NON-ROAD MOBILE ENGINE AND AFTERTREATMENT FORECAST. China State IV Overview. Knibb Gormezano & Partners. In collaboration with

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1 In collaboration with Knibb Gormezano & Partners Years International Management & Technology Consultants NON-ROAD MOBILE ENGINE AND AFTERTREATMENT FORECAST China State IV Overview Briefing 10

2 Cleaning up China The Global Impact James Dorling, Head of Non-Road Services With thanks to Reggie Zhan, Chinese Emissions Consultant This briefing looks at the potential impact of China State IV, and what it means for the international Non-Road market. 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 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 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 Table1: Market Demand China China (000 s) CE AG (Off Highway Research) YoY 16/17 +81% -15% 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 (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 However, the second life implications of this GPS tracking are yet to be fully considered. More stringent OBD required? Page 1 E: Consult@kgpauto.com W: T:

3 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 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), EU Stage IIIA EU Stage IIIB EU Stage IV EU Stage V Majority electronic common rail fuel injec on and Engine Control Introduced by Power category <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 solu- ons include EGR, DOC or DOC only. DPF also used widely in North America, and some in Europe. State III State IV State V 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 DPF Required, Par- culate Number added to emissions limits. Not yet considered 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 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 Page 2 E: Consult@kgpauto.com W: T:

4 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 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! KGP s forthcoming multi-client report focused on hybridisation and electrification in the non-road and commercial vehicle segments. The report delves deeper into the issues outlined in this article, and answers key questions including: What does electrification and hybridisation mean for customers, suppliers and OEMs? - It is critical that companies understand the scenarios facing the technological landscape of the non-road industry moving forwards, the opportunities are great, but the without the knowledge, companies could find themselves stranded with little to offer industry. There will be hardships, threats to market share and weakening of profits for some companies. However, there is a bright light at the end of the tunnel! Electrification and hybridisation offer greater functionality, lower emissions and lower fuel costs. It is just a matter of time before technology becomes commercially viable on a large scale. KGPs Non-Road Hybrid and Electrification Study will give industry the vital insight to help companies understand the possibilities presented by electrification and hybridisation potential. Page 3 E: Consult@kgpauto.com W: T:

5 Meet us! KGP will be attending various industry events in Spring Contact us to arrange a free consultation on Single Client, Multi-Client and Special Reports at any of the following: Intermat - 23rd to 28th April - Paris, France Integer Europe - 26th to 28th June - Brussels, Belgium We can also prepare a client specific webinar to introduce our services and provide an industry overview. New Products in 2018 Non-Road Electrification and Hybridisation - A Critical Impact Report Non-Road Electrification and Hybridisation Production Commercial Vehicle Electrification and Hybridisation A Critical Impact Report Commercial Vehicle Electrification and Hybridisation Production Briefings KGP s free briefings are published twice per month covering Commercial Vehicle and Non-Road topics. Forthcoming briefings will include: Briefing Week commencing References Knibb Gormezano and Partners Q Non-Road Engine Market Summary Report:- Click Here Off-Highway Research International Database Service Update April 2018 Click Here Knibb Gormezano and Partners Q CV Engine Market Summary Report:- Click Here LMC Global Commercial Vehicle Click Here Contacts Alex Woodrow, Managing Director alexwoodrow@kgpauto.com James Dorling, Head of NRMM Services jamesdorling@kgpauto.com Paris Kiernan, Analyst pariskiernan@kgpauto.com Batteries for CV and NRMM CV CO 2 Legislation Electrification Supply Chain 23/04 9/05 23/05 14 Low NOx Technology 7/06 Mick Beeson, Sales Manager mickbeeson@kgpauto.com Knibb, Gormezano and Partners 6 Lancaster Park, Newborough Road, Needwood, Staffordshire, DE13 9PD UK Disclaimer Information contained in this document has been obtained by Knibb, Gormezano & Partners from industry sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Knibb Gormezano does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Copyright Knibb, Gormezano and Partners 2017 Page 4 E: Consult@kgpauto.com W: T: