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Government decides to pare wide use of public fleet vehicles
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It can be difficult to foresee the twists and turns that compel misfortune to beget fortune, and vise versa.” The philosophy in an ancient Chinese story, which is summed up as an idiom “Sai Weng Shi Ma, Yan Zhi Fei Fu” and sometimes translated as “a blessing in disguise,” might be worth remembering by Chinese domestic automakers.
Local car manufacturers were hit by two pieces of bad news recently. One signaled that official vehicle purchases next year may be significantly reduced, and the other was that the 50 percent stake limit for foreign partners in joint ventures might be lifted.
This double whammy, at least on the surface, means that the hopes they pinned on selling higher-profit, mid-to-high end models to government fleets may be thwarted, and the domestic position in joint ventures could be weakened.
But surely, there is a brighter side to consider. A market environment with less government control and more free competition may be a blessing, however disguised.
New guidelines for the use of government vehicles in China came out as a heads-up for those domestic carmakers looking to take a short-cut to the mid- to high-end market by serving some powerful customers.
In the latest salvo in its campaign against ostentation and corruption, the central government has ordered official cars for general use to be decommissioned. These cars at the service of government officers at various levels comprise the bulk of the more than two million official cars that cost the country an estimated 200 billion yuan (US$32.9 billion) each year and often take center stage in scandals related to power abuse for personal gain.
In what policymakers call a “market-oriented reform,” many official cars will be sold off in public auctions. Only those for law enforcement, emergency services and top-ranking leaders will remain. Officials who lose their government cars will be eligible for transport subsidies.
There is no doubt that the official car market will be reducing dramatically next year and disappointing domestic carmakers that just came back in favor on the market this year with provincial governments and central administrations heeding President Xi Jinping’s “Buy China” directive.
Luckily, the decrease isn’t expected to make any onerous impact on sales of domestic cars because public fleet procurement accounts for only 2 percent of China’s auto sales, with international brands traditionally the biggest beneficiaries. But the plans for domestic car-driving officials to set an example that may spill over into private consumption will very likely be brought to naught.
Getting over such an unfavorable policy change is all about perspectives. The sales losses it might have caused are immeasurable, and on the other hand, also ignorable, as no one knows for sure whether there is really a “demonstration effect” or not.
Magic formula
Yes, the formula once worked magic for foreign car models like the VW Passat and the Audi A6, which made their names in China because they were the popular and highly visible choices of officialdom. That helped cement their positions as dominant players in their respective segments.
But the prestige of chauffeuring leaders about is certainly no guarantee of market competitiveness. Red Flag, the luxury domestic brand that first rolled off an assembly line in 1958, was famously associated with its role as the supplier of official cars. In the 1980s, its production was suspended as its sedans lost out to foreign cars in securing government fleet purchase orders. The Red Flag was simply too expensive to manufacture and too expensive to run.
In June, the moribund brand staged a comeback with the Red Flag H7 sedan. Its timing was perfect. Shortly after the launch, it became the official choice of Chinese Foreign Minister Wang Yi. But given its specifications, the model is apparently not fully prepared for a highly competitive market, where design and advanced technology are most highly prized.
In truth, it’s time for domestic carmakers to stop relying on the government market to sustain production. It’s time to switch the focus to the consumer end of the market, where products speak for themselves and “back-door” connections don’t work.
It is understandable that many local governments try to favor local domestic carmakers in their policies. But such coddling just reduces the incentive to be innovative in research, development, design, planning, management and other business factors that together create a strong and viable company.
The official vehicle policy change is an opportunity for them to come up with a new plan for the mid- to high-end market, starting with those products designed with the government vehicle purchase directives in mind.
Biggest problem
Their biggest product problem lies in executive sedans in the B segment. To offer officials “utmost” enjoyment, carmakers create models to get as close as possible to the upper budget limit of 180,000 yuan and to the maximum displacement of 1.8 liters. But that doesn’t make the cars a good choice for consumers, who can buy a SUV for the same price or an A-segment car that is more cost-effective. Domestic automakers need to fill those gaps.
They also need to play some serious catch-up in the car rental market, now dominated by foreign joint-venture models. The market provides a chance for local carmakers to attract more consumers and familiarize them with products. That will also be true for public officials who are losing their government vehicles. Some may not like the idea of substituting public transport for motoring and will buy or rent cars that they can use for official business and claim reimbursement.
Will they heed the “Buy China” call and select domestic model cars? Or will they be swayed by the performance, design and quality of foreign brands? One thing is certain. Trust in a car brand is never given; it has to be earned.
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