Tesla Crushing it in China's Car Cap and Trade

the show to run us through what they found. But today we've got kind of a preview or trailer for it, or at least an important part of it, which is China. In the report, Colin and the authors state that they expect evs to account for passenger vehicle sales in China rising and seventy. Now, this will put about two twenty million e vs on the road in China at that point. Needless to say, this is going to be a huge chunk of the global market. But how will things get there?

How will the market grow to that point? Sure, there'll be a build out of robust charging infrastructure that's needed, and there are direct purchasing centers for consumers, but those are being phased out this weekend the show. We've got me Electric Vehicles analysts for BENF based out of Beijing. She's going to tell us about some of the government policies put into place to help accelerate e V adoption.

See what I did there? Sorry, I couldn't resist. In particular, she'll tell us about the New Energy Vehicle or any V targets and corporate average fuel consumption credit systems. Under the n e V credit system, automakers are required to generate any V credits from the production of battery, electric, plug and hybrid and fuel cell vehicles in order to meet the government assigned any V targets. Manufacturers that do not generate enough credits can purchase them from other automakers

to avoid penalties. It's kind of like cap and trade, but for cars. And see he's going to tell us all about it. Our discussion is based on a report China's New Energy Vehicle Credit system. Being a user can get this report on benef go on the Bloomberg terminal, BENIF dot com and the beanof mobile app. As a reminder, Beanis does not provide investment or strategy advice, and you can hear the full disclaimer at the end of the show.

I'm Mark Taylor, and you're listening to switch on the BENF podcast see thanks for joining today, Thanks for having me. Can you start us off just with a very very high level overview of China's emission reduction target. China's presidents EMP actually announced that zero carbon neutrality targets in September. So the goal is to have China reach the carbon

peak by and to reach carbon neutral by. So what it translated into the world transport sector is that well, although there's no specific targets set for particular sector, paints a very direct picture that the country, the central government wants all sectors in the in the country to essentially to de carbonized and the passway for different for different sectors company as far as a lot. So they want

to hit their peak of emissions. Would you say, okay, wow, and then start coming down to zero by so thirty years too to come down the mountain. I guess today we're going to focus mostly on e v s or electric vehicles and a policy that's come into play to try to get those sales up and therefore get the emissions down from the transportation sector, can you explain to us just the well, start us off with the name

of the policy and a bit about its objectives. These policy tools actually called New Energy Vehicle Mandate, So New endin Vehicle is kind of China's definition of the electric vehicle, which include battery, electric, plug in hybrid, and fuel cell vehicles. So the mandate itself is very similar to California Stereo Emission Vehicle or the mandate, and it requires automakers to sell electric vehicles in order to produce NAP credit that's

going to meet a government assigned target. So essentially the policy tool is designed to push automakers to sell more electric vehicles, which the broader goal of China's push behind the autric vehicle is not only to reduce carbon emission, but also to reduce all the import and to transform is industry towards more advance. Okay, so the idea is that to reduce emissions by getting more electric vehicles out on the road, and they do that by giving in a new Energy Vehicle or an any V credit for

each electric vehicle sold to the automakers. Is that how it works? Yeah, I think the policy itself is kind of like just to force automakers, essentially to push automaker to sell more evs. I think that's like the one I subject for this policy. So the government will sign like a target just in proportion to an automaker's domestic production and imports of internal combustion and general ice vehicles. So the more ice vehicles and automaket selling, the higher

target they will face. That means they will need to sell more credits in order to meet the target, or they have to buy credits from their competitors. I think. Also the second part of the net credit met or the ne credit mandate is that it's linked with China's few economy regulations that some of the automakers can use the MAP credit to offset there or two as a compliance tool to help them meet to the stringent few

economy regulations. Okay, so the government sets a target. It started I think last year at ten of all sales having to go to e vs. Is that right? And then this year it's yeah, the target set up ten percent for so the new energy vehicle credit policy. Can you explain just very basically how that works. China's new editor vehicle credit system is kind of a policy that requires automakers to sell electrical vehicles in order to meet and government assigned the target. And when did it start?

It started last year. So the policy was actually is shooting into A seventeen, but it came into effact throughout a nineteen national And what does the government target mean? How does that work? So the government target is set ten percent in twenty nineteen and twelve percent in and we'll kind of linearly increase to eighteen percent in. So the ten percent is proportional to an automaker's dometics, domestic production,

imports of internal combustion, and general ice vehicle. But this doesn't mean that the e V share of their total cells have to be reached ten percent in twenty nineteen. Okay. So if I'm an automaker and I sold a hundred vehicles, you know, a hundred ice vehicles during I don't know during this year, that means I'm on the hook to produce ten n V credits, is that right? And then twelve in the next year. Ten credits in twenty nineteen.

