Tag:compliance and regulatory-customs and trade compliance,automotive manufacturing and industrials-automotive and mobility
On September 23, 2024, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) published a notice of proposed rulemaking (NPRM) following its review of the information and communications technology and services (ICTS) supply chain for connected vehicles, targeting the People’s Republic of China, including the Hong Kong Special Administrative Region (PRC or China), and the Russian Federation (Russia). This comes six months after BIS released an advance notice of proposed rulemaking (ANPRM) on March 1, 2024, concluding its ICTS review on connected vehicles. As the first major rulemaking after BIS was formally delegated the ICTS review authority, the stringent requirements outlined in the NPRM suggest that the review will become a powerful tool alongside export controls. This development is expected to have far-reaching effects on global trade. In this article, we analyze the NPRM’s implications in light of its content and the recent U.S. regulatory trends concerning China’s automotive industry.
I. Refined Scope of Prohibitions
The NPRM defines “prohibited transactions” under 15 CFR 791.302 - 791.304 and offers examples of prohibited transactions involving Vehicle Connectivity System (VCS) hardware and covered software designed, developed, manufactured, or supplied “by persons owned by, controlled by, or subject to the jurisdiction or direction of the PRC or Russia”. Specifically, the NPRM sets out three types of prohibited transactions:
Regarding the specific terms and concepts mentioned in the above prohibitions, BIS provides the following clarifications on their scopes:
Based on the above definitions, BIS imposes the relevant restrictions on ADS software and VCS hardware & software directly related to automobile driving, communication and telematics in the NPRM, while excluding other related on-board ICTS modules that do not involve high-frequency data communication. However, it does not rule out the possibility that BIS may expand these restrictions in the final rule or future revisions.
II. The Overall Tightening of Restrictions on Foreign Persons
In addition to the definitions of the above technical terms, the most critical aspect of the NPRM is the introduction of the broadest definition to date of “persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary (i.e., China and Russia)”. According to the definition in 15 CFR 791.301 of the NPRM, these persons include:
1）Any person, wherever located, who acts as an agent, representative, or employee, or any person who acts in any other capacity at the order, request, or under the direction or control, of a foreign adversary or of a person whose activities are directly or indirectly supervised, directed, controlled, financed, or subsidized in whole or in majority part by a foreign adversary;
2）Any person, wherever located, who is a citizen or resident of a foreign adversary or a country controlled by a foreign adversary, and is not a U.S. citizen or permanent resident of the U.S.;
3）Any corporation, partnership, association, or other organization with a principal place of business in, headquartered in, incorporated in, or otherwise organized under the laws of a foreign adversary or a country controlled by a foreign adversary; or
4）Any corporation, partnership, association, or other organization, wherever organized or doing business, that is owned or controlled by a foreign adversary, to include circumstances in which any person identified in paragraphs (a) through (c) possesses the power, direct or indirect, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in an entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting an entity.
BIS has also provided non-exhaustive examples in the NPRM to explain which entities would be considered “persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary”:
Annex: Partial examples of persons owned by, controlled by, or subject to the jurisdiction or direction of the PRC
In contrast to the definition of a Foreign Entity of Concern (FEOC) under the Inflation Reduction Act (IRA), the NPRM expands the scope of “persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary” in all respects. As an illustration, Example 4 shows that an overseas subsidiary of a Chinese company would be considered a person owned by, controlled by, or subject to the jurisdiction or direction of the PRC or Russia because its parent company is subject to the jurisdiction of the PRC. However, the U.S. Department of Energy (DOE)’s interpretive rule on the definition of a FEOC clarifies that if an entity is considered a FEOC because of the jurisdictional criterion, its subsidiaries are not automatically considered FEOCs unless they independently meet the “jurisdictional” or “owned” criteria. In addition, the NPRM does not set a threshold of 25 percent of voting power, equity interest, or board seats under the “owned by, controlled by, or subject to the jurisdiction or direction of” standard. As an illustration, Example 8 demonstrates that a “dominant minority voting share” held by a Chinese company in an overseas entity is sufficient to make the overseas entity “owned by, controlled by, or subject to the jurisdiction or direction of the PRC or Russia” under the NPRM, regardless of whether the “dominant minority voting share” amounts to 25 percent. This stringent restriction effectively prevents Chinese automakers from circumventing the ICTS review requirements for connected vehicles through any form of architectural design.
It is also important to note that the NPRM also strictly regulates the form of participation of entities owned, controlled, or subject to the jurisdiction or direction of a foreign adversary in a covered software transaction, even down to the level of the research and development (R&D) team. This is the case unless the R&D team’s Chinese or Russian nationals are working at an offshore non-restricted entity, as demonstrated in the following example.
Two different scenarios for judging the work of R&D teams
In this context, the NPRM regulations are very likely to compel numerous foreign-funded automakers to reconsider their R&D strategies within China, as well as their cooperation with China’s automotive-grade ADS and VCS development teams and integrators. This shift may have profound implications for the global landscape of the automotive industry.
