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Record-filing management, strict access, intensive supervision --An interpretation of the Administrative Provisions on Investment in the Automobile Industry

This paper mainly focuses on the background, main content and characteristics of the New Provisions, and gives corresponding suggestions for investment in China's automobile industry.

Record-filing management, strict access, intensive supervision.pdf (272kb Download)


On 18 December 2018, the National Development and Reform Commission (hereinafter referred to as the “National Commission”) promulgated the “Administrative Provisions on Investment in the Automobile Industry” (Order No. 22 of the National Development and Reform Commission of the People’s Republic of China, hereinafter referred to as the “New Provisions”), effective as of 10 January 2019.

 

The New Provisions aim to standardize the investment behavior of China's automobile market, strictly control the production capacity of new traditional fuel vehicles, actively promote the healthy and orderly development of new energy vehicles and focus on building an innovation development system for intelligent automobile. This paper mainly focuses on the background, main content and characteristics of the New Provisions, and gives corresponding suggestions for investment in China's automobile industry.

 

1. Background: Deepening the reform of investment supervision and adapting to the development trend of industry

 

The automobile industry is concerned with the national economy and the people's livelihood. The Chinese government has always attached great importance to it. It has successively formulated and implemented a series of policies and measures to promote the development of the automobile industry and regulate industrial investment. Early in 1994, China promulgated the "Formal Policy on Development of Automotive Industry", which played a positive guiding role in building the automobile industry as a pillar industry of the national economy as soon as possible. In 2004, with the approval of the State Council, the “Policy on the Development of the Automotive Industry” was promulgated and implemented, further clarifying the management requirements for automobile investment projects. In recent years, China has issued a number of policies to promote the healthy development of the automotive industry, and the Chinese automotive industry has entered the “top-level design” policy renewal stage.

 

The 2018 Edition of the "Special Administrative Measures for Access of Foreign Investment" proposes to abolish the restrictions on the proportion of foreign capital shares in commercial vehicle manufacturing by 2020. In 2022, the restrictions on the foreign-investment ratio of passenger vehicles were eliminated, and the same foreign-funded company could establish two or more joint ventures that produced similar vehicle products in the country, completely breaking the share-based ratio restrictions. In order to further deepen the reform, the National Commission issued the New Provisions, actively adapting to the new situation of the development of the automobile industry, deepening the reform of investment management in the automobile industry, increasing the degree of simplification and decentralization of power, and strengthening the in-process and post-event supervision.

 

2. Scope of application

 

The New Provisions are applicable to all types of automobile investment projects of various market entities in China. The specific categories are as follows:

 

Complete automobile investment projects

Other investment projects

   Complete automobile investment projects are divided into fuel vehicle and pure electric vehicle investment projects according to the driving power system, including two product categories, passenger vehicles and commercial vehicles.

   Fuel vehicle investment projects refer to automotive investment projects (including alternative fuel vehicles) powered by engines, including traditional fuel vehicles, ordinary hybrid vehicles, and plug-in hybrid vehicles.

   Pure electric vehicle investment projects refer to automobile investment projects that provide driving power by electric motors, including pure electric vehicles (including extended-range electric vehicles) and fuel cell vehicles.

   Intelligent vehicle investment project is managed according to the fuel vehicle or pure electric vehicle investment project according to the driving power system.

   Including auto parts such as vehicle engines, power batteries, fuel cells, body assemblies, special vehicles, trailers, power battery recycling, auto parts remanufacturing investment project.

 

3. Main contents and highlights of the New Provisions

 

The New Provisions exceed market expectations, mainly with the following highlights:

 

Highlight 1: Change the approval procedure to record- filing- procedure

 

A major reform of the New Provisions is that all investment projects for complete vehicles and auto parts are changed from the approval system to the record-filing system, and the record-filing authority is delegated to the local Commission. The complete vehicle projects shall go through record-filing formalities with the Provincial Commission. Prior to the implementation of the New Provisions, there are three types of projects subject to the approval management, which include  the newly-built Sino-foreign joint-venture car manufacturer projects subject to the approval of the State Council; the newly-built purely electric passenger vehicle manufacturer projects (including the existing vehicle manufacturer switch to purely electric passenger car) subject to the approval of the competent investment department under the State Council; other projects subject to the approval of provincial governments under the Policy on the Development of the Automotive Industry.。with the change to the record-filing system from the approval management, the New Provisions demonstrate a major breakthrough in promoting the reform in the automotive industry.

 

Highlight 2: Encourage merger and acquisition

 

The New Provisions encourage enterprises to promote merger and acquisition and strategic cooperation through equity investment and capacity cooperation, jointly develop products, jointly organize production and enhance industrial concentration. It is noteworthy that the New Regulations on Investment Management support the reform of mixed ownership between state-owned and private automobile enterprises, so as to create industry leaders and compete with global counterparts. China is clearly interested in winning the competition and becoming a leader in the development of self-driving vehicles and new energy vehicles.

 

In view of the technical needs and capital intensiveness of the automobile industry, China must undoubtedly pay attention to the scale effect in order to build the world's "leader enterprise". This move also continues China's current policy. Since 2004, China's automobile industry policy has encouraged domestic automobile companies to merge and acquire to increase industrial concentration. The Chinese government continues to encourage Chinese automobile manufacturers to merge and acquire, with a view to forming industry giants that can compete with international competitors.

