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Government vehicle reform to impact China’s automobile market

China’s State Council released concrete guidelines on July 16 to terminate official cars, an effective endeavor in cutting huge expenditures on automobiles for government officials.

As an important part of China’s campaign of combating corruption and deepening reform, the termination of official cars is expected to have great implications for the country’s automobile industry.

According to the guidelines, China will discontinue the provision of automobiles for government officials at the rank of vice ministers and lower. Officials from the central government departments will receive subsidies on a monthly basis to allow them to choose their own means of transportation. The amount of subsidies ranges from ¥500 ($80) to ¥1,300 depending on their positions.

After the elimination of most government vehicles, some officials are expected to buy their own cars, driving up domestic demand.

About two million government automobiles are targeted for elimination, according to Ye Qing, deputy director of Hubei Bureau of Statistics, in an interview with a local media. Ye believes that at least one million new cars would be sold to officials when official automobiles are eliminated in the upcoming two years, adding ¥200 billion to vehicle sales revenue nationwide.

Vehicle consumer groups will change dramatically when more legislators become private car owners, according to Jiang Suhua, member of a legal team at China Consumers Association. Consumer confidence and consumption environment in the industry is expected to be improved as the legislators are better aware of how to protect their rights and interests than ordinary consumers.

“The reform of government vehicles will be good news to dealers because government agencies used to purchase directly from OEMs,” said Shen Jinjun, deputy director and secretary-general of China Automobile Dealers Association (CADA), at a press conference held in Beijing in the middle of July. “Government officials will now buy cars individually from dealers.”  Shen believes that the reform will help speed up vehicle sales and reduce inventory of dealerships.

The product lines of automakers such as Audi, which has a key client department for official cars, are facing changes, according to Shen. The official vehicle departments of OEMs have been profit drivers over the years and that will likely to change. Moreover, products targeting individual officials as consumers may need changes in both design and pricing.

Despite possible increase in new vehicle sales at dealers, the abolition of government vehicles are likely to impair dealer profitability in aftersales service, according to Cui Dongshu, secretary-general of China Passenger Car Association (CPCA). It is not a secret in China that maintenance costs of government cars are much higher than those of private cars because of kickbacks official car drivers get from repair shops, adding to the total cost.

The State Council guidelines urge government agencies to auction off official vehicles through open procedure to avoid losses of state assets. These vehicles are likely to enter used car market and drive up demand because many of the official cars are mid- to high-end models with better performance. Used car sales will expand with an increasing number of government vehicles getting into the market, according to a signed article in Qiche Shangye Pinglun or Auto Business Review.

In order to avoid wasting of resources, government bodies and public institutions can set up and operate, on a temporary basis, vehicle service or leasing entities utilizing unsold vehicles, according to the guidelines. Leasing companies are facing great opportunities to provide leasing services for government organizations in the future.

It is noticeable that not all of the government vehicles will be abolished. Vehicles for special services such as security and intelligence shall be kept. The remaining demand for official vehicles, though not large, will favor new energy vehicles in the future.

The government has mandated that the share of NEVs in total new vehicles purchase by government organs and institutions shall account for at least 30 percent between 2014 and 2016, according to the Implementation Plan on New Energy Vehicle Purchase of Government Bodies and Public Institutions released on July 13. The share shall be at least 15 percent in 2014 in the Beijing-Tianjin-Hebei region, Yangtze River Delta and Pearl River Delta where air pollution is serious.

The State Council guidelines encourage the use of public transportation in conducting regular government affairs and urge local governments to take effective measures to improve public transit system including taxi and subway. Customized transportation services for different levels of the government may emerge in the future.

A netizen commented bluntly that only when all officials use the public transit system, can the system be improved significantly in China.

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