Evolution of the automotive sector – regulation & compliance
May 2022 | TALKINGPOINT | SECTOR ANALYSIS
Financier Worldwide Magazine
May 2022 Issue
FW discusses the evolution of regulation and compliance in the automotive sector with Lawrence Freeman, Roman Brtka, Sven-Michael Werner and Serena Du at Bird & Bird.
FW: Could you outline the new European vehicle CO2 emissions performance standards? What opportunities do they entail for electric vehicle manufacturers?
Freeman: There is currently an indicative average EU fleet-wide emissions target of 95g CO2/km for new passenger cars and 147g CO2/km for new light commercial vehicles. In Europe, vehicle manufacturers may enter partnerships with other vehicle manufacturers to consolidate their fleets for emissions compliance purposes through pooling arrangements. For example, Fiat Chrysler Automobiles agreed to pay Tesla, Inc. to pool their fleets in Europe, thereby enabling Fiat Chrysler Automobiles to avoid emissions compliance fines. The opportunities for electric vehicle manufacturers to sell CO2 emissions credits to a pool could continue as these emissions targets become more stringent. Furthermore, there is a general shift from the use of diesel to petrol in vehicles. As petrol emits more CO2 than diesel, this reduces the ease with which manufacturers of internal combustion engine vehicles can meet their emissions targets. Vehicle manufacturers also prefer to enter pooling arrangements as opposed to paying fines to the European Commission for reputational reasons.
“The Auto Data Regulation covers a wide range of players processing vehicle-related data and will have a far-reaching impact on the industry.”
FW: What recent changes have been made to the EU vehicle type-approval system?
Freeman: The EU type-approval framework has been overhauled by Regulation (EU) 2018/858 which came into force on 1 September 2020. It is designed to increase the quality level and independence of vehicle type-approval and testing, increase checks of cars that are already on the EU market and strengthen the overall system with European oversight. This new EU vehicle type-approval regulation maintains special type-approval procedures for new technologies or new concepts. This is an EU exemption granted on the basis of a national ad-hoc safety assessment which can be used, for example, for new autonomous vehicle technology. The European Commission recently published guidelines, together with EU member states, to harmonise national ad-hoc safety assessments for the exemption procedure for EU approval of automated vehicles.
Brtka: In Germany, car manufacturers should be aware of the new Autonomous Vehicle Approval and Operation Ordinance which is currently going through the legislative procedure. This ordinance will list further requirements for the national type of approval of vehicles with autonomous driving functions, such as procedural regulations regarding the issuing of national operating permits for autonomous vehicles, technical requirements for autonomous driving functions, operating areas and so on. The ordinance is expected to impose extensive technical requirements for autonomous driving functions, for example on the interaction with other road users and reactions to environmental conditions.
“The increase in the price of raw materials for auto parts is increasing tensions between upstream and downstream operators in the industry supply chain.”
FW: In Europe, what do you consider to be the key data security challenges for manufacturers of connected vehicles?
Freeman: Employees and contractors of connected vehicle manufacturers tend to be the source of data security breaches, rather than cyber attacks. In other words, it is usually an inside job. Therefore, connected vehicle manufacturers should have strong training and monitoring programmes for employees and contractors. Furthermore, the European Directive on Security of Network and Information Systems puts an obligation on operators of intelligent transport systems, which includes connected vehicle manufacturers, to implement security measures and report data security breaches to national regulatory authorities. They also have a responsibility to patch software vulnerabilities through software updates after the vehicle has been sold. For example, Tesla has a good reputation for vehicle over-the-air software updates, which not only improve functionalities in the vehicle, but also patch software vulnerabilities.
