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Auto investment regulations ushers in new era for entry approval and industry administration

The Administrative Regulations on Automotive Industry Investment (ARAII) is the most important policy for the auto industry this year and revolutionizes investment entry regulations by simplifying administrative procedures for new investment through record-based administration rather than approval-based administration, allowing diversified entities to invest in battery electric vehicle production. But it has also imposed tighter restrictions on adding new manufacturing capacity and likely push manufacturing capacity into clusters where capacities are utilized well, industrial basis solid, supplier system complete and competitive advantage obvious. Industry reshuffle is expected to pick up speed as new players scramble to acquire and merge existing available capacity.

BEIJING – The Administrative Regulations on Automotive Industry Investment (ARAII) was released on December 18 by the National Development and Reform Commission (NDRC) and will go into effect January 10, 2019.

It’s the most important policy for the Chinese auto industry to date focused on entry regulations and finalizes a draft version that was circulated in industry circles in May and published in July to solicit comments and suggestions from the public.

The ARAII essentially replaces relevant content on investment administration in the Automotive Industry Development Policy (2004) and Administrative Regulations on New Battery Electric Passenger Vehicle Manufacturers (2015) as well as the entire Comments on Perfecting Automotive Investment Project Administration (2017). These documents will be revised or abolished accordingly.

The ARAII comes on the heels of the 40th anniversary of China’s reform and opening-up and its release is a key initiative to implement reform on efforts to streamline government functions and delegate authorities, strengthen supervision and promote fair competition, and optimize service and make ease of doing business, as well as to open up the general manufacturing industry by the Central Party Committee and the State Council.

The nine-chapter, 48-article ARAII covers issues including industry investment direction, investment project standards, project record management, coordinated supervision requirements and capacity monitoring and warning.

The biggest highlight of the ARAII is that it has completely removed automotive investment project approval administration and newly established Chinese-foreign joint venture passenger car production projects, newly formed battery electric passenger vehicle manufacturing projects (including existing automakers expanding into battery electric vehicle manufacturing) as well as other automotive investment projects needing provincial government approval will now instead be administered by local governments on a “project record” basis.

On the flipside, the ARAIIhas also imposed tighter restrictions on adding new manufacturing capacity and likely push manufacturing capacity into clusters where capacities are utilized well, industrial basis solid, supplier system complete and competitive advantage obvious. Industry reshuffle is expected to pick up speed as new players scramble to acquire and merge existing available capacity.

Whole vehicle investment projects will be administered by provincial governments.

The ARAII covers investment guidance and regulations on traditional fuel-powered vehicles, battery electric vehicles, intelligent vehicles, research and development as well as key components including engines, power batteries, fuel cell stacks and bodies.

Notably, NDRC has defined fuel-powered vehicle investment projects as those that involve vehicles primarily driven by engines (including alternative fuel vehicles) such as traditional internal combustion engine vehicles, hybrid vehicles and plug-in hybrid vehicles, while battery electric vehicles constitute those primarily driven by electric motors such as battery electric vehicles (including range-extended electric vehicles) and fuel cell electric vehicles.

Key objectives include enhancing entry standards for automotive investment projects, strengthening supervision during and after investments and regulating investments to ensure that private capital is spent on necessary projects to avoid blind investment and disorderly development. Capacity expansion of traditional fuel-powered vehicles will be strictly controlled and healthy and orderly development of new energy vehicles will be promoted, while an innovation development system will be established for intelligent vehicles.

Highlights of key points of the ARAII:

Strictly control production capacity of traditional fuel vehicles

The following traditional fuel vehicle investment projects are strictly prohibited:

  • Newly-launched, standalone traditional fuel-powered vehicle manufacturers;
  • Traditional fuel vehicle capacity expansion from existing automakers crossing into passenger or commercial vehicle segments;
  • Existing traditional fuel vehicle manufacturers moving out of province (except those that are listed in the government’s regional development plans relocating to other provinces or those maintaining corporate shareholdings structure);
  • Investing into traditional fuel vehicle manufacturers on industry administrative “special” list (except those that are reinvested by original shareholders or those that are transformed into non-independent legal representatives).

