Inspecting the fleet

In 2009, China’s auto sales surpassed the 10 million mark, making it the world’s largest market for automobiles. While private consumption – encouraged by policy – played a role, fleet purchases of vehicles by corporations and government entities are also important targets for manufacturers.

According to official projections, the Chinese central government alone is expected to spend US$14.7 billion on official cars in 2010. "Fleet sales make up a very large percentage – up to 50% in the case of some models – of some passenger car model sales," said Stephen W. Dyer, principal at A.T. Kearney (Shanghai) Management Consulting.

In fact, the government is the most important single customer, with a 7% market share of passenger cars in China, said Klaus Paur, regional head of TNS Research International’s automotive division. "The government is supposed to spend around RMB100 billion [US$14.6 billion] for vehicle procurement in 2010," he said. "This represents around 6-7% of annual passenger vehicle sales, and is therefore an extremely important revenue generator for car manufacturers."

However, while government policy is an important stimulant of fleet purchases, the window of opportunity for booking large orders may be closing, in particular for foreign luxury brands.

Stamp of approval

Private firms are free to buy whichever cars they want, but central government purchases are regulated by the Procurement Center of the Central People’s Government (PCCG), which sets purchasing guidelines for central government officials. The PCCG currently has 38 preferred car companies listed, 21 of which are domestic brands. In 2009, it added the German joint venture car companies that make luxury BMWs and Mercedes-Benzes.

Being on the list does not automatically translate into sales, though, and it seems unlikely that Mercedes and BMW will receive a significant bump from their newly approved status in the near future. For one thing, brand is only one of the criteria PCCG applies: It also specifies engine displacement and price, and those standards have been recently revised downwards.

Where once an ordinary official was permitted to use a car with an engine displacement of up to 2 liters and a price below RMB250,000 (US$36,600), they are now only permitted to buy vehicles with an engine displacement of up to 1.8 liters and a price below RMB160,000, effectively ruling out a wide swathe of luxury vehicles exceeding those guidelines.

Buy China clause

The justification given was that domestic brand quality has improved, and therefore there is no need to overspend on imports when domestic alternatives are available. Indeed, according to a recently released report in state media, officials are also considering mandating that 50% of government procurement be from domestic carmakers. Spokespersons from PCCG declined to be interviewed.

There are also political problems. In response to speculation that government officials were planning to trade in their Audis for newer, more expensive BMWs and Mercedes models, PCCG issued the following statement last year: "The central government won’t replace most cars. It will only buy new cars for new officials or replace heavy-polluting vehicles. Being on the list only means the manufacturers are qualified; it doesn’t indicate actual buying plans."

The PCCG has stated that it will reduce net central spending on government vehicles by 15% from the average spending level over the last three years.

And then there is peer pressure. "Although BMW is now on the list, many government officials would not want to stand out by purchasing a BMW when all their peers have Audi vehicles. Most government officials want to maintain a low profile and appropriate image," said A.T Kearney’s Dyer.

Brand boost

Although Audi may be "low profile" as far as officials are concerned, being on the list has made it one of the most successful top-end brands in the wider market. "Audi’s strong market position in the premium car market is based on the long-term presence of A6 models in the government fleet," said TNS’ Paur: One out of every five Audis sold in China are purchased through government procurement.

Fortunately for BMW and Mercedes, there is still some room at the top. Ministers and provincial heads can have cars with an engine displacement of up to 3 liters and which cost up to RMB450,000. A vice minister can spend up to RMB350,000, according to the regulations. Selling to this smaller but more elite group of customers can only help BMW and Mercedes brand profile in the wider consumer market.

Whether a policy of protective incubation through guaranteed government orders will ultimately help or hinder foreign brands’ success in China is questionable. Private and commercial purchases together still make up 80% of the total, and coddling local manufacturers has its own risks, as the US auto industry so singularly illustrates.