July 9 (Bloomberg) -- The Chinese government’s addition of Mercedes and BMWs to the list of approved official cars for bureaucrats infuriates Yang Jun.

“Why should they enjoy such luxury?” said Yang, a 50- year-old chauffeur. “It’s a waste of public money.”

The announcement last month sparked an outpouring of criticism on Web sites and 98 percent of more than 96,000 people polled by state-controlled People’s Daily said the government should favor domestic brands. Adding to popular anger are the government’s own calls for people to buy domestic products as growth slows to 6 percent, the slowest pace in almost 10 years.

“It’s not surprising that people reacted like this; the economy isn’t doing well and some people become protectionists,” said Klaus Paur, Shanghai-based automotive director at market research company TNS.

The addition of Daimler AG and Bayerische Motoren Werke AG’s cars to 36 brands approved for government purchase does not mean they will be bought, the official Xinhua news agency reported on June 18, citing an unidentified official at the Procurement Center of the Central People’s Government. The approved cars must be made in China, the agency reported. A woman from the procurement centre, who wouldn’t give her name, declined to comment on the addition.

Daimler builds Mercedes cars with Beijing Automobile Industry Holding Co. and BMW builds vehicles with Brilliance China Automotive Holdings Ltd. Foreign automakers are only allowed to open plants in China through ventures with local partners.

Market Share

Foreign manufacturers have about 70 percent of the passenger vehicle market in China with purely domestic manufacturers controlling the remainder.

SAIC Motor Corp., Geely Automobile Holdings Ltd. and Chery Automobile Co. are also on the government’s procurement list, though Volkswagen AG’s Audi unit dominates bureaucrats’ car fleet. Audi gets about 20 percent of total sales in China from the government, according to Zhang Xiaojun, executive vice president of FAW-Volkswagen Audi sales division. Volkswagen was one of the first overseas automakers to set up a joint venture in China in 1984.

The Chinese government spent 80 billion yuan ($11.7 billion) on buying official vehicles last year. It plans to cut official expenses on vehicles by 15 percent in 2009 from the average for the past three years, the procurement agency said in a June 15 statement.

Fragmented Industry

The Chinese auto industry is highly fragmented with more than 100 domestic makers. Both overseas and domestic companies are trying to establish customer loyalty in a country of 1.3 billion people where 70 percent of car buyers are making their first purchase.

Domestic brands have been gaining on overseas carmakers, taking 29 percent of the market in the first five months of this year, compared with 22 percent in 2004, according to J.D. Power data. Chery had 5.8 percent of the market in the year so far, BYD Co., the Chinese carmaker backed by billionaire Warren Buffett, had 4.6 percent.

“There’s still a lot of work to be done on the quality technology, brand image, service and supply chain,” said Ricon Xia, a Shanghai-based analyst at Daiwa Institute of Research. “It took developed countries dozens of decades to develop the market and in China, our self-owned brands only have a history of about 10 years.”

Public Anger

The outcry over the addition of BMW echoes public anger over abuse of power by government officials. Chen Liangyu, a former mayor of Shanghai was given an 18-year jail sentence for taking bribes. Xu Zongheng was removed from his position as mayor of Shenzhen in June for “severe violations of discipline” as the authorities probed him for alleged corruption. Former drug regulator Zheng Xiaoyu was executed in 2007 after he was convicted of taking bribes to approve medicines.

“Some company bosses are taking the subway to avoid heavy traffic and I think government officials should do the same to cut public spending,” Fei Wen, a 38-year-old buyer for a lighting company in Shanghai, said as he jostled with other underground train passengers during rush hour on a Friday evening.

BMW Brilliance Automotive Ltd. spokesman Meng Wei wouldn’t comment on the government’s decision.

Sales of SAIC Motor brands to the government “aren’t that much,” company spokeswoman Zhu Xiangjun said. Chery spokesman Jin Yibo said the government buys a “very small amount” while Geely spokesman Zhang Xiaodong said the central government hasn’t bought any cars from them since it was added to the list in 2007.

Foreign Brands

Most major Chinese carmakers rely on selling foreign-brand cars for profits. More than 90 percent of 2008 sales at SAIC Motor, China’s biggest carmaker, came from vehicles produced with General Motors Corp. and Volkswagen AG.

“It’s not just BMW and Mercedes that benefit, they are half supplied by Chinese manufacturers,” Paur of TNS said of the government’s latest procurement list.

Chinese brands, which are mostly in the lower and medium segment, have a “very tough game” to compete with foreign companies, said Ivo Naumann, managing director of AlixPartners’s Shanghai office.

One customer Chinese carmakers have yet to convince is the chauffeur Yang Jun. Even as he decries bureaucrats buying BMWs, he says his dream is to buy a Honda.

--Stephanie Wong in Shanghai. Editors: Bret Okeson, Neil Denslow

To contact Bloomberg News staff for this story: Stephanie Wong in Shanghai at +86-21-6104-7029 or swong139@bloomberg.net

Last Updated: July 8, 2009 16:18 EDT