KGP

The Future of Diesel – Cleaning up China, the Global Impact

Monday, April 09, 2018

After a brief break over Easter KGP’s briefing series continues, with a look at China’s State IV NRMM legislation. James Dorling, KGP Head of NRMM Services, and input from Reggie Zhan, illustrate some of the differences between global legislation and China’s leapfrogging

  • What are the technology options?

  • What does it mean for Western and Chinese OEMs moving beyond 2020?

  • Where is investment needed?

  • Is your market share under attack?

Background

China’s Non-Road Mobile Machinery market has fluctuated widely over the past 10 years, with central government policy changes, infrastructure investment, economic growth and refocussing of the economy all playing a role.

2017 saw a rebound in volumes, mainly in the construction segment, even if the total market was still well of its artificial, incentive driven peak of 2010.

Table1: Market Demand China 2010-17

China (000’s) 2010 2016 2017 YoY 16/17
CE 459 139 251 +81%
AG 496 415 354 -15%

(Off Highway Research)

With the continued invest in construction and agricultural segments, combined with China’s air quality problems, NRMM is tightening, as it has done in most other major markets.

State III

Historically China has followed the European Union legislative outline for Non-Road Mobile Machinery (NRMM) emissions limits. In practice, the current China State III is equivalent to EU Stage IIIA/EPA Tier 3. In most cases the adoption of State III required a move to electronic engine control and common rail fuel injection.

Future Legislation

It was widely anticipated that for their next round of emissions legislation (China State IV); set to be introduced by 2019/2020; the Chinese would introduce limits that regulated to the same standard as EU Stage IIIB and EU Stage IV dependant on power category. However, whilst China State IV follows the framework of EU Stage IIIB, there are several additions and amendments that will take it beyond EU Stage IV, and closer to Stage V in some respects.

The current (near final) draft legislation requires all equipment of 37kW or above to have a Diesel Particulate Filter (DPF) as standard, most will have Selective Catalytic Reduction (SCR) as well, for machinery above 56kW.

We expect however China will use a tiered approach for China State IV, as it has done with on-road legislation. China will regulate large cities (Beijing State IV – passed 2017) before moving to more urban areas and then extra-urban areas. Fuel quality is a major factor looking forwards, high levels of sulphur in many rural provinces in China will make the sustainable, and efficient running of DPF and SCR systems virtually impossible. Because of this we hold some reservations as to the actual timing stated by the Chinese government of 2019 for type-approval. We suspect they’ll postpone in some aspects.

Divergence from Euro Stage IIIB/IV

Alongside the regulated emission levels involved in China State IV, the legislation is also expected to introduce GPS tracking of all machine types above a certain power category (yet to be announced). This will alleviate some crime issues that have been negatively impacting rural regions of China for several years. However, the second life implications of this GPS tracking are yet to be fully considered.

More stringent OBD required?

China are currently weighing the options to consider whether having on-board monitoring for particulate matter and noxious emissions is viable for China State IV. They have expressed their intention to include this in the first draft of legislation, but many in the industry hold reservations as to whether it is achievable or enforceable. This proposed section of the legislation is expected to allow for a NOx and PM sensor on the exhaust system. The impact of these sensors flagging a fault is yet to be announced. Will the engine ECU force the machinery into a version of limp-home mode? Will the government be monitoring sensor output as well as GPS – and fine accordingly? Is the data the owned by the operator or the OEM? How easy will it be to by-pass the sensors? These are just some questions that OEMs and supplier will be keen to answer in the coming months as more details emerge.

Table 2: EU IIIA-V vs China III-VI

EU Stage IIIA EU Stage IIIB EU Stage IV EU Stage V
Majority electronic common rail fuel injection and Engine Control

Introduced by Power category 2006-2008. –

<56kW – EGR, DOC, DPF or EGR, DOC only

>56kW – SCR or SCR and DOC or EGR, DOC and  DPF

<56kW – SCR not required

>56kW – SCR required for all engines. Other solutions include EGR, DOC or DOC only. DPF also used widely in North America, and some in Europe.

