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Volkswagen is pursuing a partnership with a third Chinese automaker, a move that some see as unfair.
Business

Automakers face roadblock to eco-car production in China

Opaque new rules coming in 2018 stoke anxiety in world's largest auto market

GUANGZHOU -- Automakers operating in China are bracing for the possibility of a seismic shift in 2018, when the government plans to begin restricting production of environmentally friendly vehicles even while introducing strict new rules on sales.

"Everything is a mess," an executive at a Japanese automaker said. "We need to seriously rethink our business in China."

New obstacles

For automakers, worrying changes loom for a fast-growing automobile market -- the world's largest -- seen approaching the 30-million-vehicle milestone this year.

Concerns began brewing last summer, when the Chinese government told automakers it will start limiting the number of companies allowed to produce eco-cars. Any manufacturer that wants to do so in 2018 and beyond will need a new license, according to the official notice.

Obtaining licenses in China tends to be an onerous process widely thought to involve some amount of corruption. But this was not the only reason for automakers' anxiety. Beijing at the same time was considering strict environmental restrictions requiring companies to sell a certain number of what China calls new energy vehicles in order to sell regular gasoline-powered cars.

Hybrid electric vehicles like the Toyota Prius would not count toward sales of NEVs, a category that consists mainly of plug-in hybrids and electric vehicles. The new regulations could shrink the number of producers of eco-friendly vehicles in the country from the current 120 or so to as few as about 20 starting in 2018.

There are several reasons behind the two seemingly contradictory policies. First, fraudulent claims of eco-car subsidies became rampant. One way companies gamed the system is by selling electric vehicles to affiliates in the same corporate group. A more sophisticated scam was to remove just the batteries from such a car and install them in another one, making it seem that an additional vehicle had been sold.

Beijing is looking to crack down on such abuses. A tax break on small, fuel-efficient cars ends this year. Eco-car subsidies will likely face major cutbacks in the years ahead.

China, suffering from serious air pollution, has also decided it must adopt environmental safeguards comparable to those in developed economies, and fast.

Suspected favoritism

With less than a year left before the new measures take effect, automakers have little time to add new NEVs to their lineups. Many, including Japan's Nissan Motor, Honda Motor and Toyota Motor, have not even obtained the newly required production license.

A lack of transparency is creating further confusion in the industry. Volkswagen announced in September that it was pursuing a joint venture on electric vehicles with China's Anhui Jianghuai Automobile, also known as JAC. This would be the German automaker's third alliance with a Chinese company, a clear violation of rules limiting foreign companies to two local partners.

But this large-scale project has the support of Chinese Premier Li Keqiang, who hails from Anhui Province, where JAC is headquartered. Perhaps that is why there has been no obvious pushback from the government. Volkswagen has enjoyed a close relationship with Beijing. "It's wrong that Volkswagen and Chinese companies are treated differently," a voice at a rival automaker complained.

Eight Chinese corporations have already obtained licenses to produce eco-friendly vehicles in 2018 and beyond -- a seemingly inexplicable fact, given that the production restrictions have not been made public. Though some are established automakers, including affiliates of BAIC Group and Chery Automobile, several are newcomers with little proven know-how. Beijing seems to be trying to give local companies an advantage in the country's eco-car market just as it appears poised for a boom.

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