BMW’s recent appearance on China’s 2009-2010 government procurement list has created a stir not only among automotive circles but also the general public.
One website headline reads: “When a civil servant drives a BMW, the government official becomes a newly rich.”
A local analyst aptly points out that the strong reaction reflects two kinds of public sentiment. First, due to a series of blatant hit-and-run accidents committed by BMW owners, the German luxury brand has become a notorious symbol as the luxury sedan for China’s newly rich. Many argue that it is inappropriate for government officials to drive luxury foreign brands, status symbol for the wealthy. Instead, the government should spend tax payer money on local independent makes in support of the local industry.
Secondly and probably more important, there is a strong popular discontent over the exorbitant government expenditures on official sedans. Last year, China spent over ¥80 billion ($11.4 billion) on official automobiles, or about one-fourth of the government’s total annual procurement budget. The amount has more than doubled over the past 4-5 years. It has become common knowledge that official cars in China are used for official business only 1/3 of the time and the other 2/3 mostly for personal use. The cost for maintaining an official car is 2-3 times that of a privately owned automobile.
Home made vs. independent brands
In response to popular discontent, the Procurement Center of Central Government Agencies hastened to release a notice on its website on June 15 saying that the Center would further raise the ratio of independent vehicle brands in its procurement “in accordance with the State Council’s Automotive Industry Readjustment and Revitalization Plan.”
Three days later, a responsible official at the Center told People’s Daily that it “currently has no plans in purchasing either BMWs made by BMW-Brilliance or Mercedes-Benz made by Beijing-Benz” despite the fact that the two luxury German cars are both listed in the procurement list.
Earlier, the National Development and Reform Commission (NDRC), the Ministry of Industry and Information Technology (MIIT) and seven other central government departments jointly released a notice emphasizing that the ¥4 trillion economic stimulus package involves government investment and spending. “The government should give priority to home-made products in its procurement.” China’s Government Procurement Law of 2002 stipulates that “government procurement should choose home-made merchandize, engineering products and services,” in accordance with global practice.
It seems that the Chinese government will have to define and differentiate between “home-made products” and “independent brands” soon.
Foreign vehicle brands made at joint ventures in China should no doubt be considered as home-made or locally made if they utilize at least 50 percent of local parts and components. It is therefore perfectly justified for the government to list locally assembled BMWs and Mercedes-Benz in its procurement list if they meet the government procurement standards in terms of price and engine displacement.
But the definition of independent brands may be a different story. At CBU/CAR’s 14th Presidents’ Forum held during Auto Shanghai 2009, Huang Yonghe, director of policy research under the China Automotive Technology & Research Center (CATARC), told the audience that an independent vehicle in China must be have a China-registered and global unique trade mark owned by a company registered in China, with full independent intellectual property rights in production, product improvement, certification and technology transfer.
Based on such criteria, most of the passenger vehicles made by Chery, Brilliance-Jinbei, Geely, BYD, Great Wall, JAC, Lifan, FAW Car, etc. are independent-branded vehicles. Locally assembled VW, Audi, Buick, Chevy, Peugeot-Citroen, Toyota, Ford, Honda, Nissan, Chrysler, Mitsubishi, Isuzu, Suzuki, etc. are home-made foreign brands but not independent brands. An independent vehicle designed and made by a joint venture such as the planned Linian to be launched by GAC-Honda would be considered as an independent brand.
It would be interesting to see how China’s central authorities will officially define “locally or home-made” automobiles and “independent brands.” As far as government procurement is concerned, China will act no different than the governments in the U.S., Germany, France, Japan or Korea in prioritizing locally made or home brands, including foreign brands assembled in China. Favoring only domestic independent brands in government procurement would be protectionism in violation of WTO rules.
However, China is likely to change the current standards in price and engine displacements for automobiles purchased by government agencies. The current vehicle procurement standards were adopted 15 years ago. The ¥450,000 upper limit in the price of a sedan for use by a minister-level official, for example, is equal to $66,200 in today’s exchange rate compared to the $50,000 back in 1994. By lowering the price range of government automobiles as well as putting local independent brands on an equal footing in the procurement standards local independent makes are likely to increase their market shares in the official and institutional car market.
China’s national strategy on encouraging independent innovation and branding as well as on new energy vehicle development adopted in the Plan will also help boost demand for local independent brands.
New definitions on home-made and independent-branded automobiles as well as how the government procurement policy evolves will have a profound impact on the future institutional market demand of the types and makes of automobiles assembled in China. The current situation of foreign brands dominating China’s institutional and official car market is likely to change down the road.