Brtka: On 28 July 2021, the Act on Autonomous Driving came into force in Germany. The key element of the Act is to establish a regulatory framework for autonomous motor vehicles – SAE level 4, High Driving Automation – to be allowed to operate in regular public road transport in determined operational areas in Germany. In addition, the Act also lays down new provisions on data processing regarding the operation of motor vehicles with autonomous driving functions. To be compliant with the relevant provisions of this Act, manufacturers of autonomous driving vehicles now must show that the electronic architecture of the vehicle is protected against cyber attack and manipulation. However, this law is only intended as a transitional solution until harmonised regulations are in place at the international level. In the future, manufacturers of connected vehicles will face even more challenges around cyber security, as they also might fall under the new German IT Security Act 2.0. This will be relevant for companies that are “in the special economic interest of the Federal Republic of Germany”. The purpose of the new IT Security Act 2.0 is to increase cyber and information security against the backdrop of increasingly frequent and complex cyber attacks and the continued digitalisation of everyday life. The new IT Security Act 2.0 does not define which companies are in the special economic interest of the Federal Republic of Germany, which means that the Federal Ministry of the Interior, Building and Community may, at its sole discretion, define the relevant criteria. Consequently, automotive manufacturers as well as suppliers, and thus important parts of German industry, might face additional requirements and restrictions. This has been heavily criticised by the German Association of the Automotive Industry (VDA).
FW: Could you explain the European rules around consumer information when marketing new passenger cars? How do these rules apply to electric cars?
Freeman: In Europe, it is necessary for manufacturers to declare CO2 emissions and fuel consumption figures within all promotional material for electric cars, albeit that the results will be zero for CO2 emissions and not applicable for fuel consumption data. When quoting the pure electric range, it is advisable for manufacturers to include a disclaimer to the effect that the figures are intended for comparability purposes and that the pure electric range which can be achieved under real life driving conditions will depend on several factors, including accessories fitted after registration, variations in driving styles, weather conditions and vehicle load.
Brtka: One of the challenges all car manufacturers are facing now in Germany relates to the replacement of the New European Driving Cycle (NEDC) lab test with the new Worldwide Harmonised Light Vehicle Test Procedure (WLTP) test. The latter is supposed to give more realistic results on the fuel consumption and CO2 emissions of new passenger cars. Since September 2017, the old NEDC lab test has gradually been replaced by the new WLTP test, however the German legislator has not yet implemented this in the German Ordinance on Consumer Information on Fuel Consumption, CO2 Emissions and Electricity Consumption of New Passenger Cars (Pkw-EnVKV). Hence, there is some legal uncertainty over which values – WLTP, NEDC or both – are to be provided in promotional material. According to the Tyre Labelling Regulation, end users must be informed about fuel efficiency, wet grip and external rolling noise before the sale by using a standard tyre label. In addition to tyre manufacturers, this obligation must be met by car manufacturers, including those of electric cars. This means providing potential buyers of new vehicles with the tyre label for the tyres offered with or fitted on the vehicle before the sale, and to ensure that a sheet with further product information is available.
“In the future, manufacturers of connected vehicles will face even more challenges around cyber security, as they also might fall under the new German IT Security Act 2.0.”
FW: In China, what do you believe are the major challenges for manufacturers of new energy vehicles in 2022?
Werner: On 31 December 2021, policy No. (2021) 466 for new energy vehicles for 2022 was published. As a result, China’s automotive industry is now facing the reduction of a 30 percent subsidy for new energy passenger vehicles and a complete withdrawal by the end of 2022. The sharp rise in raw material costs since mid-2021 has also added to the industry’s woes and is causing the country’s car manufacturers to increase prices substantially to protect their margins. For instance, Tesla has announced an increase in the price of the Model 3 and Model Y of RMB10,000 and RMB20,000 respectively since the end of 2021, which is subduing consumer demand. The increase in the price of raw materials for auto parts is increasing tensions between upstream and downstream operators in the industry supply chain. We are seeing lots of concern among parts suppliers that are facing massive cost gaps caused by the sharp change in expected production capacity and purchase volumes and prices, and trying to renegotiate existing supply contracts or otherwise restructure their setup in China. Default risks are increasingly entering supply chains as well. All this is currently prompting automotive companies in China to reassess risks and build coping strategies based on such assessments, which often results in considerable changes in the sector’s business practices.
FW: For manufacturers of intelligent connected vehicles in China, what challenges do they need to navigate around data security?
Du: Multiple ministries jointly issued the Interim Provisions on Automotive Data Security Management (Auto Data Regulation) on 16 August 2021, which is the first data protection regulation targeting the automotive industry and will come into effect on 1 October 2021. The regulation covers a wide range of players processing vehicle-related data and will have a far-reaching impact on the industry.
