China Auto Policy Risks Misfiring

The Wall Street Journal, February 28, 2012

In the gridlocked streets of China's cities, frustrated motorists are used to Audi-driving officials speeding down cycle lanes, illegally parked outside luxury malls and driving the wrong way along one-way streets.
A new list of cars that government officials can drive excludes foreign brands and directs China's bureaucrats to buy cheaper domestic alternatives. It is meant to kill two birds with one stone. Public anger at official waste and corruption is appeased. Domestic auto firms get a bigger chunk of the estimated 80 billion yuan ($12.7 billion) official car budget.
It won't be that simple. The new list is at the consultation stage. Even if it comes into effect, implementation will be difficult. A move last year to restrict mid-level government officials to buy smaller, cheaper cars appears to have had little impact on sales. Dealers say officials evade restrictions and get the car of their choice anyway.
In the event sales to officials do dry up, foreign luxury brands will continue to tap one of the fastest-growing sectors of the China auto market. Bill Russo, an expert on China's auto industry at Synergistics, says luxury cars account for only 8% of unit sales in the Chinese market, compared with 14% in the U.S.
As important, though Chinese companies like Chery and BYD are bumper-to-bumper in the budget end of the market, they don't have the technology or the brand image to make a dent on the luxury end. With limited domestic competition, Audi's China sales rose 29.2% year-to-year in the first three quarters of 2011, considerably outpacing growth in sales for the auto market as a whole.
The new list is good public relations for a government keen to show it is cracking down on abuse of public funds. But it will be a while before China's citizens can hope to spy officials behind the black tinted windows of a domestic brand car.

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