Audi-Led Global Carmakers May Be Shut Out of China’s Fleet
China’s government plans to stop buying cars from Volkswagen AG (VOW)’s Audi and other foreign brands, threatening to lock them out of an estimated $13 billion segment of the world’s biggest vehicle market.
All 412 models approved for purchase by state agencies this year will be limited to Chinese brands, according to a proposal disclosed by the Ministry of Industry and Information Technology last week. The preliminary list is open for public consultation until March 9, according to the ministry.
Dongfeng Automobile Co. (600006) and Great Wall Motor Co. were among Chinese automakers whose shares surged on speculation the government, the nation’s biggest buyer of vehicles, is stepping up efforts to protect its domestic industry as they struggle to compete against global producers such as General Motors Co. (GM) and VW. China stopped offering some incentives on investments from foreign automakers this year to clamp down on overcapacity.
“It seems that the China market for cars is closing slowly but surely toward foreign investment,” Dirk Moens, secretary general of the European Union Chamber of Commerce in China, said in a telephone interview. “As an industry you cannot expect to be warmly welcomed outside of your country if at the same time you start closing the industry in your country.”
Dongfeng Auto climbed 10 percent in Shanghai trading, rising by the daily limit for the first time since November 2009, while Great Wall advanced 5.5 percent to close at a record HK$14.06 in Hong Kong.
Volkswagen fell as much as 3.3 percent to 134.60 euros at 10 a.m. in Frankfurt trading, while BMW (BMW) declined as much as 3.7 percent to 67.73 euros and Daimler AG (DAI) was down as much as 3.8 percent to 45.65 euros. In France, PSA Peugeot Citroen (UG) and Renault SA fell.
Overseas brands have accounted for about 80 percent of the official pool, with Audi making up about one-third of government and state-linked enterprise fleets, according to Guotai Junan Securities Co. In the broader market, foreign brands 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 China Association of Automobile Manufacturers.
“It’s such a drastic step I could imagine they could be a bit resistant from the local government procurement side,” Klaus Paur, Shanghai-based head of auto research at Ipsos, said in a telephone interview. Shanghai-based head of auto research at Ipsos. “If you’re a relatively high-level person, you still want to have an Audi. The brand, the reputation, the standing is all important.”
Vehicles used for official purposes such as tax collection must have an engine size no bigger than 1.8 liters and costing at most 180,000 yuan, according to the government rules. Manufacturers must have spent at least 3 percent of their core revenue on research and development in the past two years to qualify for the government list, the rules say.
“We would not be surprised if there is a pushback from major JV brands that could lead to inclusion of some JV brand vehicles eventually,” Vincent Ha and Nora Min, Hong Kong-based analysts at Deutsche Bank AG, wrote in a report today, referring to foreign brands produced locally through China joint ventures.
Laws and Regulations
China spent 80 billion yuan on government vehicle purchases in 2010, accounting for 4.5 percent of total passenger-vehicle sales, according to estimates at China International Capital Corp (CICCZ)., which assumed the average car sold for 160,000 yuan each.
Audi currently derives 20 percent of its China sales from government purchases, while mid-range brands made by VW, GM, Toyota Motor Corp. (7203) and Nissan Motor (7201) Co. accounted for less than 10 percent of sales, CICC estimates.
The government is only a small part of the company’s business as more than 90 percent of Audi’s customers in China are private buyers, while remaining deliveries are fleet sales to companies, said Martin Kuehl, Audi China’s Beijing-based spokesman.
Nissan “respects the government’s laws and regulations,” Shen Li, a Beijing-based spokeswoman for the company, said in a mobile text message. Liu Peng, a Beijing-based spokesman for Toyota, said the company doesn’t comment on government policies.
Dayna Hart, a Shanghai-based spokeswoman for GM, didn’t immediately respond when contacted. Daimler AG and Guangzhou Automobile Group Co. also didn’t immediately respond when reached.
“BYD (1211) is very happy and looking forward to be selected into the government procurement list,” said Elva Zhai, a spokeswoman for the Shenzhen-based carmaker.
Moens said the European Chamber will work with its members to assess the impact of the policy and may approach the government formally if the rules hurt its members excessively.
Earlier this month, FAW Car received state approval 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 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.
“Most countries use official cars as a way to showcase the domestic auto industry, so we see this as a natural progression of the development of China’s automotive industry,” Janet Lewis, Lin Zhixuan and Aaron Qi, analysts at Macquarie Group Ltd., wrote in a report today.
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