China Puts the Brakes on Luxury Cars 中国公务车拟告别豪华车

By newsdoug on February 28, 2012

China puts the brakes of luxury automakers A new plan being floated by the central government could put the brakes on soaring sales growth for luxury brands like Audi (Frankfurt: VOWG) and BMW (Frankfurt: BMW), who have so far managed to defy a broader downturn for China’s auto sector. The shift would come as a huge blow for those names just as most are investing billions of dollars to increase their capacity to cater to China’s huge thirst for luxury brands, though I expect the final outcome will be a compromise that allows some government sales to continue. Let’s look at the facts first, which have the Ministry of Information and Industry Technology (MIIT) reportedly proposing a plan that would limit all government agencies to buying only domestic brands, in an attempt to support struggling homegrown players like Dongfeng (Shanghai: 600006) and Geely (HKEx: 175) that have steadily been losing market share to the more aggressive and resource-rich foreign names as growth sharply slows in China’s auto market. (English article) Such a step would mark a huge loss for foreign names like Audi, BMW and Mercedes, as the government now purchases about $13 billion worth of cars each year, many of those luxury models. China’s auto market zoomed in 2009 and 2010, posting growth in the healthy double digit range as Beijing offered a range of incentives to stimulate sales at the height of the global financial crisis. But now the government has ended most of those incentives, causing growth to drop to just 4 percent last year, with most foreign brands reporting low double-digit gains while many domestic ones saw their sales drop sharply. This latest government initiative seems aimed at throwing a lifeline to the domestic players. The only problem is, a big portion of those government fleet sales are for luxury brands that many higher officials prefer, and while the domestic players can provide reasonable mid-range cars, few can offer such higher-end models. One of my friends recently scoffed at the prospect of buying a Chinese-made smartphone, saying he would get laughed at by all his friends who own trendy iPhones. The same is true for many high government officials, who would probably rather walk to work than be seen getting out of a Geely or Chery automobile. At the end of the day, I suspect that cries of protest from both government officials and the foreign luxury brands themselves will get heard by central regulators at the MIIT, and both sides will reach a compromise that will allow continued purchasing of luxury cars by government agencies. But at the same time, I do expect we’ll see a slowdown for the luxury automakers as those government agencies come under pressure to buy more domestic brands, bringing growth rates for the foreign names more into line with mainstream foreign players like General Motors (NYSE: GM) and Volkswagen.

Bottom line: Foreign luxury car makers will avoid a proposed ban on sales to Chinese government agencies, but will see such sales drop sharply as the government tries to assist domestic brands.

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