Why General Motors' CEO Is Still Upbeat About China

By Markets Fool.com

Despite growing low-cost competition, CEO Mary Barra is still upbeat about GM's prospects in China. Image source: General Motors.

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Despite a slowing economy and rising competition from local automakers, General Motors (NYSE: GM) has continued to rack up good growth in China. Through the first seven months of 2016, GM's sales in China were up 6.8% versus the same period a year ago.

GM successfully avoided the market-share slide that hit Ford's (NYSE: F) China operation in the second quarter. But despite the sales growth, its profits were flat year over year, and its its profit margin last quarter slipped from 10.2% a year ago to a still-good 9.5%.

What's going on, and does it call GM's upbeat guidance for China into question?

CEO Mary Barra remained upbeat despite a drop in earnings

GM's joint ventures in China returned $471 million in equity income in the second quarter. That's not bad, but it's down from $503 million a year ago. Still, CEO Mary Barra continued to be upbeat about China during GM's second-quarter earnings call.

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"We are on track to sustain our strong margins [in China] this year," Barra said, continuing:

Our H1 sales are up 5.3% year-over-year to a record 1.8 million units, and this is really due to a really great mix of MPVs ["multi-passenger vehicles," like minivans] and SUVs, and also luxury vehicles that customers are signaling that they really like.

GM's China-only Baojun brand is positioned as an affordable alternative to the domestic Chinese brands. Its 560 SUV has been a big seller since its introduction last year. Image source: General Motors.

Barra said:

Our brands continue to grow. Buick and Baojun set quarterly records, with Buick up 40% and Baojun up 78% year-over-year. And our Cadillac sales are up 16% year-to-date [through June]. GM SUV deliveries almost doubled in the quarter, and this continues to be led by two really strong products: the Baojun 560 and the Buick Envision.

Why GM's margins are under pressure

Barra's statement about margins wasn't a casual comment. Simply put, what's going on is that the domestic Chinese automakers have upped their collective games. Their products, once dismissed as cheap knock-offs of Western designs, have improved to the point where they're able to take market share from some of the global automakers. Their success has put pressure on pricing at all mass-market competitors, including GM -- and that's putting pressure on GM's profit margin in China.

Barra mentioned the SUVs and Cadillacs because those are high-profit-margin products. Over the last few years, GM has diversified its product portfolio in China away from small, affordable cars and vans to include more high-margin SUVs and luxury vehicles. That's helping GM sustain good margins despite the pressure on its pricing at the lower end of the market.

GM just rolled out the brand-new Cadillac XT5 crossover SUV in China. As supplies grow, it should make a significant contribution to profits. Image source: General Motors.

For its portfolio as a whole, GM said it expects pricing on its "carryover" products (those that aren't all-new) to have slipped by about 5% year over year by the end of 2016. It also said that pricing pressure will be offset to some extent by new products, including the all-new Cadillac CT6 and Buick LaCrosse sedans as well as the SUVs Barra mentioned. That's why CFO Chuck Stevens maintained GM's upbeat full-year guidance.

The upshot: GM's full-year outlook for China is still positive

"We have not changed our outlook for China," Stevens said during the second-quarter earnings call. "We continue to expect strong performance in China, equity income [for the full year] in the range of $2 billion, consistent with last year, and margins in the 9% to 10% range." GM's China joint ventures returned $2.1 billion in equity income in 2015.

Stevens continued:

Going forward, as we've talked about since early last year, the market is more volatile, the competition is obviously from a price perspective stepping up. We continue to believe that we can execute our plan including our product launches, improve mix from an SUV perspective, continuing efficiencies to maintain strong margins and strong equity income going forward.

To sum up: GM thinks it will be able to continue to offset the pricing pressure and deliver another good result in 2016.

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John Rosevear 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.