By Xu Ping, Yao Lijuan (Jennifer), Zhang Dai King & Wood Mallesons
On December 6, 2018, the Ministry of Industry and Information Technology (“MIIT”) of the People’s Republic of China (“PRC”) released the Administrative Regulation on Admission of Road Motor Vehicle Manufacturer and Products (“New MIIT Rule”), which will take effect from June 1, 2019.
With the aim to address the rapid development of the auto industry, the New MIIT Rule introduced a series of changes to reform the regulatory regime for the market admission of automobile manufacturer (“Manufacturer Admission”) as well as the admission of auto vehicle products (“Product Admission”). It unifies various rules governing admission for different categories of road vehicles into one, and trims down the laundry list of matters subject to MIIT approval so as to reduce the administrative burden on the auto manufacturers. The new changes also addressed recent dynamics of auto industry practice, such as intelligent vehicles, contract manufacture of whole vehicles and upper body of trucks. Large auto group companies will also have greater flexibility in respect of intra-group sharing of production capacity and other functions. We see these as the PRC regulators’ efforts to address innovative development of the auto industry as well as the production overcapacity in the PRC auto sector.
Unified rule for Manufacturer Admission and Product Admission
Under the current PRC regulatory regime, MIIT divides road vehicles into 6 categories (i.e. passenger vehicle (PV), commercial vehicle (CV), special purpose vehicle (SPV), trailer, motorbike, and low-speed automobile) and 19 sub-categories. MIIT has issued more than 10 rules to specify admission requirements and process for each category, subcategories and their variation (e.g. school bus and new energy vehicles (NEV)) but without a set of unified rules to integrate the regulatory system of Manufacturer Admission and Product Admission.
The New MIIT Rule is the first unified umbrella rule to regulate the Manufacturer Admission and Product Admission in the auto industry. It applies to both conventional combustion engine vehicles and the NEV. MIIT will further issue two separate rules, one for Manufacturer Admission and the other one for Product Admission, the draft of which have been released for public comments.
Simplified admission procedures
At present, when an auto manufacturer applies for the Manufacturer Admission, it needs to specify the sub-categories of vehicles it plans to manufacture and shall fulfill different admission requirements for each sub-category. Subsequent addition of more sub-categories is subject to approval by MIIT pursuant to additional requirements applicable to the sub-categories.
Article 2 of the New MIIT Rule now re-grouped the 19 sub-categories of on-road vehicles into 6 categories (i.e. PV, truck, bus, SPV, motorbike and trailer). Once a company receives the Manufacturer Admission for a certain category, it can manufacture any vehicles within this category without additional approval from MIIT with respect to each sub-category within the approved category (though the Product Admission is still required for specific vehicles to be manufactured).
Also, Article 26 of the New MIIT Rule introduces the concept of vehicle “family”. Currently, MIIT grants Product Admission by vehicle model. Under the New MIIT Rule, once a Product Admission is granted to a “family” of vehicles, the auto manufacturer can manufacture vehicles with variations without additional approval by MIIT, as long as the variation models belong to the same “family”. However, the New MIIT Rule does not provide for a clear definition of “family”, which is expected to be further defined.
Legitimacy of the contract manufacture automotive vehicles
The contract manufacture model has long been a grey area in the auto industry. Though in the market there have been precedents of contract manufacture of whole vehicles in both combustion engine vehicle and NEV sector, it has not been formally recognized by the PRC regulators. In particular, under the existing regulatory regime, in a contract manufacture model, the “Public Announcement” of the automobile (i.e. the Product Admission) shall be issued to the contract manufacturer rather than the entrusting party, even if the latter owns the core technology and the distribution network. In practice many problematic issues come from such legal ambiguity. For example, is it possible for the product permit to be transferred back to the entrusting party or other contract manufacturer? Which party shall assume the product liability? Whose brand should be displayed on the vehicle? In addition, in the context of NEV, the CAFC and NEV credits will be owned by the party holding the Manufacturer Admission and the Product Admission (i.e. the contract manufacturer), while the entrusting party has limited ways to benefit from such credits.
Against the backdrop of production overcapacity in the automobile industry as well as the transition from combustion engine vehicles to the NEV age, for the first time, the legitimacy of the contract manufacture model is recognized under PRC law. Article 28 of the New MIIT Rule explicitly encourages cooperation between auto manufacturers as well as cooperation between an auto R&D company and an auto manufacturer to share the R&D and manufacturing capacity, and allows a qualified auto manufacturer to carry on contract manufacture.
More importantly, a qualified R&D company may apply for its own Manufacturer Admission and Product Admission by utilizing the production capacity of its contract manufacturer instead of investing on its own manufacturing facilities. This could also open the door for NEV companies who have NEV technology but not manufacturing capacity to earn CAFC and NEV Credits in its own name, as with its own Manufacturer Admission and Product Admission it would be possible to apply for such credit according to the CAFC and NEV Credits Rules.
However, the New MIIT Rule does not provide for detailed criteria for a “qualified” auto manufacturer or a “qualified” R&D company, nor does it address the manufacturing liability, vehicle logo issue or other issues around the contract manufacture model. These are yet to be detailed in future implementation rules.
Contract manufacture of truck
Article 27 allows chassis manufacturers of certain types of trucks (i.e. platform truck, box truck, van truck, dump truck) to commission a third party to build upper bodies for the trucks. It further clarifies that the manufacturer of chassis should apply for the Product Admission for the truck, and shall remain responsible for the product liability and the conformity of production of the trucks.
