It's a familiar scene in China: rows of identical black Audi sedans parked outside government office buildings.

For nearly two decades, Audi has been the favorite brand of Chinese officials. Audi says government orders account for one-third of the brand's Chinese sales.

But two hungry rivals -- Mercedes-Benz and BMW AG -- are catching up quickly. If Audi wants to remain China's best-selling luxury brand, it must try harder to please Chinese consumers instead of government officials.

Among luxury car brands, Audi was the first to start building models in China in the early 1990s, more than 10 years before BMW and Mercedes-Benz. Local production allowed Audi to avoid steep import tariffs and make its products more affordable.

Audi also was the first to build stretched sedans in China to attract business executives and government officials who prefer to be chauffeured.

Both factors contributed hugely to Audi's stunning success. In 2010, Audi sold nearly 237,000 vehicles in China, while BMW AG sold 151,000 units and Mercedes-Benz sold 141,000 units.

But Audi's competitors are closing the gap. In May, for example, Audi sold 25,153 units while BMW sold 21,150.

If this trend continues, BMW is likely to outsell Audi in China later this year, and Mercedes won't be far behind.

What has triggered the change?

Audi can blame measures taken by Beijing this year to limit government procurement of luxury cars. Audi's sales have taken a beating since the measures began taking effect.

But Audi also can blame itself. After nearly two decades as China's top-selling luxury brand, Audi suffers from inertia and a narrow product portfolio.

Audi still relies on the stretched A6 and A4 sedans for two-thirds of its sales in China. The company has only four models whose monthly sales in China exceed 1,000 units, according to data from J.D. Power and Associates. The other two are the Audi Q5 and Q7 crossovers.

By contrast, BMW and Mercedes have more diversified product portfolios. Each has five models with Chinese sales surpassing 1,000 units per month.

More important, BMW and Mercedes have small models that appeal to young Chinese consumers. For example, BMW has the 1 series and 3 series while Mercedes has the C class.

With their sporty styling and a relatively low price range of 250,000 to 500,000 yuan ($38,600 to $77,000), these models are 

in strong demand among young Chinese from wealthy families.

The locally produced BMW 3 series and Mercedes C class have joined the ranks of China's 10 best-selling luxury models, according to J.D. Power and Associates. Of those 10 top-sellers in April, four are BMW, three are Mercedes and just two are Audi, according to J.D. Power.

More than half of China's luxury car users are under age 35. But locally built compact models are noticeably lacking among Audi's products. That bodes ill for the brand.

Last month, local government in Foshan of south China's Guangdong province disclosed that Volkswagen AG will produce the Audi A3 at the assembly plant to be built there.

That's a move in the right direction, but the plant won't start production until 2013.

To stem its loss of market share, Audi must speed its introduction of small cars in China. Audi's traditional customers, government officials, can't prop up the brand much longer.