General Motors' China Sales Drop as it Shifts to SUVs

General Motors (NYSE: GM) said that its sales in China rose just 0.4% in February, as strong results for its Cadillac and affordable Baojun brand -- and a favorable quirk of the Chinese calendar -- were offset by challenges elsewhere, including a cut in the Chinese government's incentives.

Through the first two months of 2017, GM's China sales were down 15% from a year ago. But despite the decline, there are promising signs that GM's ongoing shift in emphasis toward premium vehicles and SUVs in China is starting to pay off.

GM's China sales: The raw numbers

Metric 2017 2016 Change
February sales 246,730 245,690 0.4%
January sales 321,264 421,023 (24)%
Year-to-date through Feb. 567,994 666,713 (15)%

Data source: General Motors.

About the reduction in government incentives

The Chinese government offers a tax incentive to buyers of vehicles with gasoline engines smaller than 1.6 liters. (As a general rule, smaller engines use less gas and produce less pollution.) That incentive used to be higher, but the government cut it by half as of the end of 2016.

The cut was announced several weeks before it happened, and the news led many buyers to "pull forward" planned purchases of qualifying vehicles into 2016 to get the bigger tax break. The upshot: GM's sales in China were strong in November (up 7%), but fell slightly in December (down 2.5%), and more substantially in January (down 24%).

GM wasn't the only automaker to see a year-over-year decline in the first two months of 2017, incidentally. Ford Motor Company (NYSE: F) and Toyota (NYSE: TM) both posted declines over the same period.

A drop in government incentives on small cars hurt GM's overall sales. One bright spot: Sales of the little Baojun 310 have remained strong. Image source: General Motors.

About that quirk in the calendar

Chinese New Year is a lunar holiday: Sometimes it falls late in January, as it did this year, and sometimes in early February, as it did in 2016. But either way, it has a big impact on new-car sales, because most Chinese businesses close for several days around the holiday.

The shifting timing can complicate year-over-year sales comparisons for the first two months of the year. The timing had a big negative impact on year-over-year comparisons in January (because there were fewer selling days in 2017), and it should have had a positive impact on February comparisons this year.

Most analysts who watch auto sales in China deal with this quirk by combining results from January and February and comparing those numbers year-over-year, as I did in the last line of the chart above.

So how is GM doing in China?

GM doesn't share a lot of brand- or model-specific sales data for China, so it's a bit difficult to tell exactly what's going on. But it did share a few highlights that allow us to draw some conclusions:

  • Cadillac sales are booming. Sales for GM's luxury brand rose 90% in February to "more than 9,000 units," GM said in a statement. That may sound like a small number, but it's a solid result for a luxury brand. Consider that Cadillac sold 10,823 vehicles in the U.S. last month -- China's sales are closing in fast.
  • The Buick Envision crossover was the best-selling "global" SUV (that is, not from a domestic Chinese automaker) in China last month, and for the last four months.
  • Sales of the recently revamped Buick GL8 minivan have been strong, up 80% in February.
  • Sales of the midsize Chevrolet Malibu sedan have been very good. GM said it will soon roll out the all-new 2018 Chevy Equinox crossover in China, with more Chevy SUV models to follow.
  • GM created the Baojun brand to compete directly with domestic Chinese automakers. It's positioned as an affordable brand for young families, and it's doing very well: Sales were up 38% in February, with the recently launched small 310 hatchback leading its segment.

What can we learn from that? Aside from Baojun, GM is doing best with larger vehicles from its global model portfolio, and with more premium offerings. That's good news in a sense: Those models are more profitable than small cars, which were GM's bread and butter in China for years.

The Buick Envision was launched in China before it came to the U.S. It has sold in huge numbers since its debut. Image source: General Motors.

Surprisingly, given its SUV-heavy U.S. lineup, GM was somewhat slow to catch on to Chinese consumers' fast-growing preference for crossover SUVs. It's catching up: The Envision, XT5, and Baojun 560 crossovers have all been big sellers in China since their debuts.

They'll soon be joined by the superb all-new 2018 Equinox, which has the potential to be a monster hit in China (and in the U.S. as well). It's likely that the upcoming all-new versions of the larger Chevy Traverse and Buick Enclave will join GM's China lineup as well, later this year or early in 2018.

GM builds the longer-wheelbase Cadillac ATS-L just for China. It's quite popular. Image source: General Motors.

GM is also doing well with larger sedans, both in the mass market (with the Malibu) and with the big Cadillac XTS (up 27% last month). The Cadillac ATS-L, a China-only, longer-wheelbase version of the compact ATS sedan, has also been a very strong seller. (The longer wheelbase adds rear-seat legroom, correcting the one significant drawback of the otherwise well-regarded ATS.)

The upshot: GM is shifting gears in China

GM's brands have a lot of strength in China, built over many years of careful work. As Chinese car-buyers' tastes (and budgets) have evolved, GM has figured out that its brands need to evolve with them.

Over the last year or two, we've seen a shift in GM's emphasis away from small cars and crossovers, which Chinese domestic automakers are doing increasingly well, and toward larger and more upscale products that benefit from GM's global scale.

For investors, here's the takeaway: GM's sales in China may be up and down for a while as it reshuffles its portfolio. But in time, the improving "mix" of sales should boost GM's profits from China, whether its total sales grow significantly or not in any given quarter.

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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. The Motley Fool has a disclosure policy.