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China's new emission rules take scalpel to bloated auto industry
China debuts one of the world's strictest standards for automobile emissions on Monday to reduce the country's notorious air pollution, a move some say also is designed to curb the runaway expansion of its automaking sector.

Over 100 companies make cars in China, many of which are small to midsize players with little cash or technological prowess. The Chinese government wants to pare the excess capacity and create an industry characterized less by volume and more by quality, asia.nikkei.com wrote.

The new National VI standards will be introduced initially in 15 cities and provinces that face serious pollution — including Hebei, Shanxi and Shanghai provinces — and together account for half of new vehicles sold in the country.

China originally planned the upgrade for July 2020. But President Xi Jinping pushed to accelerate the timeline in areas with severe pollution, under the "battle for blue skies" plan issued last year.

The new Chinese standards aim to reduce emissions of nitrogen oxides and other pollutants 40 percent to 50 percent by 2023. They are tougher than the Euro VI standard in effect in Europe.

But Beijing's standards also are expected to help weed out some of China's weaker automakers.

China intends to ease restrictions on foreign investment in stages by 2022, which will give Japanese, US and European automakers greater freedom in their operations there. The country’s government wants to consolidate its domestic players into larger, more competitive entities before then.

National VI is expected to favor the big automakers with plenty of cash and know-how.

"The new environmental standards would put companies' development capabilities and funding to the test, and will accelerate the shakeout of small and midsize companies," said an analyst for the auto industry.

The production, sale and registration of cars that meet only old standards will be banned under National VI, forcing automakers to develop more sophisticated engines and other parts. The new rules could increase production costs by 1,200 yuan ($175) per vehicle, according to some estimates.

For context, leading Chinese automaker Zhejiang Geely Holding Group averaged about $1,200 in net profit per unit in 2018. Passing on the extra cost to customers would hurt smaller players that rely on cheaper prices to sell their cars.

Despite the need to roll out National VI-compliant autos starting Monday, over 65 percent of new Chinese-brand vehicles made in April met only the old standards. Landwind and Leopaard are just a few brands that are not ready to produce National VI cars, sources say.

Smaller players have been pushed out every time China introduced new environmental regulations. Chongqing-based Lifan Motors was acquired by electric vehicle startup CHJ Automotive. Dalian Huanghai Automobile and Westtiger Automobile Industry also have been sold to EV startups.

New-vehicle sales in China have fallen on the year for 11 straight months, dropping 16 percent in May. In addition to a national economic slowdown and concerns over the US trade war, Chinese consumers appear to be delaying new purchases until National VI takes effect.

"Quite a few customers were waiting for National VI," a salesperson at a General Motors dealership in Chongqing said in late June.

"We will go on the offensive starting in July."

Rumors that the government eventually will ban National V vehicles from roads have squeezed sales further.

"I didn't want to buy a [National V auto] because you get over 10,000 yuan less when you resell it," said Guo Kunming, who is looking into purchasing a new car in Chongqing.

Beijing also could be trying to spur auto sales by enacting the new environmental standards a year ahead of schedule. But with the trade war depressing consumer sentiment, it is unclear whether such a decision will pay off.

 

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