In practice, it is not uncommon for truck manufacturers to commission a third party to manufacture and install vehicle bodies. Failure to maintain conformity of production due to incompliant installation or modification of trucks (mostly for the purpose of increasing loading capacity) has always been a significant concern for the regulators. The guiding rule to hold a truck chassis manufacturer responsible for the contract manufacturing activities demonstrates the regulators’ constant efforts to reduce incompliant modification of trucks.
Potential waiver of admission conditions applicable to innovative automobile vehicles and manufacturers
Aiming to encourage technology innovation of auto manufacturers (e.g. autonomous driving and internet of vehicles), Article 24 of the New MIIT Rule allows an auto manufacturer to apply for waiver of certain conditions required for Manufacturer Admission or Product Admission that cannot be met because of use of any new technology, new method, or new materials. MIIT will assess on a case-by-case basis to grant the waiver, possibly subject to restrictions and conditions (e.g. on geographical area, term of effectiveness of admission).
Though the New MIIT Rule does not specify how the waiver will be assessed and granted, MIIT already has a mechanism in place to assess new technologies and new materials on SPV and trailers under the Administrative Regulation on Admission of Special Purpose Vehicle Manufacturer and Products issue by MIIT in 2009. This system allows MIIT to entrust an agency, which will form a team of five experts from testing institutions, certification institutions, technology R&D institutions, major entrepreneur and organizations to evaluate the new technology or new materials. MIIT will review the agency’s report and decide whether and how to modify the admission requirements on a case-by-case basis. There is possibility that MIIT will adopt a similar system in the subsequent implementation rules of the New MIIT Rule.
Simplified MIIT filing requirements for non-technical changes in auto manufacturers
Under the New MIIT Rules, in case of changes that do not affect technical capacity of an auto manufacturer, only a record-filing with MIIT post-change is required. Such changes include changes in legal representative, corporate name, registered address, trademark and shareholding structure.
However, if there is a change in the manufacturing location (which in essence involves a new manufacturing project), the auto manufacturer would still need to demonstrate its qualification for Manufacturer Admission will remain unchanged and obtain approval by MIIT.
Flexibility of MIIT administration on auto group companies.
Article 25 provides that, in an auto manufacture group, once a member company with Manufacturer Admission receives a Product Admission, it may commission manufacturing of the vehicles concerned to other group members that have the Manufacturer Admission of the same vehicle category.
Based on case-by-case assessment, MIIT may also simplify requirements for the Manufacturer Admission for applicants from the same auto manufacture group, with the expectation that certain functions (e.g. R&D, manufacturing, sales, and aftersales, etc.) to be shared within the group. Similar measures have already been incorporated in the current administrative rules for PV and CV (i.e. truck and bus)[1].
This is consistent with the regulators’ efforts in the past years to encourage consolidation in the PRC auto sector to optimize utilization of production capacity.
Exit mechanism of auto manufacturers
Article 34 of the New MIIT Rule provides for an exit mechanism of underperforming auto manufacturers. Basically, an auto manufacturer may be listed in a “special announcement” by MIIT for a certain period of time, if it “fails to maintain normal production and operation”. Neither can the auto manufacturer change its Manufacturer Admission and existing Product Admission nor can it obtain new Product Admission during the term of the “special announcement”. MIIT will re-examine whether the auto manufacturer fulfills the applicable admission requirements when the auto manufacturer applies for removal from the “special announcement”. According to Article 34, “Failure to maintain normal production and operation” means that the auto manufacturer fails to manufacture a minimum quantity of vehicles within the approved category for two consecutive years.
Compared to the existing exit mechanism for auto manufacturers, (i) the New MIIT Rule defined “failure to maintain normal production and operation” by production volume instead of sales volume, and (ii) the term of “special announcement”, which was prescribed to be two years, is now left open.
Some domestic auto manufacturers are already struggling for business and face difficulties to meet the minimum sales volume under the current exit mechanism[2]. The New MIIT Rule might offer an opportunity to the underperforming auto manufacturers to fulfill the minimum production volume for maintaining Manufacturer Admission as they are now allowed to act as contract manufacturers. This, however, is subject to further clarification in future implementation rules by MIIT.
Flexibility in testing complete vehicle and auto parts and components
Under the New MIIT Rules, an auto manufacturer is free to choose qualified institutions to carry out tests required for application of Product Admission. In addition, for an application for Manufacturer Admission, an auto manufacturer is no longer required to provide to MIIT testing reports for parts and components that have already received China Compulsory Certificate (i.e. the “3C” certification).
The New MIIT Rule is expected to have profound impact on the PRC auto sector. That being said, the New MIIT Rule is an umbrella rule with many details left for MIIT to define in future implementation rules. According to a Q&A released by MIIT on December 10, 2018, the implementation rules are expected to be published before the New MIIT Rule takes effect. King & Wood Mallesons will continue to monitor related developments and provide further updates.
[1] When a subsidiary of an auto manufacture group applies for the Manufacturer Admission, certain requirements on R&D capability, capacity for manufacturing of chassis and vehicle body or truck driving cabin, testing and inspection, and sales functions can be simplified if the applicant can share capacity of other members in the group.
[2] In 2013 and 2015, 140 manufacturers of combustion engine vehicles in total were listed in MIIT’s special announcement and, as of April 2018, 48 of them did not manage to qualify for re-admission. In 2018, another 66 combustion engine vehicle manufacturers and 27 NEV manufacturers are listed in MIIT’s special announcement.