Understanding China’s new double credit system and what it means for TMC’s future

[ssun30]

On June 22, the Ministry of Industry and Information Technology (MIIT) of China announced a revision to the Administrative Measures on Passenger Car CAFC and NEV Parallel Credit (commonly known as ‘Double Credit’). This revision marks a substantial change of course in China’s long term strategy to reduce GHG emissions from automobile, and it benefits certain manufacturers at the cost of others.

TL;DR version: under “the Revision”, full hybrid vehicle (HV) will be given preferential treatment; battery electric vehicle (BEV) and plug-in hybrid vehicle (PHV) will generate considerably fewer credits based on range alone, while more advanced EV technology will be rewarded. Fuel-cell vehicle (FCV) will have very fast growth as China starts building up “the Hydrogen Economy”. Toyota (and its subsidiaries) will be the biggest beneficiary of “the Revision” due to its strong political influence in the making of this regulation.

 

[ssun30]

1) What is ‘Double Credit’?
The ‘Double Credit’ consists of two parts:
≫Corporate Average Fuel Consumption (CAFC) credit, a similar concept to CAFE. The CAFC Actual Value is calculated as:

N is number of models sold by the company. FCi is the MIIT-rated fuel consumption of the model (currently NEDC). Vi is the production/import volume of the model. Wi is a multiplier given to the model based on its energy source.

The CAFC of a company is compared to its CAFC Target Value calculated as:

N and Vi are the same as above. Ti is the target fuel consumption value of the vehicle based on its weight. Logically, heavier cars have less stringent fuel consumption targets.

The CAFC credit is the difference between CAFC Target Value and CAFC Actual Value. A positive value means the company has lower consumption than target and vice versa.

 

[ssun30]

≫New Energy Vehicle (NEV) credit. Currently NEV includes BEV, PHV, and FCV. The credit for each category under “the Revision” is defined below:

I know most of forum members don’t read Chinese, but here’s a brief summary:

- The credit per vehicle of all three types consists of two parts: a Baseline Credit and a Credit Multiplier. Without going into the details, you can think the former as the raw specs (range for BEV, power for FCV) of the NEV, while the latter is the sophistication or technology level of the NEV (battery energy density, power consumption etc.).

- Note that since each NEV also counts towards CAFC (BEV and FCV are considered vehicles with zero fuel consumption), they not only generate positive NEV credit, but also positive CAFC credit. So the benefit of building NEVs are counted twice.

 

[ssun30]

2) How do car makers use Double Credit?

The Double Credit conversion and trading mechanisms is shown below:

≫ If the company has a positive CAFC credit, it could 1) save it up for the future 2) transfer it to a ‘related company’ (at no cost). Positive CAFC credits could not be traded on open market.

≫ If the company has a negative CAFC credit, it could 1) use positive CAFC credit it earned in previous years (up to three years) 2) borrow positive CAFC or NEV credit from ‘related company’ (without needing to repay) 3) purchase positive NEV credit from open market.

≫ If the company has a positive NEV credit, it could 1) transfer it to ‘related company’ 2) sell it to open market.

≫ If the company has a negative NEV credit, it must make up by borrowing from a ‘related company’ or buy from open market. It could not use NEV or CAFC credits saved from previous years. This is changed in “the Revision” so that NEV credits could now be saved up for future use.

≫ The penalty for failing to meet the Double Credit requirements is stop of production/import of highest fuel consumption models. This is why Lexus discontinued a lot of high consumption models in 2020 (for failing in 2019 and to prevent failing again in 2020). Lexus could not borrow credits from Toyota JVs in China since they are ‘unrelated companies’. They also did not buy enough credits in 2019 due to faster-than-expected growth.

 

[ssun30]

3) What is the problem with the old ‘Double Credit’ system?

≫ It heavily favors NEV credits since they are much more flexible. A car company can build a lot of “Credit BEVs” with poor range and low tech battery to generate a lot of positive NEV credits.

≫ As a result, there is a huge over-supply of NEV credits on the open market, making it extremely cheap to make up negative NEV credits by purchasing. ‘Legacy car makers’ like VW and Toyota was in no rush to build NEVs because 1) it’s cheap to buy NEV credits 2) they both have ‘sacrificial models’ (like Prado) for the penalty so their core models are not affected.

