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China’s tighter emission standards choke its automobile sector


  • China rolls out the sixth stage emission standard and its repercussions
  • Country’s car sales rise in June owing to deep discounts offered by its dealers
  • Testing times ahead, sales of domestic manufacturers likely to be slower than JV manufacturers

 

China’s attempt at combating air pollution has pushed the automotive industry into a deep crisis, this is at a time when global sales have slumped. However, after a rather dismal performance over the past year, car sales finally picked up in June 2018 by 4.9% YOY. The major credit goes to handsome deals offered by the dealers, with big price cuts at a tune of 50% in some cases, the dealers were able to sell off a part of their inventory. For example, it was reported a Peugeot dealership went as far as to offer a free 301 compact model car to customers with a purchase of 5008 SUV car.

However, since July (2019) the country has rolled out another set of tighter emission norms, which mandate cars to have superior filtering systems for trapping exhaust gases and particulate matter or in short a 30% cut on carbon emissions. A lack of clarity pertaining to regulations governing the use or resale of existing inventory, which does not meet the new emission standards made buyers wary of fresh purchases in July. This added to the concerns of the industry, which has been grappling against a slowing of the economy and trade tensions with the US in the past few quarters.

A stricter emission standard implemented in July was rolled out in 17 of China’s cities and provinces, a year ahead of the original deadline of 1st July 2020. This is the sixth stage of the emission standard roll out by Beijing, which is part of a program that was launched back in 2001. And included cities like Shanghai and Beijing among others that account for approx. 60% of car sales in China. While the ongoing trade war with the US and a slowing economy were initially being blamed for the slumping sales, the blame is now shifting on a rather poorly managed fast-tracking of the sixth emission standard roll out. The market was not necessarily ready to supply products in line with the new emission standards, thereby leaving dealers high and dry. Additionally, dealers operating in the provinces that are yet to implement the new emission rules are still reeling under the pressure of trying to sell off their inventory and have been further weighed to slash prices significantly.

In the given scenario, Chinese carmakers, which already operate on thinner margins are likely to suffer the most. According to Goldman Sachs, carmakers would end up bearing the additional cost of making emission compliant vehicles, which is estimated to be around 2,000-5,000 CNY per car (US$ 290-720). Foreign players such as BMW and Audi (along with their JV partners) would be less affected as they have already rolled out models which comply with the new emission norms. According to Citi, approx. one-third of the cars that were sold by JVs in April complied with the new standard, while the same figures stood at just ~5% for the domestic manufacturers. This obviously points out to slower sales for the latter in the provinces and regions that have or will be adopting the new emission standards early.

Although June’s uptick in numbers offers some ray of hope for the industry, this can hardly be deemed as a recovery. However, the government is trying to fix the environment by taking a tough stance on emission standard among other measures, the world’s largest automotive market is struggling with a fall in the demand. Recently, China’s Ministry of Commerce also approved exports of used cars from 10 cities and provinces in an attempt to lend support to the sector. However, the next couple of months will continue to be testing time for the industry in a country which has seen demand swell for more than a decade.

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