III. A Comprehensive Regulatory Framework
The NPRM imposes comprehensive regulatory requirements on VCS hardware importers, connected vehicle manufacturers and other entities that may engage in prohibited transactions. These requirements include the submission of periodic Declarations of Conformity for BIS review. In addition, the NPRM introduces authorizations and exemptions to mitigate the negative impacts of the new regulations on market participants. It also directs all parties to fulfill their compliance obligations under the NPRM moving forward.
1. Declarations of Conformity
BIS proposes that VCS hardware importers and connected vehicle manufacturers periodically submit Declarations of Conformity to confirm that they were not engaging in the prohibited transactions. These Declarations of Conformity must be accompanied by the following required information.
The NPRM specifies the timing for submitting Declarations of Conformity as follows:
- For connected vehicles manufacturers seeking to import or manufacture for Sale in the United States a completed connected vehicle containing covered software, the Declaration of Conformity shall be submitted 60 days prior to the first import or first sale of each model year of completed connected vehicles, grouped by make, model, and trim.
- For VCS hardware importers seeking to import any VCS hardware, the Declaration of Conformity shall be submitted 60 days prior to the first import of VCS hardware for each model year for units associated with a vehicle model year, or calendar year for units not associated with a vehicle model year. VCS hardware importers may submit a single Declaration of Conformity detailing all VCS Hardware models that will be imported in the Model Year or calendar year.
- For entities that are both connected vehicle manufacturers and VCS hardware importers, the Declaration of Conformity shall be submitted 60 days prior to the first import or first sale of the model year of completed connected vehicles or 60 days prior to the first import of VCS hardware, whichever occurs first.
In addition, declarants must notify BIS of any material change in the contents of a previously submitted Declaration of Conformity (such as the change of the supplier or components) by submitting a revised Declaration of Conformity within 30 days following any such changes.
2. Authorizations
To mitigate the restrictive impact of the new regulations on the U.S. automotive industry, the NPRM introduces general authorizations and specific authorizations. This allows VCS hardware importers and connected vehicle manufacturers to engage in otherwise prohibited transactions without notifying BIS or seeking BIS approval when specific requirements are met:
IV. The NPRM Is Just the Beginning
Following the establishment of the Office of Information and Communications Technology and Services (OICTS) within BIS earlier this year, OICTS has already commenced a series of ICTS-related legislative and enforcement actions, including its first ICTS ban against the Russian software company Kaspersky on June 24. On July 18, 2024, the U.S. Department of Commerce officially delegated the ICTS review authority under Executive Order 13873 to BIS. It also created a new part 791 in Chapter VII of Title 15 (“Commerce and Foreign Trade”) of the Code of Federal Regulations to set out the relevant legal provisions for ICTS review. All previously enacted ICTS review rules by the Department of Commerce in 2021 in Title 15, subtitle A, part 7 were redesignated as part 791. The NPRM marks BIS’s first major legislative action since the internal transfer of powers and responsibilities within the U.S. Department of Commerce in July. Judging from the regulatory actions against Kaspersky and connected vehicles, OICTS is expected to very actively exercise its authority, positioning itself alongside export controls and Section 232 investigations as one of BIS’s three key national security regulatory tools. Meanwhile, according to the Department of Commerce’s legislative agenda, BIS is expected to issue the following additional ICTS-related regulations later this year or early next year following the connected vehicle regulations.
For related industries such as AI, cloud computing and unmanned vehicles, it is crucial to closely monitor BIS’s developments in the coming months. Notably, the review outcomes and regulatory rules for unmanned vehicle systems are likely to follow the decisions made regarding connected vehicles. Unmanned vehicle companies operating in the U.S. should pay particular attention to the subsequent legislative developments.
This ICTS review may signal the beginning of subsequent direct restrictions from the U.S. on China’s automotive industry. Since last year, the U.S. has focused on concerns that may be brought about by Chinese automotive companies, including so-called issues of “overcapacity” “information security” “forced labor” and “support for Russia”. This has led to various investigations and legislative actions, both at the congressional and government levels. In November 2023, the House Transportation and Infrastructure Committee first launched a congressional investigation into ten Chinese unmanned car companies. On September 12, 2024, senior Republican Senator Marsha Blackburn and senior Democratic Senator Gary Peters also launched a congressional investigation into eight Chinese automakers concerning data security. Given the anticipated results of this year’s congressional elections, both senators are likely to hold key positions on several important committees in the next legislative session, potentially intensifying and broadening the scope of these investigations. In addition, based on the ICTS review of connected vehicles, other U.S. agencies, such as the National Highway Traffic Safety Administration (NHTSA), may take further measures in the future to restrict the testing of Chinese unmanned vehicles in the U.S. Other related measures are also expected to extend to areas such as tariffs and the enforcement of economic sanctions on transactions within specific regions. While China has solidified its position as the world’s leading automobile producer and exporter, Chinese automakers are only beginning their international expansion. A lack of acute awareness of geopolitical and trade risks could present substantial obstacles to their global expansion. In this context, the NPRM serves as a crucial lesson for Chinese automotive sector.
We will continue to monitor relevant legislative and regulatory developments and provide further insights in the future.
Thanks to intern Wang Kefei for his contributions to this article.
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