The United States has released proposed rules to restrict connected vehicles, and the Chinese automotive industry will face challenges head-on

On September 23, 2024, the Bureau of Industry Security (BIS) of the US Department of Commerce officially announced the proposed regulatory rules (NPRM) for the review of the supply chain of information and communication technology and services (ICTS) for connected vehicles in China and Russia. After six months since the release of the appointment legislative notice by BIS on March 1, 2024, the basic dust of BIS's ICTS review on connected vehicles has been settled. As the first major rule making by BIS after officially taking over the ICTS review, the severity of the restrictive requirements reflected in NPRM indicates that the ICTS review will become another powerful policy tool for BIS, comparable to export controls, and will inevitably have a profound impact on global trade. We hereby interpret the relevant impact of NPRM and recent regulatory developments in the United States on the Chinese automotive industry, hoping to be helpful to everyone.
1、 Accurate prohibition scope

In NPRM, BIS defines "prohibited transactions" under sections 791.302 to 791.304 of 15 CFR, and clarifies through examples whether transactions involving the design, development, manufacturing, or supply of Vehicle Connectivity System (VCS) hardware or controlled software by entities owned, controlled, or directed by China or Russia are prohibited by NPRM. Specifically, NPRM has set three types of prohibited transactions, namely:

           

According to the relevant explanations of BIS, the actual scope of the specific terminology and concepts mentioned in the above-mentioned ban is as follows:

           

Based on the above definitions, BIS clearly places restrictions on ADS software and VCS hardware and software directly related to automotive driving, communication, and remote information processing in NPRM. Other related onboard ICTS modules that do not involve high-frequency data communication are not currently included in the scope of restrictions. But in the future, it is not ruled out that BIS may expand the scope of relevant restrictions in the final rules or further revisions.
2、 Comprehensive tightening of restrictions on foreign entities

In addition to the relevant definitions of technical terms mentioned above, the most critical point in NPRM is the establishment of the broadest definition to date for "entities owned, controlled, or under the jurisdiction or direction of foreign adversaries (i.e. China and Russia)". Currently, according to the definition of NPRM in 15 CFR 791.301, these entities include:

1) Regardless of location, any person acting as an agent, representative, employee, or in any other capacity under the direction, request, or control of a foreign counterparty, or directly or indirectly supervised, directed, controlled, funded, or subsidized by a foreign counterparty;

2) Regardless of their location, any foreign opponent or citizen or resident of a country they control, who is not a US citizen or permanent resident;

3) Any company, partnership, association, or other organization established under the laws of a foreign counterparty or its controlled country, with its main place of business, headquarters, registered address, or other organization;

4) Any company, partnership, association, or other organization owned or controlled by a foreign counterparty, regardless of its location or place of business. The situation includes any person who, through direct or indirect ownership of a majority or significant minority stake, board representative, proxy voting rights, special shares, contractual arrangements, or other forms, directly or indirectly has the power to influence important decision-making of the entity, regardless of whether such power is exercised.

At the same time, BIS has also provided relevant examples in NPRM to facilitate the determination of which entities will be considered as "entities owned, controlled, governed or directed by foreign adversaries":

           

           

           

Attachment: Examples of entities owned, controlled, governed, or directed by China

Compared to the definition of Foreign Entity of Concern (FEOC) under the Inflation Reduction Act (IRA), NPRM comprehensively expands the scope of entities owned, controlled, governed, or directed by foreign counterparts. For example, Example 4 shows that overseas subsidiaries of Chinese companies are also considered as "entities owned, controlled, governed, or directed by China or Russia" because their parent companies are entities under Chinese jurisdiction. However, the US Department of Energy's interpretation rules on the definition of FEOC explicitly state that if an entity becomes a FEOC based on the "governed" standard, its subsidiary is not automatically considered a FEOC unless the subsidiary itself meets the "governed" or "owned" standard. In addition, NPRM has not set a threshold of 25% for voting rights, equity, or board seats for the standard of "owning, controlling, or being under its jurisdiction or direction". For example, Example 8 shows that a Chinese company's "dominant minority voting rights" over an overseas entity are sufficient to make the overseas entity "owned, controlled, governed, or directed by China or Russia" under NPRM, regardless of whether the "dominant minority voting rights" reach 25%. Such strict restrictions actually block the possibility for Chinese car companies to circumvent the ICTS review restrictions of connected vehicles through any form of architecture design.

