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Government procurement not against WTO rules

China’s 2012 Catalogue of Automobiles for Selection as Official Cars for Party and Government Organs, released on February 24 by the Ministry of Industry and Information Technology (MIIT) for public comments, has generated much attention from the media and the industry.

While most analysts in China welcomed the Catalogue, saying that government spending should have been directed to locally made independent vehicles brands long time ago, some question its fairness because not a single foreign brand locally assembled by foreign invested joint ventures has been included in the draft.

Some even argue that the proposed Catalogue might be in violation of WTO rules. “Apparently, the Chinese car market is slowly but surely closed to foreign investment,” reportedly said Dirk Moens, general secretary of the European Union Chamber of Commerce in China,  on the proposed decision of the Chinese government.

“As an industry you cannot expect to be warmly welcomed outside of your country, if at the same time you start closing the industry in your country,” Moens was quoted in a telephone interview by Bloomberg. The openness of European countries that enabled Great Wall Motor and Zhejiang Geely Holding Group to make European investments “may not be reciprocated,” Moens said.

 

Not in violation of WTO rules

Moens’ comments seem to be an overreaction to the proposed Catalogue, according to Dong Yang, secretary-general of China Association of Automobile Manufacturers (CAAM), who also headed the team of experts entrusted by the MIIT, the State Council Government Offices Administration and the Departmental Affairs Bureau of the Party’s Central Committee in putting together the draft Catalogue.

“Government procurement does not have to go by the WTO principle of national treatment,” Dong wrote in his blog on auto.sina.com. “This is because government procurement spends taxpayer money. Moreover, government equipment and utensils may involve national security issues. So governments can make their own rules in terms of procurements.”

Dong also argues that in drafting the Catalogue, all manufacturing enterprises are treated equally. “We did not make the source of investment or vehicle technology as a precondition for selection. In fact, Zhengzhou-Nissan, a foreign invested JV, is listed in the Catalogue,” Dong said.

Dong explained that his team of experts followed three principles in the selection of eligible vehicles. First is price and engine displacement. Second is sustainability of the product and third is price/performance ratio. “These are official vehicles purchased with tax money and therefore should not be lavish,” Dong said. “We also have to ensure a long-term and steady supply and aftersales service, which hinges on sufficient R&D investment, ownership of full industrial rights and availability of the vehicles in the market in scale production. In terms of price/performance ratio, local independent brands have by now not only improved their technology and performance but also become much more affordable.”

 

International practice

Dong claims that the principles for selecting official vehicles to purchase are in keeping with international practice. “I don’t have to get into this because it becomes obvious if you look at government vehicles in the U.S., Japan, Germany, Korea and other countries.”

He advised that people should not overreact to the proposed government procurement catalogue. “We should not forget that until now, the bulk of vehicles purchased by the government have been foreign brands made by JVs in China,” Dong pointed out. “You can hardly argue against the fact that the Chinese government has granted foreign-invested JVs super-national treatment for a long time. Now that local makes are both cheap and durable, why can’t they become a major source of government procurement?”

 

JV makes still eligible

The proposed Catalogue, according to Dong Yang, covers only “ordinary official vehicles and special vehicles.” It does not cover official cars for Party and government leaders at the ministry or provincial levels.

“I would hope that ministers and governors will also use local independent makes, but unfortunately I have no jurisdiction over their procurement,” Dong quipped. “If they do, it would really have an impact on consumer orientation in the future.”

Government procurement of official cars for ministerial-level officials is still subject to the existing State Council’s standards adopted in 2004: up to 3.0L in engine displacement and under ¥350,000 ($55,556) for vice ministers/vice governors and up to 3.0L and under ¥450,000 for ministers/governors.

Dong therefore believes that the proposed Catalogue will have little impact on foreign brands in China. “First, the market share of government procurement vehicles is only about 2 percent,” Dong said. “Second, foreign brands with advanced technologies are obviously very competitive in China’s expanding auto market. They should really not worry too much about a very small segment of official fleets.”

The 2 percent, however, may be a big number because China’s official fleet vehicles may have an estimated annual demand of 300,000-600,000 units. Estimated annual government expenditure on fleet automobiles for 2012 is as high as ¥120 billion ($19 billion).

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