≫ Also because of this over-supply, it’s extremely cheap to make up negative CAFC credits as well. This is an even bigger problem, as it actually resulted in fuel consumption of all cars in China to go up in 2018. Car makers have no incentive to improve the efficiency of non-NEVs by developing advanced ICE or hybrid technology. Due to the increasing market share of SUVs and adoption of WLTC, China will miss all overall CAFC targets in the next decade without changing this system.

≫ The definition of ‘related company’ is very loose so it’s very easy for companies to borrow credits. As an example, FAW-Toyota could borrow from other car companies owned by FAW. The only companies that could not easily access credits are imports.

EDIT: the credit multiplier in the old system does not have energy density requirements so I've deleted that line.

 

[ssun30]

4) What changed under “the Revision”?

≫ From 2021 onwards, all fuel consumption tests for non-NEVs will be conducted under WLTC. Range/power consumption tests for NEVs will be conducted under an even more stringent cycle called CATC (similar to EPA cycle in stress). CATC will also replace WLTC for non-NEVs in 2025.

≫ NEVs are no longer ‘double counted’ for CAFC calculation. Now manufacturers are forced to reduce fuel consumption of their ICE models.

≫ Introduced a new category called ‘low fuel consumption vehicle’. The actual definition is unique to each model and company. But an easier way to understand is most full-hybrid vehicles will fall under this category. Each ‘low fuel consumption vehicle’ counts as half a vehicle towards CAFC calculation, effectively decreasing the numerator.

≫ The baseline credit rewarded to BEVs is halved. Models with less than 150km range will only be awarded a single point and no credit for models with less than 100km range. This prevents the strategy of mass producing ‘Credit BEVs’.

≫ The credit multiplier now has more stringent power consumption requirements, rewarding BEVs with high efficiency. The battery energy density requirements are effectively loosened since there is no increase of target value compared to 2017.

≫ The maximum credit per vehicle after adjustments to baseline credit and credit multiplier is now 3.4, down from 6.0. To get full credit a car needs 500km range under CATC (equivalent to 310-mi range under EPA cycle).

≫ The baseline credit rewarded to PHV is reduced from 2.0 to 1.6.

≫ The credit multiplier for PHV is now evaluated based on energy consumption in EV mode and HV mode separately, requiring the PHV to be efficient in both scenarios.

≫ The baseline credit rewarded to FCV (a function of FC stack power) is halved. However, the maximum is increased from 5.0 to 6.0.

≫ Companies with less than 2000 vehicles sold per year now have significantly relaxed Double Credit requirements. This is to protect the ultra-luxury/exotic market.

 

[ssun30]

5) Who are the winners and losers under “the Revision”?

≫ If you read the bolded texts in the previous section, you can tell almost every modification in “the Revision” is tailored to benefit Toyota:
1) they make lots of hybrids that count towards 'low fuel consumption vehicle'.
2) they could easily beat future CAFC target values thanks to those hybrid vehicles.
3) they have the most efficient ICE. Because these are naturally aspirated, they suffer less penalty under WLTC (on average +7% compared to NEDC).
4) they make not many NEVs, but these are very efficient.
5) they are leading China’s push towards the Hydrogen Economy. The Mirai will earn the maximum 6.0 credit making it the most credit-efficient NEV on the market.

And indeed, “the Revision” had a lot of influence from Toyota. Honda is in a similar position with its recent push for more i-MMD vehicles in their fleet. These two companies are the biggest winners under “the Revision”.

≫ Tesla will also benefit a lot since it makes the ‘most advanced’ BEVs. They are now probably the only company capable of getting maximum BEV credit.

≫ The ‘Credit BEV’ strategy is still viable now that NEV credits could be saved up, but is a lot less effective. Indigenous manufacturers now have to catch up in ICE efficiency and hybrid technology research. However, since they are almost a decade behind, their only viable choice is probably licensing from Toyota or Honda.

