Sell-off bodes well for sales

Govt's mass sale of official cars means bonanza for dealers, rental firms

July and August are traditionally considered the off-peak season for Chinese car dealers.

However, this year, the same two months have become "the season of the civil servants", as many dealers slug it out for affluent government-employed customers, who are suddenly faced with having to buy their own cars.

The reason for their brighter summer fortunes is a result of the government's ongoing campaign to cut down on the number of official cars.

The latest policy guidelines mean that most government cars currently being used for daily business - about 90 percent of the total number - will be auctioned off on the open market, with only cars for minister-level officials and for public security purposes, such as police cars, being kept.

That means that thousands of officials are being forced to rent or buy their own rides, albeit with allowances from the government.

The monthly allowances vary depending on the recipient's rank, from 500 yuan ($80; 60 euros) to a maximum of 1,300 yuan.

"The recent government car reform is great news for us," Swedish car brand Volvo says in a note to China Daily. Volvo is owned by the Chinese motor manufacturer Geely Automobile.

"Civil servants are important customers of ours and we have already been working out our promotional strategies to appeal to this new niche market," the company says.

But some joint-venture brands have already been aggressively touting for business within this newly emerged market.

When the car reforms were first launched in the southern Chinese city of Shenzhen, for instance, dealers representing some of the biggest names in the industry - including Audi, Volkswagen and Nissan - parked their latest models outside the city's main government offices and handed out fliers to civil servants, offering group purchases and other discounts.

The companies insisted this direct approach already had been planned, but admit the new civil servant market comes at a perfect time to jumpstart what has been a sluggish 2014 car market.

Even before the policy details were officially revealed, some dealers had already been offering their services to local government and state buyers.

The huge cost of government cars has been a target of criticism for years.

Before the official ban, government vehicles were often being used for unofficial purposes, with many simply acting as family cars, and not just on weekends.

Although no official numbers are available, the China Passenger Car Association estimates that governments bought around 750,000 cars in 2012, about 4 percent of total domestic sales.

A report by UBS Securities has estimated the value of the sector - often dominated by expensive foreign makes - at around $20 billion (15 billion euros).

In 2013, the central government said it spent 4.4 billion yuan on official cars, according to Ministry of Finance figures.

Zhang Xin from Guotai Junan Securities, China's third-largest brokerage by revenue, says this still represents a massive chunk of the car market, and "despite the cars being sold, the demand from these civil servants will still remain".

He adds: "Government officials are used to premium brands such as Audis, so they will tend to buy similar cars in future to match their social status."

Although the number of government cars will plummet, there will still be a need to replace aging official vehicles.

But in the future, government buyers will have to follow strict purchase lists provided by the Ministry of Industry and Information Technology.

Replacement cars will have to be domestic brands, cost under 180,000 yuan, and have a maximum 1.8 liter engine.

Over the past 30 years, foreign brands have dominated government fleets.

At first, Toyota Crowns were the most popular, but then Audi A6s took the lead.

"This is a good opportunity for Chinese brands, especially at a time when their market share has been nibbled away over the past 10 months," says John Zeng, head of LMC Automotive Asia Pacific, a leading provider of automotive forecasts and market intelligence.

"Around 500,000 government cars are bought annually, so it is a big slice of cake for high-end home brands."

Ning Shuyong, spokesman for Volvo, said in November when confirming Volvo was on the government purchase list, that fleet purchases by government institutions will be important for his company.

It has already sold some cars to the government after being listed as one of the preferred buyers, he said.

"It is hard to raise sales in the short term just through government sales, but the positive impact on brand image can't be underestimated," Ning says.

Car rental companies also expect to see accelerated business as a result of the new government policies.

"If governments and state-owned companies lease cars from rental companies, it could prove the most practical and economic way to meet their transport demands," adds Jia Xinguang, an independent senior auto analyst.

"Employees can pay for the service through the allowances they get every month."

Lu Zhengyao, the CEO of China Auto Rental, one of the country's largest car rental firms, told the business newspaper 21st Century Business Herald that the new policies might translate into a 100 billion-yuan market, and he expects a considerable part of that to enter the car-leasing market.

"Car purchasing is just a small portion of the government's car costs, and up to 80 percent of costs actually come from gasoline, parking and maintenance," Jia adds.

"So leasing cars can cut a lot of government spending, and I'm betting most institutions will adopt this practice in future."

Shanghai-based eHi, one of the country's largest car rental companies, which operates 16,000 cars in 90 cities, is already promoting services to Shanghai civil servants, at a 20 percent discount.

Cai Lihong, its vice-president, says it is adjusting its fleet to make sure there are enough cars meeting the "under 180,000 yuan, below 1.8L" requirements, to improve its chances of bidding for leasing contracts from government institutions in Beijing and Shanghai.

"We are already talking with major Chinese car manufacturers (including SAIC Motor Corporation Limited and Beijing Automotive Group) to make sure we have got the proper car stock to meet the requirements," Cai says.

"These reforms potentially represent a big bonus for us," he adds. "The cost of cars ranks second in government spending and after this reform, the money will flow instead into our industry."

Business rentals represent 40 percent of eHi's revenues and Cai expects government leasing in future might make up 10 percent of the total.

Meanwhile, the policy is also attracting interest from other types of transport companies, including Uber - a company based in San Francisco, California, which makes mobile apps that connect passengers with drivers of vehicles for hire, and ride-sharing.

Uber currently arranges pickups in 160 cities in 40 countries. Cars are reserved by sending a text message or by using a mobile app. The latter can also be used by customers to track their reserved car's location.

Uber recently has issued organizations with an account that employees can use for rides, and companies then pay Uber every month or quarter.

"We are going to bring this product to Asia in a few months," says Ben Chiang, who is directing its China operation.

It already has six China offices and recently launched a new service, People's Uber in Beijing to encourage drivers to share car trips, to cut costs and reduce congestion.

"Currently, our business here is still mainly for individual customers - but the business market in China has great potential.

"As Uber is a latecomer, we are still catching up with our Chinese competitors in business customers."

wangchao@chinadaily.com.cn

(China Daily Africa Weekly 08/08/2014 page14)