BEIJING -- The Chinese government is set to shift its automotive strategy to rely more on hybrid vehicles as part of its efforts to clean up the environment, instead of centering solely on electric vehicles, a development likely to work in favor of Japanese automakers such as Toyota Motor and Honda Motor.
Beijing has been scrambling to tackle its serious air pollution problem by implementing the world's strictest rules for exhaust emissions. Manufacturing and sales quotas were introduced this year to encourage use of new-energy vehicles, including electric cars, hydrogen fuel cell vehicles and plug-in hybrids. New-energy vehicles must account for the equivalent of 10% of automakers' fleets in 2019.
The Ministry of Industry and Information Technology, which oversees automotive policy in China, is seeking to amend the regulations applied to automakers to impose lighter controls on more fuel-efficient hybrid vehicles compared with gasoline or diesel autos.
Hybrid vehicles would still be considered fossil-fuel-powered but reclassified as "low-fuel-consumption passenger vehicles." The favorable treatment would make it easier for automakers to meet environmental quotas and encourage them to offer more choice in their model lineups.
Beijing will hold hearings with manufacturers and industry experts by early August, aiming to make a decision within the year.
Under current rules, hybrids are grouped together with conventional gasoline vehicles. Automakers are required to produce 20,000 high-performance electrics for every 1 million hybrids they make, under a complex point-based quota system. But if the electrics are of lower quality, the quota increases further from 20,000.
Under the new proposed regulation, automakers would need to produce only 6,000 electric vehicles per million hybrids, while the requirement for gasoline vehicles would rise to 29,000.
The proposed amendment says only that the privileged treatment applies to "fuel-efficient" cars and does not specify hybrids. However, Chinese media have reported that the category would include the top 5% most fuel-efficient models, benefiting major automakers with hybrid offerings.
Toyota and Honda are especially well positioned to take advantage. The two automakers together sold more than 2 million hybrids worldwide in 2018 -- the vast majority of the 2.29 million produced that year according to IHS Markit.
Toyota in particular sees this as an opportunity to not only boost sales of its own hybrids, but also to supply technology to other automakers. It released tens of thousands of hybrid-related patents in April and plans to step up sales of hybrid systems.
The new amendment proposition also includes measures to promote hydrogen fuel cell vehicles. Toyota has been partnering with Chinese companies including Beijing Automotive Group in such vehicles.
The proposal would also let automakers that beat the quota in one year carry over points to the following year under certain conditions. Meanwhile, the government plans to keep increasing the quota, which will rise to 12% in 2020, by 2 percentage points each year between 2021 and 2023.
The policy shift suggests that the Chinese government has come to see hybrids as a useful tool to tackle its air pollution problem and use oil resources more efficiently. Although the government has pushed electric vehicles, they are expected to require more time to catch on among the general public due to issues regarding charging stations and driving range. The change would promote adoption of hybrids in what is by far the world's largest auto market, with new-vehicle sales projected to reach about 35 million in 2025.
China "had a lot of potential demand for hybrids even before now because of such factors as tightening fuel efficiency standards," a Toyota executive said.
Hybrids accounted for just over 10% of the nearly 1.49 million vehicles Toyota sold in China last year. The automaker aims to boost this share above 30% by 2020.
Automakers are dealing with strengthened environmental regulations in other countries as well. In addition to China, the U.S. and the European Union also have quotas based on average fleetwide emissions, and Japan plans to implement such requirements next year.