≫ European and American manufacturers that converted to ‘all-turbo’ powertrains in China will be severely hit next year when WLTC is adopted. On average turbocharged ICEs suffer +15% penalty under WLTC. Basically, MIIT admitted the efficiency benefit of forced induction is overblown and they were mislead (by VW and GM). WLTC and CATC also make 48V mild-hybrid useless (they are useless to begin with). German manufacturers are still well-prepared since they have solid NEV credit generating models. GM will suffer a lot but they are big enough to take the blow. Ford/FCA/PSA are doomed and it won’t be long before they pull out of China completely.

>> I would like to add that a proposal that requires all new gasoline engines made after 2020 to have at least 70kW/L specific power was almost approved in 2018 but was later defeated. This was an extremely malicious proposal to limit Toyota's expansion because it would basically outlaw naturally aspirated engines. The proposal was 'sponsored' by GM which has an 'all-turbo' lineup so there is a clear intention.

 

[ssun30]

6) Summary

“The Revision” basically turned the table around completely. IMO China made mostly the right decisions:

≫ The current NEV market in China is unsustainable. The old system was too easily abused and resulted in a market bubble where not much real innovation was happening. It is also an inefficient use of natural resources as precious materials were used to produce crappy products that expire quickly with no recycling.

≫ It’s hard to say whether Hydrogen Economy is really viable in China. But we do have a huge surplus of hydrogen production from our chemical industry, along with clathrate deposits in the South China Sea opening up huge energy reserves. However, this is more of a geopolitics issue than a technical issue so I won’t go too far here.

≫ It’s good to see hybrids getting the credit they deserve after being ignored for almost a decade in China. Now it’s inevitable China will have a mostly hybrid fleet by 2025. It’s important for governments of the world to realize that the most efficient way to reduce CO2 emissions in the near term is hybridization of ICE vehicles, because it’s just a more efficient use of resources. 10 million hybrid cars using 30% less fuel emit less CO2 than 9 million ICE cars plus 1 million BEVs. It's not hard to convert ICEVs to 100% HVs. It's extremely hard and expensive to convert to 100% BEVs.

≫ The ‘death of ICE’ is overblown. Despite EU-wide ban on ICE in the 2030s, China and USA will remain the largest auto market in the world (with India becoming huge as well). ICEs will stay in these markets for a very long time, and development of more efficient ICEs should not stop while manufacturers continue improving NEV technology.

 

[ssun30]

P.S. This piece took me almost three weeks to complete. I’ve not written so much English for a while now, so forgive me if I made any mistakes.

 

[internalaudit]

So besides Toyota, VW and Tesla, who do you think will dominate the BEV market in 2025, and in 2030?

Thanks for so much wealth of information.

 

[CRSKTN]

P.S. This piece took me almost three weeks to complete. I’ve not written so much English for a while now, so forgive me if I made any mistakes.

Ignore the lack of replies, this is great, thanks for taking the time.

Do you have any sources for some of this? Or where to watch for regulatory disclosures?

 

[suxeL]

Awesome right up, and pardon the pure simpleton questions here.

"huge over-supply of NEV credits" and "indigenous manufacturers now have to catch up in ICE efficiency and hybrid technology
research. However, since they are almost a decade behind, their only viable choice is probably licensing from Toyota or Honda."

1)Companies that currently have a reserve of NEV credits they are still able to use those until further notice, they just wont get the CAFC credit?
2)Those same companies who cannot sustain any further could exit the market by selling those same NEV credits right?

 

[Will1991]

Regarding CHR/IZOA/UX BEV's triplets, will they be "mathematically" worse for Toyota? Do you think they have been developed with this new revision taken into account?

Toyota will be on a role... They're gaining traction (higher sales) with Corolla/CHR/RAV4 on Europe, they have been consistently selling quite well on USA and now this for China... It does show me I much wrong I was, from a company perspective, regarding some statements I made regarding Toyota plans on FCEV's and BEV's.

Still think they could do better, but lately I'm getting a clearer picture, even for BEV's they will maintain reliability on top of everything and trying to price it similarly to other power trains, not almost double as some brands are making...

 

[ssun30]

Ignore the lack of replies, this is great, thanks for taking the time.

Do you have any sources for some of this? Or where to watch for regulatory disclosures?

能源与交通创新中心

This is a third-party research organization. They actually have a page in English. Most of my info was taken from their recent report.

