19 May 2019

Govt fleet cutback may crash some China carmakers

China’s efforts to slash the official motor vehicle fleet as part of a wider campaign to cut government expenditure may deal a significant blow to some homegrown auto brands. Particularly vulnerable will be the lesser-known names that have only recently made their way onto official procurement lists.

Shortly after the conclusion of the Communist Party’s central committee plenum last month, the central government promulgated some austerity measures and issued a fresh call to rein in excessive spending. Included in those initiatives was a plan under which government cars for general purposes will be whittled down and auctioned off in phases in the near future. With the move, observers fear car purchases by governments at various levels may shrink by more than two thirds from next year.

Indigenous brands that had been scrambling for government orders to ratchet up sales and boost brand image could be the major victims of Beijing’s new policy initiative.

As for local governments, some of which hold significant stakes in automakers in their regions, they now need to look for new ways to lift the prospects of the homegrown labels. 

Before the new policy, Guangzhou Automobile Group Co. Ltd. (601238.CN, 02238.HK), for instance, shipped more than 5,000 Trumpchis {傳祺}, the firm’s self-developed marque, to bureaus and departments under the Guangdong provincial government last year. Government orders for Shanghai Automotive Industry Corporation’s (600104.CN) Roewe {榮威}, meanwhile, more than doubled during the same period, as the Shanghai Securities Journal noted. 

Officials in Zhejiang had also made it clear that Geely would be their preferred choice in procurement.

Such official support is usually the crucial factor to jumpstart various homegrown auto brands, many of which were created in a rush by Chinese automakers as they sought to launch own product lines on top of franchise units with foreign partners. As wooing private car buyers is a lengthy process, enthusiastic backing from local authorities was the only reason behind the brands’ survival. Now with the central government’s frugality campaign, local cadres have no choice but to trim their budget for car purchases.  

When it comes to the long-term impact, analysts believe Beijing’s tougher stance toward government spending can lead to varied fortunes for domestic firms while their foreign counterparts can reap some extra benefits.

Lesser-known homegrown brands like Trumpchi and peers which are obviously laggards in the fierce competition and rely heavily on generous government procurement for survival may receive fewer orders from local cadres. But brands with longer history and relatively better public recognition like Hongqi and Roewe, which have emerged as bellwethers of the country’s self-branded marques, still have a chance to gain solid mileage with patronage from the central government and various ministries. 

Meanwhile, foreign brands, which command a significant share in the country’s car rental market, are likely to see a surge in sales as car rental companies replenish their stock to accommodate demand from local officials.

– Contact the writer at [email protected] 


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