China brands hurt by plate auctions to foreign benefit

Shanghai's busy streets teem with Buicks, Fords, Volkswagens, and Toyotas. But good luck finding a Chery, Geely or Great Wall.

More than 9 in 10 cars in Shanghai are foreign brands, and some local automakers say the city's license plate auctions are responsible for their weakness. Shanghai is one of four Chinese cities that limit car purchases by imposing quotas on registrations. The prices paid at Shanghai's auctions in recent months -- 90,000-yuan ($14,530) -- have exceeed the cost of many entry-level cars, the stronghold of Chinese brands.

"Whenever there's a restriction of new car purchases through the quota system, there is always a big impact on lower price cars like the ones we make," said Lawrence Ang, executive director of Geely Automobile Holdings Ltd. (175), maker of the 37,800- yuan Panda minicar.

After Beijing introduced a license-plate lottery in January 2011, the share of Chinese brands there plunged by more than half, to 9.7 percent for the year, according to industry researcher IHS Automotive. In Shanghai, which began auctioning license plates in 1994, domestic brands made up just 8.9 percent of cars sold in 2011 (the most recent data available), less than a third the level nationwide, IHS reports.

As local governments grapple with increasing traffic congestion and air pollution and seek new sources of revenue, more cities will impose license-plate quotas, UBS AG said in a January report. The northern city of Tianjin may start them from May 1, China Youth Daily reported on April 11.

"If the measures were followed by more Tier-two and Tier- three cities, the impact would be much bigger," said Geely's Ang.

Shanghai Show

Chinese brands, which produced none of the top 10 car models sold in China last year, will seek to make converts at the Shanghai Auto Show, opening to the public next week. Guangzhou Automobile Group Co. is introducing a compact called the GA3 and Great Wall Motor Co. will show the H8, a full-size sport utility vehicle. Foreign offerings include the Ghibli, a sporty sedan from Fiat's Maserati SpA; Bayerische Motoren Werke AG's four-door crossover concept, the X4; and Qin, the first car Toyota Motor Corp. (7203) has developed specifically for China.

Hong Kong-traded shares of Great Wall rose 16 percent this year as of April 17, while Geely's gained 1.9 percent and Guangzhou Automobile's declined 15 percent. Toyota shares jumped 39 percent in Tokyo in the same period, while GM rose 1.5 percent in New York and Volkswagen tumbled 17 percent in Germany.

China's manufacturers face further trouble as cities tighten emission standards after toxic smog blanketed Beijing and Shanghai for much of the winter. Since Feb. 1, Beijing has used the same strict regulations as the European Union for new car purchases, and Shanghai expects to impose them by November.

Urban Handicap

With the combined blows of the pollution regulations and license plate quotas, some smaller domestic manufacturers have been forced to retreat from the biggest cities, according to Chi Yifeng, head of the Beijing Asian Games Village Automobile Exchange, a dealer in the capital.

"Local automakers have pretty much given up on markets like Beijing," said Chi. "The plate lottery system is too big a test for them."

That urban handicap reverberates deep into the hinterland, said Cao He, an analyst with China Minzu Securities Co. in Beijing.

"Making their cars visible in cities like Beijing and Shanghai impresses future buyers like migrant workers when they consider buying cars back home," Cao said.

Hinterland Strategy

Chinese automakers have focused on places such as Lanzhou in northwestern Gansu province and Chengdu in Sichuan. Domestic manufacturers can find plenty of growth in such cities, considered third-tier or lower despite populations ranging from 2 million to more than 10 million, said Wang Chuanfu, chairman and founder of BYD Co., an automaker based in Shenzhen that counts billionaire Warren Buffett's Berkshire Hathaway Inc. as a shareholder.

"Tier-3 and Tier-4 markets are opportunities for local brands," Wang said at the company's earnings briefing in Hong Kong last month. "With urbanization there, local brands will have chances for growth."

Problem is, foreign manufacturers are also training their sights on China's hinterland. GM and its joint-venture partners in 2011 created a new brand, Baojun, to make cars aimed at the emerging working class outside major cities. And Volkswagen says it's considering introducing a new low-cost car in China for budget buyers.

"Local automakers had to start by making low-end cars as the threshold is lower and easier for them to get in," said Li Dongsheng, vice secretary general of the China Association of Automobile Manufacturers. "Now, the big foreign automakers are competing hard on the low end as well."

80:1 Odds

Some domestic automakers are also building bigger, more expensive vehicles to take on the foreigners. Geely plans to introduce its EX8 sport utility vehicle this year. Great Wall Motor Co. will spin off its Haval brand as a standalone nameplate focusing on higher-end models, Chairman Wei Jianjun said March 29.

Such efforts won't make much difference to Zhang Xin, a 40- year-old Beijing resident who works in finance. She has been waiting for two years to win the city's lottery for license plates, in which would-be buyers register online for a monthly draw. Last month, the odds were 80:1 against getting one of the 18,457 plates being offered. Though the lottery is free to enter, the long wait has convinced Zhang that it's smarter to buy a foreign brand if she ever wins.

"Two years ago, I just wanted to get some cheap local- brand car to get around," said Zhang. "Every month that I don't win the lottery, I tell myself I'll get the best car I can afford. A BMW X1 or an Audi A1 is what I want now."