China is the world’s largest automotive market and the world’s largest automotive manufacturer. For a foreign automotive supplier — a company that makes components, systems, or materials for vehicle manufacturers — the China market is both the biggest opportunity and the most demanding regulatory environment the company will encounter. The regulatory landscape affects every aspect of the business: the product certification, the manufacturing standards, the environmental compliance, the intellectual property protection, and the customer relationship.
Here’s what a foreign automotive supplier needs to know about the regulatory landscape and how to navigate it.
The Market Structure
The Chinese automotive market is organized around the vehicle manufacturers — the OEMs — which include the joint ventures between foreign automakers and Chinese partners — SAIC-Volkswagen, FAW-Toyota, Beijing-Hyundai — the domestic Chinese automakers — BYD, Geely, Great Wall, Changan — and the new energy vehicle startups — NIO, Xpeng, Li Auto.
The OEMs are the customers for the automotive suppliers, and the supplier relationship is governed by the OEM’s purchasing terms, the OEM’s quality requirements, and the OEM’s delivery requirements. A supplier that wants to sell to a Chinese OEM must pass the OEM’s supplier qualification process, which includes a technical review, a quality system audit, a production capacity assessment, and a financial review.
The supplier qualification process for a Chinese OEM is similar to the process for a global OEM, but the Chinese OEMs have specific requirements that reflect the Chinese market and the Chinese regulatory environment. A supplier that’s qualified by Volkswagen in Germany is not automatically qualified by SAIC-Volkswagen in China — the China joint venture has its own qualification process, and the supplier must pass it.
The new energy vehicle segment — electric vehicles, plug-in hybrids, fuel cell vehicles — is the fastest-growing segment of the Chinese automotive market, and it’s the segment that offers the most opportunity for foreign suppliers with advanced technology. A foreign supplier that has electric vehicle technology — battery materials, power electronics, electric motors, thermal management, lightweight materials — should target the NEV segment as the primary entry point into the China market.
The Product Certification
Automotive components sold in China must comply with the Chinese product certification requirements. The China Compulsory Certification — the CCC — applies to certain automotive components — tires, safety glass, seat belts, lighting equipment, and other components on the CCC catalog. A component that’s on the CCC catalog must be certified by a Chinese-designated certification body before it can be sold in China, and the certification must be maintained through periodic factory inspections.
The CCC certification requires the supplier to submit the product for testing at a Chinese-designated testing laboratory, to undergo a factory inspection by the certification body, and to obtain the CCC certificate. The testing demonstrates that the product meets the applicable Chinese standards — the GB standards — and the factory inspection demonstrates that the manufacturing process is capable of consistently producing products that meet the standards.
The CCC certification is product-specific — a supplier that sells five different components that are on the CCC catalog must obtain five separate CCC certificates. The certification is also factory-specific — a supplier that manufactures the same component at two different factories must obtain two separate certificates. The certification cost and the certification timeline — typically six to twelve months per certificate — should be factored into the market entry plan.
Components that are not on the CCC catalog may be subject to voluntary certification — the CQC voluntary certification — which is not legally required but which may be required by the OEM as a condition of supplier qualification. The voluntary certification demonstrates that the component meets the applicable standards, and it’s a competitive advantage in the supplier qualification process.
The Quality Management System
Automotive suppliers in China are expected to maintain a quality management system that’s certified to IATF 16949 — the international automotive quality management system standard. The IATF 16949 certification is the global standard for automotive suppliers, and the Chinese OEMs require it as a condition of supplier qualification.
The IATF 16949 certification requires the supplier to establish and maintain a quality management system that covers the product design, the manufacturing process, the supply chain management, the product testing, and the customer complaint handling. The certification is audited by an accredited certification body, and the audit includes an on-site inspection of the supplier’s facility and a review of the supplier’s quality records.
A foreign supplier that’s already IATF 16949 certified in its home country must extend the certification to its China facility — the China facility must be included in the certification scope, and the certification body must audit the China facility. The extension of the certification to China is a precondition for the supplier qualification with the Chinese OEMs.
The Environmental Compliance
Automotive suppliers in China are subject to environmental regulations that are among the most stringent in the world. The environmental regulations cover the manufacturing process — the air emissions, the wastewater discharge, the hazardous waste disposal — and the product — the restriction of hazardous substances, the end-of-life vehicle recycling requirements, and the new energy vehicle battery recycling requirements.
The manufacturing environmental compliance requires the supplier to obtain the environmental permits — the pollutant discharge permit, the hazardous waste disposal permit — and to comply with the discharge limits and the monitoring and reporting requirements. The environmental permits are site-specific — a supplier that operates two factories must obtain two sets of permits — and the permits are renewed periodically.
The product environmental compliance requires the supplier to ensure that the components don’t contain restricted substances above the permitted limits — the China RoHS requirements — and that the components can be recycled at the end of the vehicle’s life. The supplier must provide the OEM with the material composition data — the International Material Data System, IMDS — and the recycling information that the OEM needs to comply with the end-of-life vehicle regulations.
The Intellectual Property Protection
A foreign automotive supplier that brings proprietary technology to China — a unique manufacturing process, a proprietary material formulation, a novel component design — must protect the technology through the Chinese IP system. The protection strategy includes patent registration — filing Chinese patent applications for the patentable aspects of the technology — trademark registration — registering the supplier’s brand in China — and trade secret protection — the contractual and the practical measures to protect the proprietary information.
The IP protection in the automotive supply chain is complicated by the customer relationship. The OEM requires the supplier to disclose the technical details of the component as part of the supplier qualification process and as part of the production part approval process. The disclosure is necessary for the OEM to evaluate the component and to integrate it into the vehicle, but the disclosure creates a risk that the OEM — or a competitor who obtains the information through the OEM — will use the information to develop a competing component.
The supplier should manage the disclosure through a phased approach — disclose the minimum information necessary at each stage of the relationship, and disclose the proprietary details only after the OEM has committed to the supplier and has signed a non-disclosure agreement that protects the information. The supplier should also maintain records of what information was disclosed to which OEM and when, so that the supplier can trace the source of any unauthorized use.