Additionally, it should be noted that NPRM also imposes strict regulations on the form of participation in business by entities owned, controlled, governed, or directed by foreign counterparts in controlled software transactions. According to the following examples, its restrictions are even implemented at the level of research and development teams, unless Chinese or Russian nationals of the relevant research and development teams work for non restricted entities overseas:

           

           

           

Judgment of R&D team work in two different situations

In this situation, the relevant regulations of NPRM will inevitably lead to a large number of foreign car companies considering readjusting their R&D plans within China, as well as cooperating with Chinese automotive grade ADS and VCS development teams and integrators, which may have a profound impact on the global layout of the automotive industry.
3、 Comprehensive regulatory system

This NPRM has set comprehensive regulatory requirements for VCS hardware importers, connected vehicle manufacturers, and other entities that may participate in related prohibited transactions, including regularly submitting compliance statements for BIS review, and setting up relevant licensing and exemption mechanisms to mitigate the negative impact of the new regulations on relevant market participants. It has also instructed all parties to orderly fulfill their compliance obligations under the new regulations in the future
1. Compliance Statement

BIS suggests requiring VCS hardware importers and connected vehicle manufacturers to regularly submit compliance statements to them, proving that they have not participated in the aforementioned prohibited transactions, and to provide the following necessary information when submitting such statements.

           

For the submission time of the above compliance statement, NPRM requires:

For connected car manufacturers, a declaration should be submitted 60 days before the first import or first sale of each model year, and should be grouped by brand, model, and interior;

For VCS hardware importers, a declaration should be submitted 60 days before the first import of each model year for those involving model years, and 60 days before the first import of each calendar year for those not involving model years. VCS hardware importers shall provide a detailed list of all vehicle models they intend to import in the model year or calendar year in their compliance statement;

For entities that are both manufacturers of connected vehicles and importers of VCS hardware, the submission of compliance statements shall be based on the earlier of the aforementioned import or sales activities.

In addition, if there are significant changes to the submitted compliance statement (such as changing suppliers or software), the statement needs to be updated within the first 30 days.
2. Licensing mechanism

To mitigate the restrictive impact of the new regulations on the US automotive industry, NPRM has established a general license and special license mechanism, allowing VCS hardware importers and connected vehicle manufacturers to engage in prohibited transactions without notifying BIS or seeking BIS approval under specific circumstances:

           
3. Exemption mechanism

           
4、 NPRM is just the beginning

As early as the beginning of this year, after the establishment of the Information and Communication Technology and Services Review Office (OICTS) within BIS, OICTS has begun a series of legislative and enforcement activities related to ICTS, including the first ICTS ban on Russian software company Kaspersky on June 24th. On July 18, 2024, the US Department of Commerce officially delegated the ICTS review authority under Presidential Executive Order 13873 to BIS, and established a new legal provision for ICTS review in Chapter 7 of Title 15 of the Code of Federal Regulations ("Commerce and Foreign Trade"), Title 791, to list the relevant legal provisions for ICTS review, and transferred all the ICTS review rules formulated by the Department of Commerce in the original Title 15, Group A, Title 7 in 2021 to Title 791. And this NPRM is the first major legislative activity carried out by BIS since the internal adjustment of responsibilities by the US Department of Commerce in July. From the perspective of regulatory activities related to Kaspersky and the current connected car, OICTS will actively exercise its regulatory power in the future, making it one of the three pillars of the US Department of Commerce's national security supervision, alongside export controls and the 232 investigation. At the same time, according to the legislative plan of the Ministry of Commerce, BIS is expected to introduce a series of regulations related to ICTS review within this year or early next year after the implementation of connected vehicles

 

For industries such as AI, cloud computing, and drones, special attention needs to be paid to the relevant trends of BIS in the coming months. Among them, it should be noted that the review results and regulatory rules for unmanned aerial vehicle systems are likely to refer to the decisions of connected vehicles. For unmanned aerial vehicle companies operating in the United States, special attention should be paid to the follow-up trends of relevant legislation.

For the Chinese automotive industry, this ICTS review is also likely to be the beginning of subsequent US direct restrictions on the Chinese automotive industry. Both at the congressional and government levels, the United States has been paying close attention to the so-called "overcapacity", "information security", "forced labor", and "support for Russia" issues brought about by Chinese automobile companies going abroad since last year, and has begun a series of investigations and legislative actions. In November 2023, the House Transportation Committee initiated a congressional investigation into 10 Chinese autonomous vehicle companies, while on September 12, 2024, Republican senior senator Marsha Blackburn and Democratic senior senator Gary Peters also launched a congressional investigation into data security related to eight Chinese car manufacturers. Based on the expected results of this year's congressional elections, the two senators are expected to hold core positions in multiple important committees in the next Congress next year, and related investigations may escalate further next year. In addition, based on the ICTS review of connected vehicles, other relevant US agencies such as the National Transportation and Road Administration ("NISHTHA") may also take further measures to restrict the testing activities of Chinese autonomous vehicles in the United States. Other related measures are expected to be further extended to areas such as tariffs and enforcement of economic sanctions on transactions with specific regions. Although China has grown into the world's largest producer and exporter of automobiles, the internationalization of Chinese car companies has only just begun. Many car companies often lack sufficient awareness of international geopolitics and trade risks, which may pose fatal risks to their internationalization development in the future. From this perspective, this NPRM is a very important and profound lesson.