Why General Motors is outpacing Ford in China

General Motors (NYSE: GM) said its sales in China rose 11.9% in August from a year ago, a gain driven by strong sales for its Cadillac, Buick, Chevrolet, and China-only Baojun brands.

GM's gain came as rival Ford Motor Company (NYSE: F) posted a 1% decline in its sales in China for the month.

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GM in China: The raw numbers

GM is finding growth with premium and luxury vehicles

Domestic Chinese automakers have made great strides in the last couple of years. With much-improved products, they have been able to put intense pressure on the global automakers' offerings in some big-selling market segments, like affordable compact SUVs.

The competition has forced the big names to cut prices, hurting some of the global automakers' margins in China. In particular, old Detroit rival Ford Motor Company (NYSE: F) has struggled in China in 2017: Ford's sales in China are down 6% this year through August. Ford's challenge: Its products are looking a little dated in China's super-fast-moving market.

But GM has been able to fight back in a couple of ways. One is to emphasize its newest products in more upscale segments where the local Chinese automakers haven't had as much success.

In particular, GM's luxury Cadillac brand has been on a growth tear in China this year. As in the U.S., Cadillac's midsize XT5 crossover SUV has sold very well: XT5 sales in China jumped 73% in August to over 5,300, GM said. But unlike the U.S., where premium sedans have become a tough sell, Chinese buyers are also snapping up Cadillac sedans. Sales of the ATS-L, an extended-wheelbase version of the compact Cadillac ATS made especially for China, rose 63% from a year ago to over 5,200 units.

Buick, long a Chinese favorite, is also doing well, powered by the Envision SUV, the GL8 (a China-only upscale minivan), and the Excelle GT, a sedan that's closely related to the recently discontinued Buick Verano. (The Excelle GT is consistently one of China's best-selling cars. GM sold over 40,000 of them last month.)

GM's China-only discount brands are having mixed fortunes

GM is also countering the domestic Chinese automakers with a low-cost Chinese brand of its own. The idea behind GM's Baojun brand is that it offers the affordability of domestic Chinese brands with a global automaker's quality standards. Baojun offers a small lineup focused on young families -- a couple of crossover SUVs, a minivan, and a few sedans -- and sales have soared over the last year or so.

But the success of Baojun has come as GM's Wuling brand has faded. Wuling makes so-called "microvans" -- small, inexpensive vans marketed to tradespeople and first-time car-buyers. Two factors have put pressure on Wuling: First, as China's building boom has faded, fewer vans are being sold to tradespeople. Second, the rising tide of prosperity in China means more first-time car buyers are choosing to aim a little further upscale. That trend has helped Baojun, but hurt Wuling.

The bigger picture: GM is back on an upswing after a rough start to the year

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 engines smaller than 1.6 liters. Thanks to Baojun and its popular premium models, GM's sales have since recovered: Through August, GM's sales in China are up slightly (0.3%) from the same period a year ago.

But despite the early year sales decline, GM has been able to deliver good profits in China this year, as it has essentially traded sales of low-margin small cars for increased sales of higher-margin premium and luxury vehicles. (And in the more affordable end of the market, it has traded very-low-margin Wuling sales for more profitable Baojun sales.) Despite the competitive pressures, GM earned $509 million in equity income from its Chinese joint ventures in the second quarter, up from $471 million a year ago.

With two-thirds of the third quarter now in the books, it looks like those profitable trends are holding: All signs show that GM is on course to deliver another strong profit from China.

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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 has a disclosure policy.