General Motors: Growth in China Isn't Over

By Markets Fool.com

The Baojun 560 SUV has been a huge success for GM in China. Image source: General Motors.

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A year ago, slowing economic growth in China seemed like a major threat to U.S. auto giant General Motors . After all, China is the company's largest market in terms of sales volume -- it delivered 3.6 million vehicles there last year. China is also GM's second-most-important profit driver, regularly producing annual profits of about $2 billion for the company.

From May to September of 2015, GM posted year-over-year sales declines in China for five consecutive months. However, it has seen a sales resurgence in China since last October, helped along by government incentives. As long as those incentives remain intact, GM should be able to continue delivering solid growth in this key market.

Weathering a slowdown

Through the first nine months of 2015, GM's sales in China increased a paltry 1.6% year over year. This was an inadequate level of growth, considering that GM announced plans in early 2014 to invest $12 billion in China to expand annual production capacity from 3.5 million to 5 million vehicles.

However, it was part of a much broader slowdown in the Middle Kingdom. Ford Motor -- which has a smaller presence in China but has been one of the fastest-growing automakers there in recent years -- reported a year-over-year sales decline through the first nine months of 2015.

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General Motors managed to outperform Ford during the slowdown largely due to its move to sell more SUVs and crossovers in China. GM's low-cost Baojun 560 SUV was particularly successful, driving huge sales gains for the 5-year-old Baojun brand.

Sales in China gaining steam (again)

China halved its purchase tax for vehicles with engines of up to 1.6 liters beginning last October, driving a rebound in sales in late 2015. By the end of the year, Ford was back in positive territory. Its full-year 3% sales gain was almost entirely driven by a 49% jump in deliveries from its Changan Ford joint venture during December.

Meanwhile, GM closed out the year in strong fashion, ending with a 5.2% full-year sales gain in China. GM's SUV sales there surged a whopping 144% in 2015.

In the first quarter of 2016, GM's sales growth in China decelerated again, with deliveries rising a meager 0.2% year over year. By contrast, Ford's China sales jumped 14% year over year in Q1.

A strong SUV portfolio is driving sales growth for Ford in China. Image source: Ford Motor Company.

The two automakers' sales trajectories flipped once more in the second quarter. Ford reported a year-over-year decline in deliveries in China for Q2, bringing its sales gain for the first half of the year to a more modest 6%. At the same time, GM's growth reaccelerated. Through the first half of 2016, GM's sales in China are up a solid 5.2% year over year.

Can GM get to 5 million?

General Motors' growth in China this year has come despite a sharp sales drop for its Chevrolet brand. The end of a government subsidy for the entry-level Chevy Sail car has been one key factor behind this decline.

However, the new Malibu XL model launched earlier this year has posted strong sales out of the gate. It will be joined by an updated version of the Chevy Cruze later this quarter. Those models could help stabilize Chevy brand sales in China, leading to even stronger companywide growth there.

Late last year, GM stated that it would consider postponing some of its growth investments in China due to the market slowdown. However, it still expects the overall market to grow 3% to 5% annually in the coming years, with larger vehicles continuing to drive a disproportionate share of the growth. GM is investing heavily to expand its portfolio of SUVs and luxury vehicles in China to capitalize on this opportunity.

Changing government incentives represent a key risk for GM's drive to reach 5 million annual vehicle sales in China. The current purchase tax cut for smaller vehicles is set to expire at the end of 2016. This could lead to a rush of sales activity in the second half of 2016 followed by a deep slump next year.

However, the China Passenger Car Association thinks that the Chinese government could actually increase its auto stimulus efforts next year to support growth. China certainly has enough slack in its budget to fund such a move.

General Motors' sales growth in China could be somewhat volatile as government policy evolves in the coming years. Nevertheless, China represents an important long-term growth opportunity for the company.

The article General Motors: Growth in China Isn't Over originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.