China’s New Emission Standards Could Squeeze Auto Makers Further In Largest Auto Market

The electric vehicle (EV) industry has disrupted the Chinese auto market, the world’s largest today, for good. China has been careful to ensure that domestic firms lead the EV boom, even while allowing Tesla and other incumbents to have a play in the Chinese market too.

However, with most outside majors plying mostly ICE vehicles in China, the country’s latest emission norms could deal a major blow to operations in the country. A combination of a faster than expected Chinese shift towards EVs, and the upcoming China VI HDV standards could really hurt ICE vehicle makers, with the biggest among them, Toyota and Volkswagen taking the brunt of the hit.

China’s New Emission Standards to Bring Doom Upon Legacy Auto Makers

As per an article (now deleted) by the China Auto Dealers Chamber of Commerce (CADCC), dealers could be left with hundreds of thousands of non-compliant unsellable petrol and diesel vehicles once China’s new emission standard is implemented July this year.

The Chinese metals information provider Shanghai Metals Market (SMM) further detailed the CADCC article stating that the CADCC had received reports from many auto dealer groups that the upcoming full implementation of the China VI B emission standards would bring enormous pressure to the survival of auto dealers.

The China 6 Standard

China released its rule for stage 6 light-duty vehicle emissions limits – China 6 standard – in December 2016, giving manufacturers roughly 7 years to bring their vehicles into line. The China 6 standard would be implemented in two phases. While the first phase 6a took effect on July 1, 2020, the 6b part will be implemented on July 1, 2023. The standard applies to gasoline or diesel-powered light-duty vehicles – up to 3,500 kg.

 

The 6b further lowers the limits by about one-third to half of the magnitude for NOX, THC, NMHC, PM, and CH4, on top of the China 6a standard, as per the International Council of Clean Transportation report. The rigorous compliance norms combine best practices from both European and U.S. regulatory requirements.

The Chinese Inventory Crisis

Post- Covid, auto sales — especially of internal combustion engine light vehicles — haven’t bounced back from pandemic restrictions. New-vehicle sales fell 20 per cent in the first two months of the year, with deliveries of gasoline-fueled cars dropping 30 per cent.

Hundreds of thousands of “high-polluting” vehicles are lying with dealers, creating a potential inventory crisis. Reports say that just about 20 per cent of dealers operated at a profit last year, and more than 2,000 closed down.

Chinese consumers are rapidly shifting to EVs with electric vehicles comprising over 25 per cent of all new cars sold in China in 2022. As per the China Association of Automobile Manufacturers (CAAM), China accounted for around two-thirds of global sales of EVs in 2022. From about 27 million vehicles sold in the country in 2022, almost 7 million were EVs.

Why Does This Impact Foreign Auto Makers More?

The foreign legacy automakers are at the receiving end of the current crunch. Here’s why.

Chinese car manufacturers, like BYD have EVs making up a much higher proportion of their total production. On the contrary, foreign companies like Toyota and Volkswagen are still manufacturing and selling mostly petrol and diesel cars in China. Thus, the ones to be hit hardest by this inventory crisis will be major foreign players from countries like Japan, Germany, and the US. EV makers, such as Tesla, will continue to see their demand grow.

This is evident in the first two months of 2023. While the Chinese brands have faced losses in ICE vehicle sales, the increase in domestic EV sales offset them.

 

However, the case of foreign legacy automakers was dire. In the same two months, sales of Japanese brands in China dropped by 40 per cent year-on-year. German and Korean brands have dropped by over 20 per cent, while the US brands have dropped by 12.5 per cent.

Implications

Chinese electric car manufacturers are currently far ahead of Volkswagen and Toyota, who have no plans to begin mass production of their electric vehicle models until 2027!

This puts these two companies at a disadvantage in the world’s largest car market. A surplus of unsellable vehicles in China could further damage their reputation with trade in China feeding into even more customer aversion to purchases. The negative effects of this could spread to the economies of Germany and Japan, as these mega-manufacturers employ significant portions of the workforce, either directly or indirectly.

With little signs that the Chinese government will delay the implementation of the 6b of China 6 standard, especially when the domestic manufacturers are largely immune from its impacts, the next quarter could yet prove to be truly make or break for many of these auto firms.