DPF Required, Particulate Number added to emissions limits.
China State III China State IV China State V China State VI
Many mechanical <56kW, mix mechanical and electronic above 56kW Adds DPF requirement Optional limits for State IV likely to approximate to State V Not yet considered
  • EGR – Exhaust Gas Recirculation
  • DOC – Diesel Oxidisation Catalyst
  • DPF – Diesel Particulate Filter
  • SCR – Selective Catalytic Reduction

The reasons for this deviation from normal legislative practice of following the European guidelines has taken some by surprise, and there are many possible reasons as to why China has taken this path. Some people in the industry have suggested it is a way of ensuring Chinese companies have a competitive edge over their Western competitors. However, Chinese engine OEMs do not have the capability or the resource to develop aftertreatment systems such as those required by proposed State IV regulation. In addition to the technical aspects of SCR and DPF systems, the poor fuel quality in China adds an additional level of R&D expense. It is more likely that instead of offering a competitive advantage to domestic OEMs China State IV could help develop relationships between Chinese and Western OEMs.

Western OEMs WOFE vs JVs

In China, historically a foreign OEM was only allowed to manufacture in China if their facilities were part of a Joint Venture with a Chinese company.  This is now looser.  There are still many examples of this, Cummins has several JVs with Chinese vehicle OEMs (Foton, DongFeng for example), CNHi (SFH).  Doosan (Foton Lovol),  Deutz (FAW).  But Western OEMs are going it alone i.e Volvo/SDLG, CAT/SEM, AGCO, Deere with their new wholly owned plants).  (For more information regarding Chinese JVs  and their impact on the global Non-Road Machinery supply chain, please visit our website www.kgpauto.com, or contact me at jamesdorling@kgpauto.com)

However, when considering the long-term outlook for the global NRMM market, the legislation begins to make a little more competitive sense. KGP has been talking to several Chinese OEMs, they have stated that one of the key challenges for them moving forwards is expansion outside of China and lesser-regulated regions. They want to compete on a global basis, with the likes of Caterpillar, CNHi, John Deere, JCB, Komatsu, Doosan, Hitachi, Volvo CE, to name a few. There are very few wholly owned Chinese OEMs that are successfully trading in Western highly regulated markets, apart from some ventures into North America by Sany, there isn’t as much as the Chinese government would like from their OEMs within the global marketplace.

The problem is that historically, when China has passed legislation, OEMs have invested huge amounts of their R&D budgets and vast amounts of resource into meeting current Chinese legislation, which is effectively the previous round of legislation for Western OEMs. With China State IV effectively by-passing the current European legislation and bringing it in line with the next set of emissions limits (Stage V), by 2020, Chinese and European engines should require the same aftertreatment. Will this allow Chinese OEMs to compete more effectively in the global marketplace?

The impact of China State IV on the global NRMM market could be significant! The Chinese does not have the domestic ability to develop engines compliant with their proposed plans, not yet anyway. This will mean massive opportunity for companies throughout the supply chain of highly regulated markets.  We expect joint ventures and technical partnerships to continue to flourish in China over the next 3-5 years.

Timing

Then there is the question of timing! Does China have the ability, commitment and resource to enforce this legislation by 2019/2020, in line with EU Stage V? The answer to this question is unknown, we at KGP hold reservations as to whether China will be able to meet the various requirements of what they’re suggesting. The impact on Western companies would not change dramatically either way, as the Chinese will still need their technological expertise regardless of timing. However, it would certainly boost the Chinese profile in the international market if China were able to pass such advanced legislation within a reasonable period after Stage V is introduced!

Download the PDF version of this briefing Briefing Paper No 10 NRMM The Future of Diesel China State IV the Global Impact 09 04 18.

 

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