Electric vehicular dreams were shattered across the world when Dyson abandoned it’s electric vehicle project just after 2 years because of its commercial inviability. And it’s not just EV industry that is stuck in reverse. Since the second half of this year, the global automotive industry has been buffeted by multiple structural headwinds that have pushed up manufacturing costs and dampened overall sales, slowing global growth.
According to data from China’s National Bureau of Statistics, the operating revenue of the automobile manufacturing industry in 2018 was 8,337.2 billion yuan (US1190 billion). However, China's GDP in 2018 was 9030.9 billion yuan (US1289.1 billion), with the automobile manufacturing industry accounting for about 9.26% of China’s economy.
On top of weakening sales, China’s “zero tolerance” policy when it comes to protecting the environment and pressing environmental requirements, is set to dampen China’s car industry even further. According to MioTech’s ESG data, 312 companies in the automobile sector have been fined a total of 182 million yuan (US25 million) over the past five years.
Which brings us to investigate in on one particularly notorious Chinese automobile company, Jianghuai Automobile (JAC Motors). In July, Jianghuai Automobile, a leading domestic car brand, received a fine of 170 million yuan (US24.7 million) over emissions fraud. An inspection by the bureau showed that the on-board diagnostics (OBD) system on three new vehicles, a pollution control device used for emission detections, failed regulatory requirements, said the filing to the Shanghai Stock Exchange.
The heftiest fine in China’s history
On the 6th of July, JAC Motors makes known of the hefty penalty handed down by the Beijing Eco-Environmental Protection Bureau. According to the Bureau, the automaker was found culpable of selling substandard pollution control devices as if they had passed emission tests. Its illegally-made income of 0.879836 million yuan (US 0.12 million) was confiscated. It was also fined 169 million yuan (US21.1 million) twice the value of the goods, bringing the total amount to more than 170 million yuan (US24.7 million).
According to the MioTech’s ESG data on JAC motors, in terms of environmental penalties based on the statistics of A-share listed companies in the past 5 years, the 170 million yuan that Jianghuai Automobile got slapped with was so high, it has now positioned the automobile industry as the most risky ESG sector among all listed companies in China. In second place, the mining industry with total penalties at 150 million yuan (US21.4 million) and in third place, the steel industry which received a total of 142 million yuan (US20.2 million) in fines.
A Series of Unfortunate Events
Before receiving the hefty fine, Jianghuai Automobile was already in the red. Its annual revenue increased slightly in 2018, but its net profit plummeted. Its share price dropped by nearly half, from 9.37 yuan at the beginning of 2018 to about 4.7 yuan in December 2018.
According to the 2018 financial report, the operating revenue of JAC Motors reached 50.092 billion yuan(US7.1 billion) in 2018, with a year-on-year growth of 1.92%. The net profit loss attributable to shareholders of the listed company was 786 million yuan(US112 million), a year-on-year decrease of 282.02%. Sales of other various vehicles and chassis was at 462,400 million yuan, down 9.48% year-on-year.
The main reason for the drop in net profit is the decline in sales volume. Last year, Jianghuai automobile sold more than 460,000 units of vehicles and chassis, a year-on-year drop of 9.48%.
Is the worst yet to come?
After all those fines, Jianghuai Motors is not fine. If Jianghuai Automobile shows yet another depressing loss in 2019, it will have to be listed as ST shares, leaving a trail of very unhappy investors and on the verge of delisting. As a result, JAC Motors passed a series of measures, including giving up control of listed Ankai Automobile and transferring 12.85% of its control of Ankai bus, in an effort to ease the financial strain caused by the penalties. JAC Motor’s chairman, An Jin, sees light at the end of the tunnel, optimistic that the company’s most difficult days have passed.
On October 30th, Jianghuai Automobile announced its third-quarter profit. The financial report showed that from January to September 2019, Jianghuai Automobile’s net profit attributable to listed companies to be 122 million yuan (US17 million), up 154.33% year-on-year; operating income in the first three quarters 37.242 billion yuan(US 5.32 million), an increase of 2.36%; operating costs of 9.1 billion yuan (US1.3 billion), a year-on-year decrease of 21.8%.
Through equity transfer, product structure adjustment and the tightening of cost management, Jianghuai Automobile's net profit increased. But it’s likely that the profits garnered in the third quarter profit is equivalent to having paid a full fine.
It is rumored that government subsidies have always been the main reason for the growth of Jianghuai Automobile's profits. Jianghuai Automobile has been known to have received government subsidies of 463 million yuan (US66 million) in the third quarter; between 2014 and 2018, Jianghuai Automobile received a total of 8.718 billion yuan (US1.2 billion) of government subsidies, with a net profit of only 2.225 billion yuan (US314 million).
Judging from the current automobile market climate and JAC Motors’ worrying profitability, one can only imagine where Jianghuai Automobile would be without the aid of government subsidies.
Opening the Diesel Floodgates
Going back to further evaluating ESG risks in the automobile sector, emissions fraud is likely to be the biggest culprit as compared to other ESG risks such as corporate governance.
Let’s take another notorious counterpart in the West as an example - Volkswagen. In 2015, Volkswagen received a huge fine worth US4.3 billion dollars from the U.S. Environmental Protection Authorities over using misleading or false software, known as the “defeat device”, which caused diesel vehicles to produce lower-emissions fuels under test conditions.
According to an official announcement issued by Volkswagen, the company admitted that the emissions scandal involved about 11 million vehicles worldwide, of which 5 million fall under the Volkswagen brand, 2.1 million vehicles under Audi, 1.2 million vehicles under Skoda, 700,000 under SEAT and 1.8 million under Volkswagen light commercial vehicles. These models were all equipped with Volkswagen's EA189 diesel engine.
According to statistics, the emission scandal caused losses to Volkswagen of nearly 30 billion euros (US33.4 billion). The scandal gravely tarnished the reputation of the company, causing the CEO of Volkswagen, Martin Winterkorn, to resign. The former boss and four other executives are now charged with fraud in their involvement in the cheating and could face up to a decade in prison.
In comparison to foreign countries, China’s domestic penalties for emissions fraud are increasing year on year. In 2016, another listed company, Changan Automobile, was also handed a penalty notice by the Beijing Municipal Environmental Protection Bureau for their Ruiqi and CS75 models, due to excessive emissions. The fine was 3.78 million yuan (US 0.54 million) and the vehicles that were confiscated added up to about 12.605 million yuan (US1.8 million) in sales revenue. This is the first known penalty in Beijing to date
With increased surveillance and the greater supervision of penalties, the awareness of ESG on enterprises will increase day by day. When future investors evaluate the investment potential of a company, ESG will evidently play a critical component. MioTech’s ESG risk management platform, AMI, has recently launched a variety of ESG data points, including environmental penalties, product recall, employment discrimination etc. to ciomprehensively visualize the ESG performance of listed companies in China. .