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Luxury brands favored by Chinese bureaucrats excluded from government purchase list
<p> <strong>Luxury brands favored by Chinese bureaucrats excluded from government purchase list.</strong></p>

China’s Wall Against Imports Has Holes

The power and prestige of senior Chinese officials and their taste in cars may prove the new restrictions on imports to be a paper tiger. Previous attempts to curb government spending on expensive foreign makes have failed.

A new list released by China defining which vehicles qualify for government purchase may have more bark than bite for foreign auto makers.

All of the 412 approved models are Chinese domestic brands. No foreign brands meet the three conditions needed for official purchases: engines of 1.8L or less, priced no higher than RMB180,000 ($28,270) and made by companies that have spent at least 3% of their revenues on research and development in China within the past two years.

Higher-powered, more-costly luxury brands such as the Audis, BMWs and Buicks favored by Chinese bureaucrats are excluded.

The third condition is a puzzler, given that major Chinese auto makers including SAIC, Dongfeng, Chang’an and FAW only spent between 0.5% and 2.5% of their sales revenue on R&D in 2010. Independent Chinese auto makers did a bit better that year, spending 2% to 3% of sales revenue on R&D.

In comparison, Volkswagen, General Motors and Honda each spent more than 5% of their sales revenue on R&D in 2010, while other foreign auto makers such as Ford, Toyota and PSA Peugeot Citroen spent more than 4%.

Although the new list raises questions about China’s adherence to the fair-trade and open- market principles agreed to by all members of the World Trade Organization, criticism from the country’s trading partners is more about principle than about damage to sales of foreign cars.

Fifteen or 20 years ago, when China’s automotive industry was young, government purchasing accounted for virtually all passenger vehicles sold in the country, but times have changed and this has shrunk dramatically.

LMC Automotive reports only 8.6%, or 464,000, of the 4 million cars registered in China in the first five months of 2011 were purchased by officials in all levels of government, government institutions and state-owned companies.

An LMC check shows government entities accounted for only 14% of the 10 best-selling foreign brands’ combined 7.2 million deliveries in 2010, and only about 7% of those sales could have been impacted by the new rules.

Audi models, for example, long have been the first choice of many Chinese officials. The basic Audi A6 is priced at RMB 355,000 ($56,000), which is double the new legal limit on government purchases of imports. The German auto maker sold 227,938 units in the country in 2010.

Sales volumes have been shifting toward private buyers in recent years. “In 2011, sales of official vehicles accounted for around 20% of Audi’s total sales, and this percentage is expected to decline further in 2012,” says LMC Automotive analyst Jenny Gu.

Chinese domestic brands have offered limited competition in this category. Only about 6.7% of government-vehicle purchases last year were Chinese brands, according to LMC. Domestic models seemingly fail to convey the status and prestige sought by top officials.

“Global brands such as Audi, Volkswagen, Buick, Toyota, Honda and Nissan are the preferred choice of Chinese officials and make up more than 80% of the cars purchased in the government system,” LMC analyst Marvin Zhu says.

Many of the 3 million government-owned passenger vehicles now on the road are used by only one official and are either idle most of time or are used for private purposes, he notes.

The power and prestige of senior Chinese officials and their taste in cars may mean the new restrictions on imports will prove to be a paper tiger. Previous attempts to curb government spending on expensive foreign cars have failed and, in practice, the new rules may be sidestepped.

Turbocharged engines may remove one obstacle. VW already is providing government buyers with a 1.8L turbo Passat and Audi and Buick and Nissan are likely to follow suit.

Another possibility may be special versions of the foreign marques favored by government officials, with some features removed or replaced with less-expensive versions to lower costs, and available for official government purchasing only at “appropriate prices.”

In China, it always is easier to introduce new rules and regulations than enforce them.

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