Foreign cars may be shut out of govt fleet

China's government plans to stop buying cars from Volkswagen AG's Audi and other foreign brands, threatening to lock them out of an estimated $13 billion segment of the world's biggest vehicle market.

All 412 models approved for purchase by State agencies this year will be limited to Chinese brands, according to a proposal disclosed by the Ministry of Industry and Information Technology last week. The preliminary list is open for public consultation until March 9, according to the ministry.

Dongfeng Automobile Co and FAW Car Co were among Chinese automakers whose shares surged on speculation the government, the nation's biggest buyer of vehicles, is stepping up efforts to protect its domestic industry as they struggle to compete against global producers such as General Motors Co and VW. China stopped offering some incentives on investments from foreign automakers this year to clamp down on overcapacity.

Overseas brands have accounted for about 80 percent of the official pool, with Audi making up about one-third of government and State-linked enterprise fleets, according to Guotai Junan Securities Co. In the broader market, foreign brands account for seven of every 10 cars sold in the country, which overtook the United States in 2009 to become the world's largest vehicle market, according to data from China Association of Automobile Manufacturers.

'Drastic step'

"It's such a drastic step I could imagine they could be a bit resistant from the local government procurement side," Klaus Paur, Shanghai-based head of auto research at Ipsos, said in a telephone interview. "If you're a relatively high-level person, you still want to have an Audi. The brand, the reputation, the standing is all important."

Vehicles used for official purposes such as tax collection must have an engine size no bigger than 1.8 liters and costing at most 180,000 yuan ($28,561), according to the government rules. Manufacturers must have spent at least 3 percent of their core revenue on research and development in the past two years to qualify for the government list, the rules say.

"We would not be surprised if there is a pushback from major JV brands that could lead to inclusion of some JV brand vehicles eventually," Vincent Ha and Nora Min, Hong Kong-based analysts at Deutsche Bank AG, wrote in a report on Monday, referring to foreign brands produced locally through China joint ventures.

China spent 80 billion yuan on government vehicle purchases in 2010, accounting for 4.5 percent of total passenger-vehicle sales, according to estimates at China International Capital Corp, which assumed the average car sold for 160,000 yuan each.

Audi currently derives 20 percent of its sales in China from government purchases, while mid-range brands made by VW, GM, Toyota Motor Corp and Nissan Motor Co accounted for less than 10 percent of sales, CICC estimates.

Martin Kuehl, Audi China's Beijing-based spokesman, didn't answer calls to his office and mobile phone on Monday.

"BYD is very happy and looking forward to be selected into the government procurement list," said Elva Zhai, a spokeswoman for the Shenzhen-based carmaker.