China's automakers get a turbo boost
By Olivia Chung
HONG KONG - Chery Automobile, BYD Auto and other Chinese car brands, whose
sales are already booming in the world's biggest auto market, are set to get a
further boost from changes to rules on Chinese central government purchases of
vehicles.
New guidelines that will lower the maximum engine size and prices permitted for
government vehicles are expected to lead to a move away from high-end cars made
by foreign joint ventures and towards vehicles at the top end of ranges
produced by Chinese companies.
The National People's Congress standing committee meeting said last month that
domestic brand cars should account for not less
than 50% of official vehicles purchased by "all levels of government and public
institutions". That is line with a similar declaration last June by the
procurement center for the central government, which also released a list of
approved carmakers that included 21 domestic brands on its list of 38.
The new measure will favor smaller and cheaper domestic brand cars, especially
those for general officials. The maximum engine displacement for their
purchases is likely to be reduced to 1.8 liters from 2 liters and the price
limit lowered to 160,000 yuan (US$23,400) from 250,000 yuan, according to a
report by China Business News.
The change of policy, whose implementation is being studied by the Ministry of
Finance, the Government Offices Administration of the State Council and the
Communist Party's Central Commission for Discipline Inspection, will give a
further boost to sales of domestic car brands in China, where overall sales
surged about 50% last year. That made it the world's biggest auto market.
Customers bought about 13 million vehicles, compared with just over 10 million
in the US.
Once the new regulation is released, lower-level governments will follow the
central government in increasing the proportion of home-brand vehicle
procurement.
In 2008, 80 billion yuan (US$11 billion) was spent to buy government vehicles,
with 90% going on cars made at Sino-foreign joint ventures and accounting for
about 8% of total car sales. The procurement figure is expected to jump to 100
billion yuan in 2010, analysts said.
The government's move to increase the proportion of home-brand vehicles in its
procurements was overdue, according to Jia Xinguang, chief analyst with the
Chinese National Automotive Industry Consulting and Development Corp.
"The current standard of government cars was released a long time ago when cars
were luxury vehicles," he said. Car prices, especially for home-brand vehicles,
are cheaper and their quality is improving, "so those costing about 100,000
yuan and with engines of about 1.6 liters should be included in the procurement
list."
The new policy would also favor homegrown car brands using new energy sources
to promote the development of environmentally friendly vehicles, Jia said.
BYD, part-owned by US investor Warren Buffett's Berkshire Hathaway, and a range
of other carmakers, including Chery, Dongfeng Motor and Shanghai Automotive
Industry Corp, have announced plans to launch pure electric cars.
These brands "may not roll out the models in a large scale until the government
policy shows clearly how it will support the industry," Jia said.
Shang Yugui, spokesman of Great Wall Motor Company, a Chinese sports utility
vehicle maker based in Hebei province, said the change in government
procurement guidelines to give priority to homegrown vehicles should have taken
effect earlier.
"It is wrong that the government has been giving priority to mid- and high-end
vehicles with higher engine capacity in vehicle procurement, which senior
officials believe would give them 'face'," he said. "Government procurement
should be based on utility and economy." Shang favored rules that cars should
cost about 100,000 yuan and have an engine displacement less than 1.5 liters.
The procurement rule change "is clearly an attempt to promote the sales of
local-brand vehicles and help build consumer confidence in local brands," said
Yang Bo, general manager of Chery, the top Chinese-brand vehicle maker.
Chery's range includes models that can be bought under existing procurement
policy - its high-end "Riich" G5, powered by a Chery-developed two-liter turbo
engine, can be used for senior officials above the ministerial level, said
Yang. "It can match foreign brands," he said.
Its rivals include Audi, whose A6 is the Volkswagen-owned brand's most popular
model in China and is a good example of how the government influences car
buyers in the non-government market.
During its early years of production in China, the A6 was the primary fleet car
for high-level government officials, which also helped Audi sales in the
private sector, where buyers followed the government line to display their
higher social status. Sales of the A6, in production for 10 years, jumped 12.3%
in the first six months of last year to 55,233 units, compared with the same
period a year earlier.
A spokesman for Audi sales at FAW Volkswagen Automobile Company, a Sino-German
joint venture, said the policy change would not have a big impact on its sales.
"Audi has been trying to introduce various models to private buyers in a bid to
reduce its image as 'a car for government officials'," he said. About 80% of A6
customers were already private buyers, with the country's growing number of
well-heeled businessmen offering a ready market.
The present standard for government car purchases was released in 1994;
vehicles for senior officials above the ministerial level are supposed to cost
less than 450,000 yuan and have engines smaller than three liters. Cars for
officials at the vice-ministerial level are supposed to cost no more than
350,000 yuan and have engines of less than three liters, and cars for general
officials should cost less than 250,000 yuan and have displacement less than
two liters.
Zhang Zhiyong, chief auto analyst with SDR Consulting Group, said an increasing
ratio of home-brand vehicles in government procurement meant more than boosting
earnings for domestic brands, especially those also developing mid- and
high-end vehicles.
"It means lifting their brand images," Zhang said.
Sales of homegrown brand sedans reached 1.95 million units in the first 11
months last year, accounting for 29.39% of the total sedan sales in China,
according to the China Association of Automobile Manufacturers, indicating that
the market, especially for more profitable middle- and high-end segments, is
still dominated by foreign brands.
Most homegrown car brands, such as Chery, BYD and Geely Automobile Holdings,
focus on low-end vehicles with engines smaller than 1.6 liters and cheaper than
100,000 yuan. Fierce competition means low margins, while quality standards
often still struggle to match those found in more developed markets.
Even so, many manufacturers are speeding up efforts to develop more high-tech
and expensive cars, such as the Riich from Chery, Emgrand from Geely and Roewe
from SAIC. They are also gearing up to sell their cars in developed markets
such as Europe and the United States.
Privately owned Geely, which in 2006 became the first Chinese carmaker to
display at the Detroit Auto Show, is preparing to launch its first car
specially designed for the Western European market. The car, priced at between
80,000 yuan and 120,000 yuan in China, is a four-door sedan aimed at the
mid-range market. Geely gained its initial reputation making small cars priced
at between 30,000 yuan and 50,000 yuan, and already exports vehicles to
Southeast Asia and Eastern Europe.
Great Wall Motor introduced a utility vehicle, priced under US$20,000, in June
last year in Australia and New Zealand.
However, Jia said, when it came to mid- and high-end sedans, there was still a
long way for home brands to go to catch up with foreign rivals. "There is no
single factor allowing any brand to get a bigger market share of the domestic
market," he said.
Olivia Chung is a senior Asia Times Online reporter.
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