First one, you have to have at least like fourteen and you BI credits this is fourteen, okay, So how do I get those credits? So there's a few different options, right, Yes, I think the simple as option is that you just produce more evs, which kind of include very large joy

plug in hybrid or fuel cell vehicles. I think the second option is that if you cannot have that enough, or if you do not have enough e B cells, you can buy credits from your competitors, or you can have some of the credit transfer from like your joid venture set. Okay, so this is kind of like cap and trade in power, right, So you you cap the emissions I guess in this this case instead of two

commune smokestack, it's from a tailpipe. This is kind of like cap and trade for for for power plants, right, but instead of capping CEO two from the exhaust from smokestack, it's from tailpipe. Is that right? Yes? Okay, you know you can either switch you know, to renewables or in this case e V s and if you don't have the the capability of doing that, you can buy credits so you can keep selling internal combustion or ice vehicles.

Is that right? Yes? So does this result in twelve percent higher e V sales or how does that work? So the twelve percent doesn't mean that each other maker have to have twelve percent of your total sales to be electric. For each electric vehicle they can generate more than one credit, and for bettery luxury they can generate up to five actually six credits in the period, and it's like around like somewhere like nearly four credits starting from this year, and for plugging hybrids is normally just

like two credits. Oh wow. Okay, so that's pretty cool. So there's kind of a sliding skill, and I hate to keep going back to power, but it's kind of like, you know, there's a little bit of credit for gas, you know, a little bit fewer emissions, you know, you can equate that to a plug in hybrid, but then going fully electric you get more credits, kind of like going fully renewable in power. I guess you could say that's cool. So if I'm a pure play electric vehicle manufacturer,

I'm producing all kinds of credits exactly. I think pure electric vehicle manufact are in a really poor position is credit because all they can have or they can generate thousands or hundred tons of thousands of credit without having any liabilities. Okay, so let's let's get into that in a second. But before we do, can we go a little bit further with the policy itself. You mentioned it

started off at ten percent. Now it's at next year it's at four percent, and where will it go at the end the government sets the target will be fourteen percent for one and will kind of increase to eighteen percent in three and beyond that the government hasn't specified kind of a target. We expect there will be a more exponential increase. That's not really going to be linearly increased anymore. So the idea is to kind of to push automantor will sound more and more evs in by

setting a higher target. Okay, so you expect they're using this is kind of a ramping period to where in a few years the target to be much higher and hopefully they'll just be producing whole bunch of vs at that point. Yeah, just stepping back a little bit. We talked in a recent show, I think it was four or five weeks ago about GM and Volkswagen taking on Tesla in the US and Europe. But we set an impediment to growth in those markets was a charging network.

You know that most people would buy e v s, myself included, actually if the charging network were better. So how is the charging network in China? Is it an impediment to the NTV program or an enabling feature of it. So I think having a bar in order to reach count and ask if you have the option that trying to really need a better charging infrastructure network. By that I mean both for for the public chargers that also there there should be chargers available for a home or

at the workplace. So I think China is still account for accounts on the half of the global public charger installations. So there has been a quick ramp up of public charging infrastructure, but all that's mostly because the buildings still kind of in China is mostly high high rise buildings

that limits people's access to the private parking spaces. What are you seeing where you live and based in Beiging, So since Veiging in such a like a metropolitan city, I see public chargers almost everywhere in the hotels and the never office, so every almost everywhere. But I think what's been challenging for people living in major cities in China is to have access to home chargers because now

all of them can guarantee a a private parking space. Yeah, that's the challenge for me here in London as well, or access to to charging. Okay, so moving on to a different part of the policy, the corporate average fuel consumption target sounds captivating. It's the C a f C. Can you explain what that is? So essentially it's a

it does a few economy regulations for passenger cars. So many countries actually used for economy regulations to reduce the carbon mention as well as the few consumption so the average presenter car fleet. And as we also a way to to promote EVS by signing a really low few

consumption or few consumption values for evs. So for China's policies, in the kind of the Chinese few economy regulation, it sets a target for the average passenger vehicle car fleet to ridge for leaders for a hundred kilometers by twenty which is very stringent, almost on par with that in Europe, and it's also more strangent than that team that's in