 

Highlight 3: Restrict fuel vehicles

 

According to the New Provisions, the production capacity of fuel automobile enterprises shall be under control. The specific contents are as follows:

 

Strict restrictions

Specific contents

Explicit prohibition

(Exclude investment projects that do not sell products in China)

   New independent fuel vehicle enterprise

   Fuel vehicle production capacity building of existing complete automobile manufacturers across passenger car and commercial vehicle categories;

   Relocation of existing fuel vehicle enterprises as a whole to other provinces (exclude projects that are included in the national-level regional development plan or without the change of the enterprise's shareholding structure);

   Investment on fuel vehicle companies that are specifically publicized by the industry management department (exclude the original shareholder investment of the enterprise or the investment project that converts the enterprise into a non-independent legal person.)

Enhance requirements

If an existing fuel vehicle manufacturer intends to expand production capacity, it shall meet the following six conditions:

   The utilization rate of automobile production capacity in two years is higher than the average level of the same product category industry.

   The proportion of new energy vehicle production in the last two years is higher than the industry average (exclude plug-in hybrid vehicle production capacity building investment projects of existing auto companies);

   The proportion of R&D expenses in the previous two years to the main business income is higher than 3%;

   Products with international competitiveness

   In the past two years, the utilization ratio of automobile production capacity in the provinces where the project is located is higher than the average level of the same product category industries, and there are no fuel automobile enterprises of the same product category that are specially publicized by the industry management departments. But including the following items:

1.     The existing automobile enterprises build investment projects for plug-in hybrid electric vehicle production capacity;

2.     On the premise of not increasing the total production capacity of the automobile enterprise group, the independent automobile enterprise affiliated to the group constructs the fuel automobile expansion project by allocating the internal production capacity;

3.     On the premise of not adding the total production capacity of the province, independent automobile enterprises build fuel automobile expansion projects through mergers and acquisitions;

   The average fuel consumption of enterprises should meet the requirements of national standards and relevant regulations. The construction scale of newly built expansion investment projects in different places should not be less than 150,000 vehicles and the total output of enterprises in the previous year should not be less than 300,000 vehicles.

Note: Existing automobile enterprises may not be bound by the above regulations if they merge other independent automobile enterprises of the same product category and turn them into independent automobile enterprises without increasing their original production capacity.

 

The signal conveyed by the New Provisions is very clear. Not only are policies that encourage new energy vehicles, but fuel vehicles are also restricted. From this point of view, fuel car manufacturers will have to gradually adjust production, reducing the production of fuel vehicles as the proportion of new energy vehicles rises.

 

Highlight 4: Encourage investment in pure electric vehicle projects with relevant standards enhance

 

According to the New Provisions, pure electric vehicles are still encouraged by the Chinese government, but the threshold for investing in pure electric vehicle projects has also increased. Specific requirements include:

 

ŸProject area

 

The provinces where new independent pure electric vehicle enterprise investment projects are located shall meet the following conditions:

 

1)     The utilization ratio of automobile production capacity in the last two years is higher than the average level of the same product category industries;

 

2)     The existing investment projects of newly-built independent pure electric vehicle enterprises of the same product category have been completed and the annual output has reached the construction scale.

 

ŸNew electric vehicle manufacturing enterprise

 

The enterprise legal person of the newly-built independent pure electric vehicle enterprise investment project shall meet the following conditions:

 

1)     All shareholders shall not withdraw their equity until the project is completed and the output reaches the construction scale.

 

2)     Shareholders have the intellectual property rights and production capacity of key components such as vehicle control systems, drive motors, and vehicle power batteries, and have strong control over key components;

 

3)     The existing investment projects of the newly-built pure electric vehicle enterprises of the shareholders have been completed, and the output has reached the construction scale, and there are no illegal construction projects;

 

4)     The main shareholders' equity is more than one-third, and their own capital and financing capacity can meet the needs of project construction and operation, and meet other conditions (including the specific provisions of intellectual property rights and vehicle sales volume of overseas companies);

 

5)     Product R&D institutions have been established and comply with other specific provisions;

 

6)     Effective after-sales service guarantee for products.

 

In addition to the above regulations, there are some requirements for production projects. For example, in terms of construction scale, there shall be no less than 100,000 pure electric passenger cars and no less than 5,000 pure electric commercial vehicles. These requirements can be challenging for enterprises.

 

Highlight 5: Strengthen post-event supervision of investment projects

 

According to the New Provisions, on the basis of project record-filing management, the Commissions at all levels will establish a coordinated supervision mechanism with the planning, land, environmental protection, safety production and industry management departments, and revoke the verified violations with joint punishment. At the same time, the Commissions will establish a sound supervisory responsibility system and accountability system, give interviews and notifications to units that fail to perform their supervisory duties or fail to perform their supervisory functions according to laws, and order them to rectify within a time limit; if they fail to rectify within the time limit, they shall suspend filing before the rectification is put in place. Leaders and persons directly responsible shall be held accountable and handled according to laws and regulations.

 

IV. The New Provisions and new investment opportunities

 

In summary, the New Provisions are very prominent, that is, to guide enterprises to adapt to the general trend of industrial development, to optimize the layout of production capacity, break through core technology, carry out strategic cooperation, improve the efficiency of factor allocation, and promote industrial transformation and upgrading. At the same time, the New Provisions strictly control the production capacity of new traditional fuel vehicles, further improve the project conditions of new pure electric vehicle enterprises, and actively guide the healthy and orderly development of new energy vehicles. In 2019, the Chinese automobile industry will usher in new investment opportunities in new projects of new energy vehicle, optimization and upgrading of new energy vehicles built projects, and optimization and upgrading of traditional fuel vehicle projects.

 

For more information please contact:

 

Dr. Zhong Lin

Managing partner

Chen & Co. Law Firm

Phone:+86 21 2228 8358

Email:zlin@chenandco.com

 

Xing Li

Partner

Chen & Co. Law Firm

Phone:+86 21 2228 8355

Email:lixing@chenandco.com

 

 



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