General Motors: SUVs Will Boost Profits as China Slows

It's not sold in the U.S., at least not yet. But the all-new Buick Envision is one of several new SUVs that GM hopes will help it weather the slowdown in China. Source: General Motors.

General Motors still sells a lot of cars and trucks in the U.S. But it sells even more in China, which is now the world's largest new-vehicle market. And GM's Chinese operation is huge -- it's second only to Volkswagen in terms of sales.

In recent months, there have been lots of signs that China's economic growth is slowing. More recently, a big stock market decline has made Chinese consumers nervous -- and that has put a damper on new-car sales.

Add in increased competitive pressure from up-and-coming local Chinese automakers, and the Chinese government's moves this week to devalue the yuan, and the picture starts to look grim.

How is General Motors planning to deal with all of this?

GM is already weathering the storm better than expectedGM executives haven't yet said anything publicly about China's latest currency moves. But CEO Mary Barra and CFO Chuck Stevens did talk at length about China during the company's second-quarter earnings call last month.

The slowdown in China had been a big concern of investors in the weeks leading up to GM's earnings report. Shares had tumbled on those worries, and I said before the call that GM's outlook for China might be the biggest story coming out of its earnings.

It may or may not have been the biggest story, but GM's outlook for China certainly was better than expected (and GM's shares rose about 4% after the earnings report).

During the call, Stevens said that GM expects "low to mid single-digit growth" in new-vehicle sales across the industry in China for the full year. That's despite year-over-year declines in the overall market in every month since April (including in July). He gave several reasons for his relative optimism. First, several big automakers, including GM, are planning to introduce new models in the second half of the year. Those are likely to boost demand even if overall sales are still sluggish.

Second, China's calendar favors the second half of the year. "Typically the second half in China is the stronger half, driven by national holidays in the fourth quarter of the year," he said. And then finally, Stevens anticipates that some recovery will happen after the recent stock market volatility passes, although he hedged his optimism with some caution. "Clearly, in June and thus far in July there have been pretty significant headwinds on a year-over-year basis," he said. "We don't anticipate that that is going to continue through the year, but it's something that we're going to have to monitor."

But he still expects a good full-year result for GM. "Despite our revised industry outlook, we expect to sustain our first-half performance throughout the rest of the year," Stevens said. GM's sales in China were up 4.4% in the first half of 2015.

The new SUVs that willhelp boost GM's China profits in 2015Stevens went on to say that GM expected to increase both its profit and its market share in China this year. His reason for optimism? The same factor that's helping to drive huge profits in the U.S. for GM: strong sales of new SUV models.

GM has high hopes for its new Baojun 560 SUV. The 560 aims to compete with inexpensive offerings from domestic Chinese automakers. Source: General Motors.

One is the Buick Envision. Launched in China earlier this year, the Envision is a brand-new midsize SUV that could eventually make its way to the U.S. market. It's a very profitable upscale model that has already boosted GM's results in China. But GM hasn't neglected the affordable end of the market, either.

One theme in recent reports from China is the surge in sales of inexpensive SUVs made by local Chinese automakers. GM's affordable China-only Baojun brand is an effort to push back against that competition. The new Baojun 560 and 730 SUVs are very affordably priced -- the smaller 560 starts at RMB 76,800, about $12,000 -- and GM has high hopes for them.

Stevens said that the new SUVs, along with recent sales gains for its luxury Cadillac brand, should improve GM's "mix" -- its ratio of more profitable to less profitable products -- and thus boost profits even if overall sales don't rise. Stevens and Bara think that, together with careful attention to cost control, will help GM get through the Chinese downturn profitably.

It's a plausible strategy if the market cooperates. We'll know more in a few months.

The article General Motors: SUVs Will Boost Profits as China Slows originally appeared on

John Rosevear owns shares of General Motors. 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.

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