In addition, existing automakers who plan to expand production capacity of traditional fuel

vehicles must meet the following six specific and stricter requirements:

  • Achieved capacity utilization better than segment average (passenger vehicles or commercial vehicles) in the previous two years;
  • Achieved share of NEV fleet in their production volume better than industry average in the previous two years;
  • Achieved more than 3 percent in share of R&D expenditure in sales turnover in the previous two years;
  • Products that are internationally competitive;
  • Provincial automobile capacity utilization better than segment average in the previous two years and no traditional fuel vehicle manufacturers listed on industry administrative “special” list;
  • Expansion projects for traditional fuel passenger vehicles, in addition to meeting the above requirements, must also meet corporate average fuel consumption (CAFC) targets and have capacity of no less than 150,000 units and produced no less than 300,000 vehicles the previous year.

Tougher requirements for battery electric vehicle investment projects

Provinces where newly formed battery electric vehicle investment projects are to be located must meet the following requirements:

  • Achieved capacity utilization better than industry average in the previous two years;
  • Existing independent investment projects have already started operation and reached designed output capacity.

Legal representatives of newly formed independent battery electric vehicle investment projects should meet the following requirements:

  • Product R&D organization has been set up with professional R&D team having experiences and capabilities in BEV concept design and system and structural design; R&D and testing capabilities in vehicle control system, power battery system, vehicle integration, light weighting, body & chassis, power battery system integration and vehicle assembly with products and technologies reaching advanced levels;
  • Own patents and intellectual property in BEV core technologies;
  • Commit to quality warranty for products sold within five years of SOP.

Main shareholders of newly formed independent battery electric vehicle investment projects should meet the following requirements:

  • Control more than a third of shares;
  • Project has been completed with original intended output capacity;
  • Self-funded capital and financing capabilities ensure project operation;
  • Shareholders that are OEMs should have capacity utilization and proportion of NEV production over the previous two years both higher than industry averages. BEV OEMs must have production the previous year reaching original intended capacity;
  • Shareholders that are suppliers must have vehicle control systems, motors or power battery systems supply exceeding 100,000 units over the previous two years;
  • Shareholders that are design institutions, overseas companies or other entities should research and develop BEV products with own intellectual property, with cumulative registration of BEVs in and outside China over the previous two years exceeding 30,000 units (passenger vehicles) or 3,000 units (commercial vehicles), or, cumulative BEV product sales revenues exceeding ¥3 billion over the previous two years.

New battery electric vehicle investment projects must meet the following requirements:

  • Annual output capacity of no less than 100,000 passenger vehicles or 5,000 commercial vehicles with capabilities in body stamping, painting, general assembly and battery systems and related key components manufacturing, as well as management of quality assurance, marketing & sales, aftersales service and battery recycling; and produce own-branded BEVs;
  • Existing OEMs expanding into BEV production must have capacity utilization higher than industry average over the previous two years or existing BEV OEMs had production the previous year meeting intended scale;
  • Existing OEMs expanding BEV production outside home province must meet requirement above, with expanded capacity no less than 100,000 passenger vehicles or 5,000 commercial vehicles.

Delegate administrative power to local governments

The administrative power for governing investments in the auto industry will now be passed down to local provincial and municipal governments. Investment projects regarding vehicles and auto parts must be put on record and be under the supervision of local administrative departments. Investment projects related to passenger vehicles, special-purpose vehicles, trailers, as well as key components like engines, body assemblies, power batteries and fuel cells should be recorded and supervised by provincial-level administrative departments.

Local governments shall not disrupt fair competition in the market. It is illegal for them to offer investment projects favorable policies in tax revenues, funding, land use and other areas. The ARAII is expected to help further consolidate the auto industry, optimize production capacity and distribute more resources to more capable vehicle manufacturers following the principle of “survival of the fittest.”

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