place in Japan and the United States. Okay, so the government is setting a target for fuel economy and you can get there by having really ridiculously efficient ice vehicles, and I guess in evs which bring down the average to make you more efficient or more fuel economic. Is

that right? Yes? I think the benefits of selling e VS is not only evs are are given basically zero few consumption values, but also because there's sometimes it will sign a multiplier too, So so producing each electric vehicle is counted twice or three times that of the ice car. Let's talk about the impact of these two policies, So the impact of the NYV credits and the c a f C there the corporate average fuel consumption target on

sales and emissions. Can you can? I just walk us through both those for the n e V credit system, so it's just kind of push automakers to sell more e v s unless you lowered your overall ice production, which is something that automate hasn't really wants to lose their market share. I think for the few economy regulation, as you mentioned earlier, it's about forcing automakers to either have really efficient ice vehicles like hybrid or mildhabber, et cetera,

or you have to sell more evs. So I think combining these two policies, the overall objective is just to accelerate the cells or the adoption of electric vehicles in China, and is it working to some extent, It is hard to say that it's working because China also have the kind of the some more more direct policy tools in place, like the purchase subsidies, which has been very powerful to

in promoting the V cells. But I think as China plans to kind of phase out EV subsidies by the end of twenty two, the country will rely more and more on this sort of the supply side policies like the V credit system as well as a few economy or the CFC credit system, so essentially that automakers have to fulfill those targets. Okay, So there's kind of a carrot and a stick in place, So you have a subsidy for the purchasers or the buyers of evs, and I think he said in the report that made sales,

you saw an eleven percent increase on evs. Is that right? Well, it's hard to say that it's kind of the subsidies is the most important factor or driver in EV cells last year, but yeah, I think it's still a very very useful to loosing place. Okay, So you have the carrot and the sticks, and so the carrot is going to be phased out so the e V subsidy, but the stick is going to be well more more powerful in terms of you know that the targets that will go up for the n e V and the c

A f C. Is that right? Yeah, okay, cool, Let's talk about some of the other impacts of the policy. So what happens to companies in a credit deficit? So what is the penalty if an automaker fills to to meet the government assigned target, So it will kind of in a in a deficit of the a V credits. So to offsete those the credit deficit, they have to either buy or transfer some of the credits from their competitors and joint ventures. And if they still cannot make

up the deficit. Right now, China doesn't really have a financial penalties and like those in California or elsewhere, so basically you won't face a like a fine for it. But but I think on the other side said the government do has a kind of a wet list for models that are can be available to solve. So that means that if you cannot need that that or if you if an automaker has a has a credit deficit

that it cannot be ballanced out. It cannot sell particularly ice vehicles that's not really fuel efficient, So it's just that kind of losing market shares, So that's your real risk. It's not necessarily a penalty risk, but it's a risk of not being able to sell your car, yes, particularly like pickups, as you'll be sold those with like more

higher fuel consumptions. And this means that EV credits have been sold and traded right, So if companies are in a deficit and they want to to get credits to cover their their deficit, they can buy from other manufacturers. As you mentioned, do we have an indication of either how this works or even the price for buying the credits. I think first is that the price is still where

the preced is still very limited. First because China doesn't really have like a fine which always kind of serves as a price sailing for for the maximum level of the credit or the max level of the value per credit. So that means a lot of automakers right now are actually negotiating the the price of the table, so rather than entering into like a feed or except or an auction.

We do think because like back in twenty nineteen, there's or in there's has been an over supply of a V credits in the market, which translated into probably lower credits or lower value per per credit. But however, we do see that because there's the supply of the n V credit has been decreasing because of the strandent target, and that will kind of help drop at the price.

So some of the report or some of the articles suggested that back in nineteen the price per AV credits around like seventy dollars per credit, but now it had an increased to over two hundred dollars, which is still relatively low compared to other markets, etcetera. Relatively low, it seems high to me. Well, we we do expect that as the supplies of the credits decreases, the price of per any credit will definitely be going up in the next few years and even probably even double the current level.

