Audis Trump China Patriotism as Local Brands Falter

Audis Trump China Patriotism as Local Brands Falter

By Bloomberg News  Mar 5, 2013

China is pressuring bureaucrats to buy locally branded cars to help domestic automakers and cut lavish spending of taxpayers’ money. That’s unless you are a high-level government official with an Audi A6L.

At Beijing’s Great Hall of the People yesterday, where Chinese Premier Wen Jiabao was addressing a crowd of almost 3,000 delegates, only those senior enough could park in the nearby north gate and southern courtyard. The scene: dozens of gleaming black Audi sedans waiting for their VIP occupants to emerge from the National People’s Congress.

“We should try to use Chinese cars when possible and actively advocate our officials to use them,” Guo Gengmao, governor of central Henan province, said yesterday when asked whether he will swap his Audi for a local brand. “But we should do so in a practical way and switch cars when we need to replace the old ones. Otherwise, it’s a big waste to replace cars when they’re still good to use.”

While civil servants in the U.S., Japan and South Korea typically ride in local cars, Chinese senior leaders stand out in their preference toward foreign brands, namely Volkswagen AG (VOW)’s Audi. That’s not helping Chinese automakers, whose combined market share of domestic sales has declined to a four-year low.

Official Prestige

Audi has benefited from its image as the car of choice for China’s political elite by targeting state-owned company bosses and business executives. That’s helped the automaker cement its position as the top premium brand in the world’s largest vehicle market.

Led by China FAW Group Corp. (000800), maker of the Chinese Red Flag brand of luxury vehicles, local automakers are pushing to win government sales to burnish their brands.

“If the top leaders started to switch to Chinese brand cars, junior officials and bosses of state-owned companies would follow overnight and that would be a great push for state-owned automakers,” said Chi Yifeng, head of the Beijing Asian Games Village Automobile Exchange, a vehicle dealer in the capital. “People have been waiting for detailed policies of promoting domestic brands for the government fleet.”

Local automakers could use the help.

The combined market share for Chinese sedans and compact cars fell to a four-year low of 28.4 percent in 2012, according to data compiled by the state-backed China Association of Automobile Manufacturers. No Chinese brand was among the top 10 selling passenger-vehicle models last year, the data showed.

Falling Behind

Chinese carmakers risk falling further behind as competition from foreign companies intensifies. Automakers from General Motors Co. (GM)to Nissan Motor Co. (7201) are expanding their upscale brands to attract more Chinese buyers.

Audi dominated the premium vehicle segment in China with a 29.6 percent share last year, followed by Bayerische Motoren Werke AG andDaimler AG (DAI)’s Mercedes-Benz at 23.6 percent and 20.6 percent, respectively, according to estimates at researcher IHS Global Insight. Luxury car sales in China are forecast to surpass the U.S. as early as 2016 and equal that of Western Europe by 2020, driven by rising incomes, McKinsey & Co. said in a report this week.

Audi is stepping up efforts to transform its image as a brand for Chinese bureaucrats, a task that has taken on added urgency as Communist Party Chief Xi Jinping pushes to reduce government expenditure.

Transforming Audi

Audi says its association with the government is limited. Private individuals now account for nine out of every 10 customers in China, Luca de Meo, member of the management board at Audi, said in Beijing in January.

The Ingolstadt, Germany-based automaker last month opened its first interactive digital showroom in Asia in a Beijing shopping mall to reach out to younger consumers, and has introduced sport-utility vehicles and sports cars like the TT and R8 to expand its offerings beyond the A6 sedan.

Regardless of their influence over total sales, some Chinese officials have gone ahead to use local brands, mostly by automakers headquartered in their respective jurisdictions.

Wang Rong, Communist Party secretary of the southern Chinese city of Shenzhen, started using BYD Co. (1211)’s e6 electric cars last year.

Local Switch

His counterparts in Beijing, municipal party secretary Guo Jinlong and mayor Wang Anshun, have expressed interest in replacing their Audi sedans with BAIC Motor Corp.’s Senova cars when they become available in the second quarter, according to BAIC Vice President Dong Haiyang.

The local communist party committee in Gansu province asked its senior cadres to “gradually” switch to use indigenous- brand cars, according to a Gansu Daily report carried on the government’s website. Ningxia, Hunan and Xinjiang are among other provinces that have issued similar directives.

“To make the Chinese auto brands more competitive, the industry needs support from the whole society, especially the government officials, who should be role models and use local- brand cars,” said Cheng Xiaodong, head of vehicle-price monitoring at the National Development and Reform Commission, the nation’s top economic planner.

Chinese automakers from FAW to SAIC Motor Corp. have stepped up development of premium models in anticipation the government will lend more support to help them revamp an image as producers of cheap, utilitarian cars.

FAW is completing a $280 million revamp for its Red Flag — or Hongqi in Chinese — first produced for Chairman Mao Zedong and discontinued in 1981 because of its high fuel consumption. Local governments in more than 10 provinces and cities have put in orders for Red Flag’s H7 sedan since its introduction in July last year, according to FAW’s website.

SAIC Roewe

SAIC’s Roewe 950 sedan, whose prices start from 149,800 yuan ($24,065), was selected as the official car for the annual meeting of Sichuan province’s local political advisory body in January, the Shanghai-based company said on its website.

The central government issued guidelines in November 2011 lowering the budget for cars used for routine official business by 28 percent to 180,000 yuan. The Audi A6L, the best-selling luxury car in China, starts at 287,300 yuan.

The industry ministry followed three months later with a proposed list of 412 models approved for purchase by state agencies that excluded foreign brands.

The fine print: Those regulations don’t apply to cars used by senior government and Party officials.

Detailed rules will probably be issued after the Congress meeting this month, providing a big boost to FAW, SAIC and other local automakers, the Beijing Times reported on Feb. 28, without saying where it got the information.

“For a country with such a gigantic capacity also in terms of their own industry, they are always proud to promote their own brands,” Pan Qing, head of China region sales at Audi China, said on Jan. 31 in Beijing. “That is something that everybody can anticipate because if you look at those mature markets like Germany, Japan, Korea and the U.S, all the governments always use their own brands.”

For Related News and Information:

To contact Bloomberg News staff for this story: Tian Ying in Beijing at ytian@bloomberg.net; Alexandra Ho in Shanghai ataho113@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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