with large gasoline car sales volume will accelerate electrification," Shi said.

All six major state-owned auto groups are struggling to comply with the credit system, the chairman of state-owned automaker Changan, Zhu Huarong, said in January.

Changan, which has a venture with Ford, lost 4,000 yuan ($611.86) per car because it needed to buy credits or sell unprofitable EVs, he told an industry conference.

DRIVING CHANGE

In modified rules starting this year, regulators also raised the standards for electric vehicles to qualify for credits and introduced new standards such as EV power efficiency.

Policymakers are considering further tightening the credit system and are expected to roll out rules for commercial vehicles this year, said sources familiar with the process, who declined to be named.

Driving the changes are officials at China's finance ministry, who want to shift government funding to other industries such as semiconductors, according to officials' speeches and people with understanding of policy discussions.

China's finance ministry and industry ministry did not respond to requests for comment.

Subsidies helped a swathe of Chinese EV makers including BYD and Nio (NYSE:NIO) Inc improve products and boost sales. Chinese EV technology suppliers were buoyed as well. Battery maker CATL became one of world's top battery makers, competing with established players such as Panasonic (OTC:PCRFY) and LG Chem.

Beijing hopes the compliance system will consolidate China's lead in electric vehicles, with credit trading meant to encourage automakers that have been slow to develop electric cars to support EV startups, sources said.

Tesla, the leading electric vehicle maker, is the top green credit generator in China, according to MIIT. Tesla reported receiving $1.58 billion from credit sales last year globally.

Automakers under compliance pressure include Geely, General Motor Co's China tie-up with SAIC Motor, Daimler AG (DE:DAIGn)'s partnership with BAIC Motor, another Volkswagen venture with SAIC Motor.

Geely, Daimler (OTC:DDAIF), GM all told Reuters they will manage the credits between different ventures and will comply with the rules by expanding electric lineup in next years.

Geely President An Conghui said the group was compliant thanks to roll-over credits from previous years and new electric models, and would not buy credits from external companies.

Daimler and GM both said they planned to expand their ranges of electric vehicles in China.

Analysis-China's green car credit scheme turns up heat on carbon-emitters
 

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Comments (4)
Erski Gumby
SB20 Apr 19, 2021 12:05AM ET
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That was a lot of spam to report.
John Wim
John Wim Apr 18, 2021 8:21PM ET
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I wont trust VW.
Roland Hara
Roland Hara Apr 18, 2021 7:59PM ET
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Props to china here on trying to curb gas cars. Is it time to buy Li? Its been correcting, nicely..
Catholic Man
CatholicMan Apr 18, 2021 7:07PM ET
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A growing trade in imaginary credits based on an imaginary emergency.
 
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