So that could be an expensive prospect for manufacturers that are in a deficit. So once again pushing for more actual evs to be sold in the market. Okay, so we're gonna take a quick break, and when we come back, we're going to talk about what this all means for manufacturers, both for and domestic in China, what this means for

their sales in that market. Stay with us, Okay, let's talk about who's active in China and who's actually having to be concerned about these ny V credits and the c A f C. Can you tell us a bit about who the foreign and domestic players are in the Chinese auto market. So I think it really has to look down to bost the ice vehicle market, but also

the EV market. I think for ice vehicle markets that a lot of the foreign manufacturers are still dominating trying to see your market Lexposkwagan General Motors and they sell through their Chinese story adventures. But for EV market it's mostly local brand particularly like b y D or b a Isa, etcetera. But there's also an increasing number of either the foreign companies as well as kind of pure e V players like Tessa being actively selling e V s in China for both credits and the few consumption

CFC credit positions. So because a lot of the four international automakers, as just say like Bothwaga and they sell a lot of ice vehicles in China, that means they have a huge credits epicite in terms of both an EV credits but also the CFC credits. So on the other side, small domestic manufacturers like b y D and because they have a large portfolio or evs in their total stills and they get both surplus for an EV

credits and CFC credits. Domestic automakers tend to have more an EV credits or the time to have a surplus of any credits. So my initial thought on that was that, okay, so it sounds like VW might want to rush to get it with I D three or electric vehicle into that market to kind of offset its ICE sales. Is that kind of what we're seeing happen or are they

buying credits from other manufacturers? Yeah, I mean totally. I think what's fun is exactly in the position of they have to sell more evast in order to to meet the target. But unfortunately for probably the past few years, because there's such a huge amount of like ice be a coast with sol each year. So I think it's reported that VOT, one of the joint venture, is about to buy credits from Tesla in China out of price

about like four four or four hundred sixty dollars per credit. Overall, I think the strategy for companies that Volts Wagening is skilled to ramp up their BB productions in China and to increase their EB lineup as like I D three, I D four at least six, So essentially they want

to so increase the evselves by themselves. Wow. Okay, So it seems, going back to guess big picture, that you have Chinese peer play EV manufacturers and well, I guess Tesla and other foreign peer play EV manufacturers that are selling as much as they can in China to bank as many of these credits as they can to be able to use them in the future or sell them on to companies and deficits. That kind of how it's

playing out. I think for for incumbent manufacturers like volt Swamen as well as their joint ventures with domestic players like w or I C I S, they're in a

rough position this year. But therefore pew EV manufacturers like Testa or even domestic ones like Neal or x Poon, they're in a poll position because all the conset get is the pure credits and they can bank them and probably when the price reads of in futures they can sell them to or establish modermakers got a new revenue scream somehow, But it seems it seems like a short term game, right, It's short term pain for maybe v W I keep you know, VW is kind of an example,

but it can mean any you know, ice dominant manufacturer. I guess that they're using this time, you know, to I guess pay other manufacturers for the credits while they bring in their evs into the market. Is that right, Yeah, it's that kind of the time they buy into become or when they try to ramp up BV production. Yeah. And so once I'm just trying to make sure I get this is that it would seem that as more evs enter the market, it's a revenue stream for nobody.

That the the ultimate result of the policy is simply that you know, there's just more evs in the market and nobody's making money from this scheme through selling credits. Is that right or no? I think definitely having more evs is like one of the main objections for this policy. So if if each of them makers having like a huge amount of evs ev sales, I think the sort of indicative policy is successful. Okay, I'm asking all the

wrong questions. No, I mean it's yeah, I think as you're right, it's so kind of a short term game for the STARTUF, but also my personal senses that it depends on if be double can actually sell that many EPs, because it's not really up to them, or is more up to consumers whether they want to buy a Tesla or or re double car. Right, well, fair play, Yeah, sure, are you seeing longer term I guess winners and losers

in this this scheme. So any automakers whospian batting on or increasing their bad on ebs, it's going to be a winner in this in this scheme. So I think there are automakers of horrible were we're relying more on hybridization or hybrid vehicles as a complise tool like Toyota or Honda. It's kind of make it more challenge for them to meet the target because so the hybrid doesn't really account for the EV credits. So I think that's kind of a trick for or that's challenging for for

for those automans because for those incombents. Okay, can we go back to the really high level overview and talk about just kind of who's in deficit and who's in surplus after NYV credits and you know, kind of who's

winning at this game. Most Chinese automakers are having a surplus of both the EV credit as well as a C physic credit because they're they're high relatively high EV share in their total sales and on the contrares that automakers most international automakers of either European or either domicide in Europe or in the United States like Volkswaga and General Motors for etcetera. So these automakers tend to have a huge deficit of a UNI credit as well as