关于修改《乘用车企业平均燃料消耗量与新能源汽车积分并行管理办法》的决定_国务院部门文件_中国政府网

《关于修改〈乘用车企业平均燃料消耗量与新能源汽车积分并行管理办法〉的决定》已经2020年4月23日工业和信息化部第15次部务会议审议通过，并经财政部、商务部、海关总署、国家市场监督管理总局审议同意，现予公布，自2021年1月1日起施行。

www.gov.cn

This is the original announcement of the policy change.

1)Companies that currently have a reserve of NEV credits they are still able to use those until further notice, they just wont get the CAFC credit?
2)Those same companies who cannot sustain any further could exit the market by selling those same NEV credits right?

1) Yes. They could still use saved-up NEV credits to make up for the negative CAFC credits.
2) Yes they can.

Regarding CHR/IZOA/UX BEV's triplets, will they be "mathematically" worse for Toyota? Do you think they have been developed with this new revision taken into account?

Under the old system they each get the maximum 6 points (5.0 base line x 1.2 efficiency multiplier). In the new system they get 3.4 maximum points (2.65 base line from 401km range x 1.0 energy density multiplier x 1.0 range multiplier x 1.32 efficiency multiplier) but that's using the NEDC cycle. The actual point they get will be lower than 3.4.

Currently no BEV on the market is designed for the new system. The only one that could possibly get maximum score is TM3 LR+ but we don't know its CATC range rating.

Although CATC has similar stress to EPA (+22% vs. NEDC and +8% vs. WLTC), it is actually very different from EPA in that the V_max is low while the idling time is very long. The average vehicle speed in CATC is the lowest of all cycles (even lower than JC08) to reflect congestions in China. Therefore, ICEVs (especially turbocharged) are expected to suffer much higher penalty vs. NEDC compared to NEVs which consumes no energy when idling. The CATC range for BEVs is expected to be similar to WLTC.

 

[ssun30]

The previous plan to completely ban ICEV by 2035 is officially abandoned. The new target aims for 50% NEV/50% HV by 2035 with following technology milestones:
>>A-segment vehicles have lower than 3.3L/100km WLTC fuel consumption.
>>ICEs reach 49-50% thermal efficiency.
>>Transmission system reach 96% efficiency.
>>Traction motor reach 7kW/kg power density, PCU reach 70kW/L.
>>Battery reach 120Wh/kg specific energy, 240Wh/L energy density, and 7kW/kg power density.
>>Combination of vehicle-to-Internet connection technology, remote sensing, AI to achieve autonomous driving.

The fuel consumption target is quite conservative considering many JDM Kei-cars could achieve 3.3L/100km already. The B-segment Yaris hybrid is already lower than 3.0L/100km in WLTC. Indigenously developed hybrid systems could only achieve 5.0L/100km which is where Toyota was 20 years ago (Gen 1 Prius) so there's obviously an incentive to protect indigenous brands here.

The battery specs are very aggressive for HV. 120Wh/kg is ~2x Toyota's densest Li-ion (used on Yaris hybrid). 7kW/kg is 3.5x Toyota's most powerful Li-ion (used in Multi-stage 500h models).

 

[Will1991]

It’s really nice to see legislation pushing for innovation.
Thanks for sharing!

 

[internalaudit]

@ssun30, I recall you suggesting BMW (or was it VAG) PHEVs are not as good as Toyota's.

Was this because they can't operate in pure EV mode easily?

If you were to provide an honest assessment, which PHEVs come close to a Toyota PHEV like the RAV4 Prime or the upcoming E-Axle Lexus vehicles?

 

[ssun30]

The German P2 PHVs (used to) only operate in "blended mode" instead of pure EV mode. Their latest generation have much larger battery for EV operation. But the problem with severely degraded fuel economy persists. P2 layout also doesn't have the same smoothness as a PS system.

The closest to Toyota PHVs is Hyundai's Ioniq PHV, although I haven't actually driven one to make a fair assessment (because they are unavailable here). The Hyundai P2 system is pretty close to THS in execution.

The strongest point of THS has always been consistency in driving experience not specs i.e. when Toyota claims its hybrids are capable of something, you can count on them to actually deliver it.