General Motors, Thriving in China, Sees More Growth Ahead

By Markets Fool.com


GM's Chevy Volt in China. Image source: General Motors.

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It was only a few years ago thatFord Motor Company (NYSE: F) and General Motors (NYSE: GM) were champing at the bit to get more market share in the quickly growing Chinese automotive market. For GM, China had already been a huge source of revenue, as the company has perennially been one of the leading foreign automakers in the region by market share. For Ford, growing sales in the country was the simplest way to lessen its dependence on the North American auto market.

After a few years, however, the growth in China has slowed -- although it's still become the largest automotive market in the world -- and it hasn't yet developed into the pillar of strength for Ford that the company had hoped. The good news, though? GM is still confident there is immense untapped potential there.

30 million, going once? Going twice?

The issue with China isn't necessarily growth potential, it's where that growth potential is happening. The initial boom in auto sales was driven by huge "tier 1" cities in China. But as pollution and traffic became huge problems, vehicle sales in those massive cities screeched to a halt. Now, the growth has shifted.

"Tier 1 is near saturation," said Matt Tsien, who has run GM's China operations since 2014, according to Automotive News. "But when you go into Tier 3 and 4 cities, we saw double-digit growth for the whole of last year. It's still growing at double-digits this year and will continue."

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Thanks to the surge in sales from smaller tier 3 and tier 4 cities, GM believes that total sales can still hit 30 million per year in China by 2020, up from 24.6 million last year. Furthermore, Tsien believes that new-vehicle sales saturation is still about a decade away, which is great news for automotive investors.

What GM is doing right

While sales in China have slowed for many competitors this year, GM's remain red-hot. GM and its joint ventures delivered a July record of 270,529 units in China, already topping 2 million units during 2016. July's sales figures were a significant 18% increase year over year, with three brands -- Buick, Cadillac, and Baojun -- hitting all-time highs for the month.

The key to GM's continued success, and its more recently topping Volkswagen to become China's best-selling foreign automaker, is that it made a strategic move to invest in cheap, no-frills brands Wuling and Baojun. Those two brands alone generate roughly 2 million vehicles a year, more than half of GM's total 3.6 million vehicles sold in China last year.

It's not that Ford, for it's part, doesn't have cheaper vehicles for China. But Ford has had amazing success instead stepping consumers up its buying tier to more expensive trims and vehicles in the U.S. and in Europe. The Titanium and Platinum trims, and the Vignale vehicle (in Europe) have great take rates and generate better margins for Ford -- but that strategy may limit Ford's near-term success in tier 3 and 4 Chinese cities.

Doom and gloom?

Over the past two months it's become clear that Wall Street believes the extremely profitable North American automotive market is plateauing. That means automakers face many challenges ahead to control inventory, match supply with demand, and keep incentives in check. But it also means that perfecting a strategy in China to take advantage of surging tier 3 and 4 cities is a race against time.

Any major automaker that can position itself for the different growth tiers in Chinawill help offset the plateauing revenue potential in North America, which will be increasingly important over the next half-decade. General Motors has already figured it out, and now Ford, among other competitors, needs to figure it out quickly.

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Daniel Miller owns shares of Ford and 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.