their CFC credits. I think for Japanese automakers, they used to have some surplus of the CFC credit because they sell hybrids, which is good to offer them to to meet the fewer consumption targets. But nowadays because hybrid doesn't really take account towards EV credits, that means that they still have a huge or they still have a deficit of the EV credits. Are you saying that the Japanese manufacturers can meet the c A f C with the hybrid but they're they're generating fury n e V s

through the scheme. They meant the target in twenty nineteen, but not because it's kind of getting it harder to meet from selling hybrid only. I see this is really interesting. It seems like we know that the auto manufacturing industry is relatively young. Is that fair to say? Yeah, And it seems that the old legacy, you know, manufacturers are the ones that are in deficit. So you have your GM, and you know your American manufacturers, they've been making ice

vehicles forever, your European ones, same thing. And then you have your Japanese manufacturers that have been doing hybrids for a long time, and they're the ones that have been in deficit. And your newer ones, your Chinese manufacturers and your Tesla's and your pure players, they're doing really great at this. Is that fair to say? Policy is probably just like the government is trying to send a signal that if you want Chinese car market, you have to focus on a lot for the vehicles, which is a

lot of the domestic governament whose are doing. If they wanted to that onto the Tinnis market, they have to be go for for life for vehicles. Yeah. I think the signal is getting pretty clear. That's it's really interesting. A couple of shows ago, we we talked about the EU e t S or the European Emissions Trading scheme, and I was kind of surprised, you know, I was like, Oh, it's actually having an impact, it's has teeth, it's actually

doing something. I guess I'm a skeptic most of the time and a lot of these things like this, but it seems like this is kind of working too that it's the signal is pretty clear, and then it's driving more EV sales in the market, and it will in the future, as you said, the target will ramp up most likely. Can we talk a little bit more about access to the market. So if I'm an American manufacturer and I want access to the market, I have to do a joint venture with the Chinese company. Is that right?

Is that still how it works? Kind I used to have the stowing venture or restrictions for any automakers want to enter the domestic market, but the restriction has been lifted. So TESTA is the first one the stoptics. I can established Holly owned foreign manufacturing plan in China. And we also see a lot of like BMW, there's either increasing their their shares in their existing joint ventures or they are kind of thinking about maybe setting up like their own,

the Holy owned one in the future. Okay, so access to the market is going to be much more about the technology selling a n V than it is about a j V in the future. Yeah, because I don't think there's will be any restriction or probably I didn't

really touch but her purpose anyway. So I think there's other ways to kind of restrict access to the market when to specify kind of which we are called will receive the credits or receive subsidies, and they may kind of discount some of the or take some of the foreigning, may vehicles aut of the equation or out of the kind of the white list. I think that's also maybe a more subtle tool to block for an automakers from

entering the Chinese market. I guess the final question from me is did this policy make it into your modeling for the upcoming electric vehicle outlook? You know, did it make it into the forecasting for the Chinese market growth? I mean totally. I mean I think particular for the short term forecast, we do factor allotting the policy impact in China, like the V credit as well as a few economy credits. These are two very important policies. They're going to drive a V adoption in China in the

short term. A short term we've been period, so we do increase because of the hard to meet. So for the n e V credits, we do see that it's relatively easy to meet for the industry as a whole, So it requires around like fift to eleven percent of the total sales to be electrics by like in around one So that target is easy to meet. But for the few consumption targets, for the few CFC targets, that's really challenging, and we we do expect that will help

drive up the EV cells. We do expect EV sells in China to be around that's a lot and soon is that going to be the biggest market? I think, yeah, yeah, it's gonna be the biggest thing. There, you have it. What are you gonna be watching for in the Chinese EV market next? Like, what's the thing that you're you're looking out for in your research? Well, I think policy is definitely something that we watch a lot in the past because it's such an important driver in EV adoption.

But as kind of the evy adoptions is now regular about five percent, we see consumers moving from the from this early adopter to be gradually and enter into the to them what a mass adoption faces, that's why we observe a lot more nuanced factors are going to drive ev adoptions such as the charging infrastructure coverage as well as maybe the resell values of the lactural vehicles, and we do observe all other kind of the more other factors are going to drive or potentially drive drive or

become a bottom act to the to the massive adoption in the in the future. So basically watching for signs at the tipping point or whether that tipping point is going to be blocked somehow. Yeah, wow, cool sounds exciting. See thanks for joining, Thanks for having me. Today's episode of Switched On was edited by Rex Warner the Great Stoke Media. Bloombergin e F is a service provided by

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