Chinese EV manufacturers will on the other hand boom...as will Tesla's China operations...as will China's booming battery manufacturers.
-I can see Carlucci knifing the pennies out his piggy bank slot and counting excitedly already...
Legacy auto faces disaster in China with unsellable cars as pollution crunch looms
MARCH 30 DANIEL BLEAKLEY
We are currently witnessing a major disruption in the world’s largest car market, that will have massive implications for the biggest carmakers as they seek to manage the switch from fossil fuel vehicles to electric.
Potentially millions of petrol and diesel cars may about to become unsellable in China as the country implements new vehicle emissions standards, and as EV demand booms. With China already experiencing a car inventory crisis, the next three months could spell disaster for some legacy auto companies.
Auto News recently reported that the China Auto Dealers Chamber of Commerce (CADCC) posted an article on March 23 on WeChat saying that dealers could be left with hundreds of thousands of non-compliant unsellable petrol and diesel vehicles once China’s new emission standard is implemented in July.
According to its website, the CADCC had over 8000 auto dealer members as of 2019.
More details on the CADCC March 23 article – now deleted – were given on the Shanghai Metals Market SSM news site on Monday in post titled Industry Association Appeals for Delayed Enforcement of Imminent China VI B Emission Standards to Tackle Huge Inventory Pressure.
The Chinese metals industry publication is justifiably concerned as the inventory crisis will have massive flow on effects for auto industry metals suppliers.
The SSM article says the deleted document stated that the CADCC had “received reports from many auto dealer groups that the upcoming full implementation of the China VI B emission standards will bring enormous pressure to the survival of auto dealers.”
SSM reports that in the document the CADCC appealed for three measures on behalf of the majority of auto dealers.
Postpone the implementation of the China VI B emission standards to January 1, 2024;
Car makers should stop producing new cars that do not meet the China VI B emission standards;
Auto OEMs should allocate existing new cars that do not meet the China VI B emission standards to dealers as soon as possible, and launch sales promotions.
Industry has had plenty of warning of new emission standards
China released its rule for stage 6 light-duty vehicle emissions limits in December 2016, so manufacturers have had 7 years to bring their vehicles into line.
The “China 6 standard” is being implemented in two phases. The first phase, 6a took effect on July 1 2020 and the 6b standard will be implemented on July 1 2023.
The China 6 standard applies to light-duty vehicles up to 3,500 kg powered primarily by gasoline or diesel.
The International Council on Clean Transport (ICCT) says the China 6 standard combines best practices from both European and U.S. regulatory requirements in addition to creating its own.
The ICCT says “China 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.”
While the inventory crises is hitting Chinese dealerships hard, the biggest impacts will be felt by legacy auto companies who have failed to shift to electric vehicles.
Inventory crunch will hit foreign legacy auto makers hard
The glut of hundreds of thousands of high polluting vehicles sitting in Chinese dealerships comes as Chinese consumers shift rapidly to EVs. Over 25% of all new cars sold in China in 2022 were electric.
According to the China Association of Automobile Manufacturers (CAAM), 27 million vehicles were sold in China in 2022, with almost 7 million being EVs. China accounted for around two-thirds of global sales of EVs last year.
Although the inventory crisis is playing out in China, counterintuitively Chinese car manufacturers may actually benefit while foreign legacy auto companies sales plummet in the world’s largest car market.
This is because electric vehicles make up a much higher proportion of the total production of Chinese automakers like BYD, while foreign companies like Toyota and Volkswagen are manufacturing and selling mostly petrol and diesel cars in China.
So it will be predominantly Japanese, German and US carmakers that are hit the hardest by the inventory crisis while Chinese EV companies as well as Tesla will continue to see demand grow.
This trend is already playing out in 2023.
In the first two months of the year, sales of Japanese brands in China have dropped by 40% year-on-year. German and Korean brands have dropped by around 20% while US brands have dropped 12.5%.
Meanwhile, Chinese brands have held steady with losses of ICE sales being offset with increased EV sales domestically.
And this trend is accelerating rapidly. EV output in China totalled 7 million units in 2022, an increase of 97% on 2021, while sales of electric vehicles rose by 93%.
The imminent implementation of new pollution standard will compound this trend even further.
Meanwhile, the two largest automakers in the world Volkswagen and Toyota aren’t even planning on launching mass produced EV models until 2027, which is still 4 years away.
Could the Chinese inventory crisis lead to a broader collapse?
The German and Japanese car giants are also two of the most indebted companies in the world, both with almost $US200 billion of debt and highly questionable valuations on their internal combustion factory assets.
An inventory glut of unsellable vehicles in the world’s largest car market is the last thing these companies need and with ICE vehicles sales plummeting, it’s difficult to see how they will survive.
In Japan, automotive manufacturers and the industries that support them are estimated to employ over 5 million workers. Around 8% of Japan’s workforce.
Because of Japan’s disastrous national hydrogen strategy (largely promoted by Toyota), the nation produces a trivial number of electric vehicles and as a result its addressable market in China is vanishing before its eyes.
With Chinese automakers largely shielded from the impacts of the new pollution standards because of their early move to EVs, it’s unlikely that the Chinese government will delay its implementation.
Its looking like the next few months will be crunch time for the legacy automotive industry.
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