Production mode selection for automakers considering product substitution under the dual-credit policy

Abstract

Purpose This paper aims to compare and analyze the effect of the dual-credit policy and product substitution rate on the automakers’ operational strategies under different production modes (e.g. centralized and independent), and further illustrate which production mode is more conducive to improving new energy vehicle (NEV) development.Design/methodology/approach The decision-making models for a centralized production mode where an integrated automaker produces both NEVs and fuel vehicles (FVs) and for independent production mode where an NEV automaker faces competition from a traditional FV automaker were formulated. The equilibrium solutions of each production mode were obtained by extreme value and game theory methods. The conclusions of the theoretical analysis were further verified with numerical analyses using IBM-MATLAB R2019a. Some management insights could be obtained by comparison analysis.Findings Under the dual-credit policy, an increase in the NEV credit trading price will always raise production quantity of NEVs, but only in an independent production mode where a higher trading price will also bring higher total profits to NEV automakers. In addition, only when the NEV credit trading price is high enough, a rising product substitution rate will be more favorable to NEV production and restrain FV production. Furthermore, an independent production mode is more favorable for the initial production of NEVs, but as each of the two vehicle types captures a certain amount of market share, a centralized production mode will be more conducive to the full replacement of FVs by NEVs.Originality/value The main contributions of this study include the formulation of decision-making models for FVs and NEVs in not only a centralized production mode but also an independent production mode. Moreover, this paper comprehensively analyzes how the dual-credit policy and product substitution relationship affect automakers’ production and pricing decisions. Then, the specific conditions under which each production mode is more conducive to NEV production and sales are summarized. The results proposed in this study provide scientific managerial insights for automakers and policy makers.