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Mao’s Red Flag Returning to Drive China Leaders From Audi: Cars

Chairman Mao Zedong’s Red Flag limousine is making a comeback after a $280 million overhaul, seeking to regain its standing as the ride of Chinese leaders from Volkswagen AG (VOW)’s Audi.

China FAW Group Corp. (CHFAWZ), which built the first Hongqi -- as the brand is known in Chinese -- for Mao in 1958, received state approval this month to make the C131, reviving the Red Flag’s production after it was discontinued in 2010. The sedan will be the official car for minister-level officials, according to the Communist Party’s official People’s Daily website.

The endorsement may be a blow to Audi, which accounts for an estimated 30 percent of cars used by public servants, and illustrates the state’s efforts to protect domestic producers as they struggle to compete against VW and General Motors Co. China signaled last week it will stop buying foreign brands and in January ended some incentives on external investments.

“The move is an indication that the government supports the homegrown auto industry,” said Klaus Paur, Shanghai-based head of auto research at Ipsos. “Audi has a long history as provider of government cars. Therefore, a substantial reduction of foreign brand purchases would impact Audi the most.”

Ipsos estimates the government spends about $16 billion a year as China’s biggest buyer of cars, while China International Capital Corp. projects the amount to be closer to $13 billion.

China’s first carmaker plans to invest 1.98 billion yuan ($280 million) on the Red Flag and produce 30,000 C131s next year, according to the closely held carmaker. The Hongqi is part of ambitions by FAW -- which makes vehicles with General Motors Co. (GM), VW and Toyota Motor Corp. (7203) -- to double its own-brand vehicle sales to more than 2 million units by 2015.

Following Mao

Chinese leaders followed the late Mao in embracing the Red Flag. President Hu Jintao stood in an open-topped Hongqi parade car during China’s National Day celebrations, as did Jiang Zemin and the late Deng Xiaoping. U.S. President Richard Nixon rode in one during his 1972 trip to China.

Then the global oil shocks hit and FAW was ordered in 1981 to stop producing Red Flag sedans because of its high fuel consumption. Attempts to revive the brand -- including buying a platform from Nissan Motor (7201) Co. in 1982 and revamping the vehicle three times from 1987 to 1990 -- failed, leading FAW to discontinue production two years ago.

The last model, based on a Toyota platform, sold from 334,800 yuan, enough to buy a Mercedes C-class sedan or an Audi Q5 sport-utility vehicle, according to Sina.com prices.

‘Crowded’ Market

China’s elite defected toward foreign brands as FAW was unable to deliver cars that could compete in fuel efficiency, reliability and styling, said Zhang Xin, a Beijing-based analyst at Guotai Securities. That hasn’t changed, he said.

“It will be tough for FAW to revamp the brand now given that the market is already way too crowded,” said Zhang. “They may have to sacrifice profit for sales.”

The government owns FAW and its purchases may help turn around the iconic brand, the People’s Daily reported this month.

“Red Flag still has a reputation in China, mostly the one of the traditional limousines of the leaders,” said Erik van Ingen Schenau, a car historian and author of “Hongqi: A History of the Limousine.” “Without selling to the state, the C131 won’t be a success.”

Under current rules, ministers can use domestic or foreign cars as long as they have engines no bigger than 2.5 liters and cost no more than 380,000 yuan, while vice ministers are restricted to 280,000 yuan. Cars can be replaced every eight years.

Home Advantage

Count Dong Yang, deputy head of China Association of Automobile Manufacturers, among those saying the government should help its own.

“State leaders in many countries ride their home-brand vehicles and I think our own officials should do so as well,” said Dong, who’s involved in drafting the government vehicle procurement list that’s in the final approval stage.

The Ministry of Industry and Information Technology last week issued a preliminary list of this year’s official-vehicle purchases, which excluded all foreign brands.

Chinese government officials didn’t respond to faxed queries. Liu Lina, a spokeswoman with FAW Group’s publicly traded unit, declined to comment on the report or provide details of the C131.

Foreign carmakers stand to lose the most from a Red Flag revival. Overseas brands accounted for about 80 percent of the official pool, according to Zhang at Guotai Junan. In the broader market, they account for 7 of every 10 cars sold in the country, which overtook the U.S. in 2009 to become the world’s largest vehicle market, according to data from CAAM.

‘Small Part’

Audi said it would be able to overcome any loss in government sales. Direct sales to the government represent only a “small part” of Audi’s business in China because more than 90 percent of its customers are private buyers and the rest is dominated by fleet sales to companies, said Martin Kuehl, a Beijing-based spokesman for the automaker.

The automaker remains “a very attractive partner for the customers in China, including the administration,” he said. About half of Volkswagen’s earnings come from China, according to estimates by Max Warburton at Sanford C. Bernstein in London.

Still, the Ministry of Supervision estimates the state operated a fleet of at least 5.2 million vehicles as of November 2007 -- more than the total number of cars sold in Japan last year. Ministries and related agencies spent about 100 billion yuan on official cars a year, according to Paur at Ipsos.

FAW isn’t the only Chinese automaker reviving brands.

SAIC Motor Corp. (600104), the country’s biggest automaker, has included the Shanghai brand in its product plans, the company said in an e-mailed response, without giving additional details. Generally used for lower-ranked bureaucrats who didn’t merit a Red Flag, production of the brand was suspended in 1991 after SAIC started making Santana cars with Volkswagen.

In the end, nostalgia and government support for homegrown brands can only do so much, said Cao He, an analyst with China Minzu Securities Co. in Beijing.

“The bottom line is that the Red Flag and other home- designed cars need to be good enough,” Cao said.

To contact Bloomberg News staff for this story: Tian Ying in Beijing at ytian@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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