China’s ‘dual-credit’ policy that spurred the EV sector will be revised in bid to ensure high quality growth

China’s decision to revise a “dual-credit” policy on carbon emissions that helped electric vehicle (EV) makers boost production is likely to hurt the industry leaders in a trade-off for long-term quality growth, market observers said.

The policy, first implemented in 2018 based on California’s zero-emission vehicle programme, penalises companies that fail to meet the fuel consumption targets of their vehicles. Conventional carmakers are subject to production quotas if they are unable to report positive credits. They are, however, allowed to buy credits from other makers to make up any deficit.

“The revised policy is expected to ease pressure on [conventional] carmakers to meet their targets while denting EV companies’ sales of credits,” said Gao Shen, an independent analyst in Shanghai. “As conventional carmakers ramp up production of EVs, they may no longer need to buy a lot of credits in the coming years.”

The Ministry of Industry and Information Technology (MIIT) said last week that it will reasonably set subsequent annual credit ratio requirements and explore the setting up of a flexible mechanism. It did not reveal a timetable for the revision, but underscored the importance of ensuring high-quality development of the EV sector.

According to Fitch Ratings, 71 of the 117 carmakers in China, including Sino-foreign joint venture assemblers, reported negative credits last year.

EV makers have benefited from the policy as the credits earned generate revenue for them. NIO, one of the three leading Chinese smart EV start-ups, raked in 517 million yuan (US$81 million) by selling credits this year. Tesla made US$1.58 billion from trading “regulatory credits” in 2020, helping it record its maiden annual profit of US$721 million.

The EV companies that made a windfall by selling energy credits to conventional internal combustion engine (ICE) carmakers, however, are likely to shift focus from scaling up production to improving profit margins in the fast-growing Chinese market where three out of every five new cars sold in 2030 will be powered by batteries, they added.

“The dual-credit policy has been of great significance to the country’s automotive industry and has been a kind of windfall for the leading EV start-ups,” said Phate Zhang, founder of CnEVPost, a Shanghai-based EV news portal. “An adjustment could have an impact on the industry too.”

Chinese carmakers are on track to deliver 2.4 million NEVs in 2021, more than double last year’s 1.17 million units. Tesla, along with NIO, Xpeng and Li Auto, dominate the premium EV segment in China.

Beijing has set a target of 20 per cent penetration rate for new-energy vehicles (NEVs) – which comprise pure electric, plug-in hybrid and fuel-cell cars – by 2025. UBS forecast that NEVs would represent 25 per cent of total new car deliveries in 2025, buoyed by Chinese consumers’ increasing penchant for battery-powered vehicles.

Hongguang Mini EV, an entry-level vehicle assembled by General Motor’s three-way venture, SAIC-GM-Wuling, is the bestselling model in China. The car that can go 170km on a single charge is priced from 28,800 yuan onwards, a fraction of Tesla’s Model 3 sedan that starts at 255,652 yuan.

While the mini EV has a thin profit margin, it can still generate profit for the joint venture through the credit earned from deliveries of as many as 40,000 units per month.

“Regulators want car companies to move up the value chain to produce more high-performance EVs,” said Peter Chen, an engineer with car components company ZF TRW in Shanghai. “The revised dual-credit scheme should not just encourage production of EVs, but EVs that can compete on the global market.”

Author: Daniel Ren, SCMP

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