At last year’s Beijing Auto Show one of the major trends was the launch of large cars by Chinese manufacturers. Hongqi (Red Flag) was there with the H7, BAIC showcased their Saab derived cars and Roewe launched the 950. However as HIS Automotive analyst Sa Boni pointed out this was not entirely new as both Chery and Brilliance started sell larger models some years back. What was different this time, however, is that large cars were being offered by some of the largest SOEs.
Such efforts were obviously encouraged by new government regulations. Last year the Ministry of Industry and Information Technology (MIIT) published a draft regulation for the procurement of government vehicles. Included was a list of 412 approved vehicles that are priced less than ¥180,000 with engine displacement of 1.8 litres or less. Thanks to an additional requirement for manufacturers to spend more than 3 percent of revenue on R&D not one of the included cars was from a joint venture.
“When China regulates it does so in regard to the stage of its industry and with a certain set of outcomes in mind,” says Bill Russo, president and CEO of Synergistics Ltd., a Beijing-based automotive consultancy. Both FAW (Hongqi) and SAIC (Roewe) have a history of providing government cars. Hongqi dates back to 1958 and was used for high ranking government officials until they switched to favouring foreign cars. SAIC built the Phoenix and later the Shanghai SH760 for officials not important enough for a Hongqi.
Precise government expenditure on official cars is difficult to pin down but is thought to be in excess of ¥150 billion annually. The Volkswagen group is said to sell around 10 percent of JV output in China for the government, compared to only around 1 for Chery.
In 2009 when then President Hu Jintao reviewed the troops for the 60th anniversary of the founding of the People’s Republic he did so in the Hongqi HQE. This came at a time of increasing criticism of lavish government spending on items such as banquets and foreign luxury cars, a theme which the new administration seems to be furthering to address. While China’s domestic auto industry is massive the local Chinese brands are failing to gain traction and are losing market share to the JVs – last year market share was just 27.3 percent. Traditionally Chinese producers have been stronger at the lower end of the market but they are now feeling the pinch as JVs also move into the segment.
SAIC with its Roewe and MG brands has tried to position them above other Chinese producers but sales have been far lower than anticipated. Government procurement could provide SAIC along with other Chinese manufacturers much needed government procurement sales and exposure which might lead to more sales to the public.
For Chinese manufacturers it also makes sense to produce larger vehicles. Whilst the profit margin is unlikely to be better, by nature of the fact the car is more expensive the total profit per unit is far greater. Chery reportedly only makes around ¥100 from each QQ sold. “Larger cars or premium sedans could always result in higher profit if the vehicles sell well,” says Sa.
While the Roewe 950 has been on sale since April last year, the Hongqi H7 and Beijing Senova have only been launched on the market this year and it seems that these two have been very specifically aimed at the government market. The H7 launched this March was initially only available for government procurement. Although it did go on sale to the public in May, the 2.5 litre V6 version is exclusively for official purchase. Under government regulations ministerial and vice-ministerial level officials are restricted to cars of 2.5 litres or less. China’s Foreign Minister Wang Yi has already taken delivery of an H7.
BAIC’s Saab-based car the Senova also went on sale in May. The 1.8T version is exclusively for government procurement. Curiously though the price doesn’t fit within this year’s reduced ¥160,000 cap and equipment levels are higher than for the consumer versions including features for rear occupants such as massage seats, LCD screens and a refrigerator.
With regard to government procurement the biggest issue lies in implementation. MIIT for a number of years has been putting out similar regulations which have then largely been ignored. “When such kind of new policies are released it’s always difficult to strictly execute in the whole country. JAC’s cars won some fleet orders in Anhui Province but we didn’t spot any significant impact on either the Audi A6L or other domestic models,” says Sa.
It is also going to be difficult to persuade officials to drive domestic cars if they are perceived to be inferior. “The existing government fleet can hardly be downgraded,” says Russo.
Sales of these large cars so far have not lived up to expectation. Last year the Roewe 950 sold 4,905 compared to 86,101 for the Buick LaCrosse, on which it is based. “It isn’t about just having a product that meets the specifications but the esteem this class of buyer aspires to have,” says Russo.
This may well be an uphill struggle with private customers but if the government really does start buying Chinese it will certainly help build exposure.