General Motors: Booming China Sales Should Set Up a Profitable Third Quarter

General Motors (NYSE: GM) just reported that its sales in China rose 6.6% in September, on strong SUV-driven gains for its Buick, Cadillac, Chevrolet, and China-only Baojun brands.

GM has now overcome the year-over-year declines in China sales that it posted earlier in 2017; year to date, its sales there are up 1.1% in 2017 versus the same period in 2016.

GM in China: The raw numbers

SUVs and luxury are driving growth for GM in China now

Over the last couple of years, China's domestic automakers have matured: They're now fierce competitors in lower-priced market segments, particularly with affordable small SUVs. Their offerings have put heavy price pressure on the small, inexpensive vehicles that used to make up the bulk of GM's sales in China.

But several timely new products over that same period have helped GM roll with the changes. Now, GM is finding good growth (and good profits) in China with the well-regarded crossover SUVs from its global product portfolio, and with the much-improved products from its Cadillac luxury brand.

For starters, Cadillac's sales in China jumped 38% from a year ago, continuing what is now a 19-month streak of double-digit percentage sales gains for the brand. That's significant: China's luxury-car market was long the preserve of the three German luxury brands (Mercedes-Benz, Audi, and BMW), but Cadillac has been able to kick down the door and establish an increasingly significant presence.

Cadillac's sole crossover, the XT5, is a big part of its China growth story, of course. But the brand is also posting gains on sales of its sedans, with its top-of-the-line CT6 recently gaining significant sales momentum.

Buick's top-selling model in China is a compact sedan called the Excelle GT, a relative of the now-discontinued U.S.-market Buick Verano. But Buick is also gaining with its midsize crossover, the Envision, which sold nearly 20,000 units in September. And in what might be a surprise to Americans, the big Buick LaCrosse (a slow seller here) is also doing well: Sales were up 35% last month to almost 10,000 vehicles.

Chevrolet continues to do well on sedan sales, but it's also gaining ground with a crossover: The all-new 2018 Equinox, a model that's brand-new to GM's lineup in China, is gaining traction, with over 6,000 sold last month.

The story was similar at GM's Baojun brand, which GM established to compete with low-cost domestic Chinese automakers. It has been a big success, again thanks to crossover SUVs: Baojun sold almost 40,000 models of its 510, a small SUV, in September.

Baojun's success is helping to offset an ongoing sales decline for Wuling. The Wuling brand specializes in small, inexpensive vans popular with tradespeople, and sales have slipped with the decline of China's building boom. Wuling is in the process of refocusing on small, inexpensive minivans for young families. Sales of those products have been promising, though it's early days.

GM appears to have booked another good quarter in China

As I noted above, GM's sales in China suffered early in 2017, after the Chinese government cut a tax rebate that had been offered to buyers of vehicles with small, fuel-efficient engines. But despite that sales decline, GM delivered good profits in China in the first two quarters of 2017, as it essentially traded less-profitable small-car sales for more-profitable SUV and luxury sales. (And in the low end of the market, it traded very-low-margin Wuling sales for somewhat-more-profitable Baojun sales.)

The upshot last quarter was that GM delivered $509 million in equity income from its Chinese joint ventures, up from $471 million a year ago. With its sales in China up 8.2% in the third quarter, and those profit-enhancing sales trends still playing out, it looks like GM will have another strong profit from China to announce when it reports its third-quarter results on Oct. 24.

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John Rosevear owns shares of General Motors. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.