Werner: Looking at the rationale of the new rules, the Auto Data Regulation was promulgated to strike a balance between the privacy rights of individuals and the promotion of intelligent connected vehicle (ICV) technology in China in the wake of the importance imposed on personal data for ICV development, which has been making considerable progress in other countries. The cyber security review of Didi and Manbang initiated in early July gave this project additional urgency. This is because the Ministry of Industry and Information Technology (MIIT) has made data protection and cyber security capability a key part of ICV market entry requirements. In April, the MIIT further released draft guidance on establishing a regime of cyber security standards for ICVs, which aims to formulate at least 100 sets of cyber security standards by 2025. A draft circular was released in June which requires telecom carriers, vehicle-to-everything (V2X) service operators and ICV manufacturers to enhance cyber security protection. In July, the MIIT required vehicle manufacturers to strengthen their data security management and cyber security capabilities in an official opinion on ICV market entry. The Auto Data Regulation applies to a variety of players in the industry and may reshape product design regarding the underlying approach to auto data.
“Employees and contractors of connected vehicle manufacturers tend to be the source of data security breaches, rather than cyber attacks.”
FW: Could you provide an insight into China’s independent aftermarket business, and the risks and challenges facing car parts suppliers?
Du: As is common practice, suppliers need to use original equipment manufacturer (OEM)-owned tooling to make IAM parts. If they had to buy separate tools to make these parts, the resulting costs would make the aftermarket business uncompetitive or unprofitable. The Chinese authorities have emphasised the importance of offering more spare parts options to the IAM in the Guidelines on Anti-Monopoly in the Automobile Industry, published on 4 January 2019. However, they have not explicitly addressed and prohibited this tooling restriction. The Chinese authorities consider this OEM restriction on suppliers as a one-sided requirement instead of a concerted action. Therefore, the restriction on suppliers was addressed under Chapter III of the Abuse of a Dominant Market Position instead of Chapter II on Monopolistic Agreements. Apart from the exemption for subcontracting agreements between the OEM and the supplier, the OEM under Chapter III of the Guidelines is obliged to allow suppliers to produce dual-brand parts and to not return all spare parts to the OEM. This restriction in tooling agreements imposed by the OEM on suppliers may constitute an indirect restriction on the supplier to return all spare parts to the OEM. However, to establish a violation of the Guidelines, the threshold is quite high as it will be necessary to meet the conditions that the supplier is not under a subcontracting agreement with the OEM, under which the OEM agrees to provide technology or equipment necessary for the supplier to manufacture parts, provide services or complete other relevant work for the OEM to brand products as its own, and the OEM customer is in a dominant market position.
Lawrence Freeman is a senior counsel in the Brussels office of Bird & Bird. Before joining Bird & Bird, he spent five years as the European counsel of Tesla, Inc. where he founded the European legal department. Since 1992, he has been handling issues of European regulatory, competition and commercial law. He is admitted as a solicitor in England and Wales and is a member of the Brussels Bar. He can be contacted on +32 2 282 6053 or by email: lawrence.freeman@twobirds.com.
Roman Brtka is a partner in the Munich office of Bird & Bird. He advises German corporations and multinationals from a wide range of different sectors, such as automotive, telecommunications, media and sports, on all matters of intellectual property law. He can be contacted on +49 89 3581 6440 or by email: roman.brtka@twobirds.com.
Sven-Michael Werner is a partner in the Shanghai office of Bird & Bird. He has been practicing law in China for more than 20 years with a focus on corporate, commercial and regulatory issues of international businesses entering and operating in the China market, particularly in the automotive, technology and retail & consumer industry sectors. He can be contacted on +86 21 2312 1300 or by email: svenmichael.werner@twobirds.com.
Serena Du is a managing associate in the Shanghai office of Bird & Bird. Her industry practice is focused on the automotive sector in China where she has been practicing law for almost 10 years. Prior to joining Bird & Bird, she was an in-house legal counsel at one of the large German automotive parts suppliers in Shanghai. She can be contacted on +86 21 2312 1288 or by email: serena.du@twobirds.com.
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