New Gov’t Rules Shake Foreign Automakers to the Core

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“I have bought this Audi A6 for five years. I decided to buy it because most government officials took the same car. When I went to talk with them in Audi A6, I could impress them and trigger their senses of identity.”

The words mentioned above came from Chen Nan, general manager of a government purchasing agent in Beijing.

However, Chen Nan might need a Red Flag car or any other Chinese self-owned brand to gain the “sense of identity” of Chinese government officials. That’s because the Ministry of Industry and Information Technology (hereafter MIIT) published the Catalogue of Public Vehicles for Government and CPC Departments in 2012 (hereafter the “Catalogue”), which list 25 automakers and 412 types of cars – notably, all of them are Chinese self-owned brands.

For foreign automakers which have monopolized the government car market in China for years, the publishing of the“Catalogue” is undoubtedly bad news. Will they willingly accept the fate of being driven out of this market in the future?

Depressed Audi

Foreign cars are always popular for government-level purchasers. Though relevant departments once required a minimum 50% proportion of self-owned brands in the government purchasing, but unfortunately the requirement was completely ignored by many government departments. But this time, the central government seemed to get serious and did not plan to give foreign cars any chance to strike back.

It is necessary to mention Audi when talking about gov- ernment car purchasing. It is known that 20% of Audi cars sold in China every year came from the government purchasing before 2010. The proportion had a decrease in 2011 but was still maintained between 10%-15%.

When asked about the opinions about the new “Catalogue”, the PR Department of Audi China, which used to be“bold” and “straight”, became unusually cautious. “We are studying how to deal with the influence from the ‘Catalogue’but the detailed measures could not be available in recent days,” said a PR Manager from Audi China.

According to the statistical data, Audi sold 309,888 cars in China in 2011, and 30,000-45,000 of them were sold to government departments.

The issuance of the “Catalogue” rings the alarm for Audi. Actually, it was not the first time that Audi suffered from the government rules. The Management Details about Public Vehicles for Government and CPC Departments issued in November 2011 required that the emission amount of “ordinary government cars” and “cars for duty and enforcement” should not exceed 1.8L and their prices should not be higher than 180 thousand yuan. At that time, Zhang Xiaojun, vice general manager of FAW-Volkswagen Sales Department, said that Audi could get into the ordinary government car market through customization though it has no cars meeting the two aforementioned requirements.

But now, Audi’s access to the entire government car market is completely blocked by the new “Catalogue”.

Chain Reaction

It is known that there are two reasons for the foreign autos’ difficulty in reentering the “ordinary government car”market. Firstly, the automakers chosen as candidates of cars for government departments should have their R&D cost ac- count for 3% of their total revenue. Secondly, the automakers must have industrial property right. Nearly all joint ventures, in which most of the foreign cars sold in China are produced, could meet neither of them.

In comparison, Audi has the chance to satisfy the first requirement. Its joint venture in China, the FAW-Volkswagen Audi, is a result of Chinese automaker First Auto Works (FAW for short) with FAW taking 60% of the joint venture’s stake. Though it is hard for Audi China to get back the industrial property from FAW, it could still get back to the ordinary government car market by increasing its R&D investment in China to 3% of its total revenue in this country.

Compared with Audi, other joint ventures could not even get by the restriction of the rules in 2011, let alone the “Catalogue”, which completely shut the door of the government car market for them. Toyota’s Camry, Honda’s Accord, Volkswagen’s Magotan and Passat are favorable types of Chinese government departments.

“The ‘Catalogue’ is changed once a year and we have the hope of returning next year,” said the PR Director of Shanghai Volkswagen more likely to reassure himself. Su Yun, chairman of the Tangible Car Branch of the Industrial Association of Automobiles of China, said that the “Catalogue”, without any legal effect, actually left a large number of loopholes fore foreign automakers. “How much will the foreign automakers be influenced by the ‘Catalogue’ depends how strictly the relevant departments follow its requirements. And, as you can see, there has been no efficient regulation and control over the government car purchasing in China for a long while.”

In spite of the remaining hope, the hurdle for foreign automakers to regain the access to the government car market really exists for a short while. But this does not mean they are permanently rejected. As the PR Director of Shanghai Volkswagen said, the policy might be changed next year. And the foreign automakers could have their joint ventures in China“increase their R&D investment to 3% of their total revenue”or “possess the industrial property”. Presently, FAW-Volkswagen, Shanghai Volkswagen, Guangzhou Honda, Dongfeng Nissan are working on it. They have already launched selfowned brands, whose intellectual property completely belongs to these joint ventures.

“Presently, the self-owned brands of joint ventures in China do not cost too much R&D expenses and most of them have only one type of car. Therefore, they still to increase their investment in that field to make themselves meet the requirements of Chinese policies,” said an auto marketing expert.