This Automaker Will Win During China's Luxury Boom

Money, money, money! That's what every investor wants! And it's what every automaker wants more of, too. Money is exactly why we've seen an explosion of brands in the luxury segment.

There are plenty of reasons companies are flocking to high-end vehicles. They're an easy way for automakers to differentiate themselves from their entry-level vehicles and increase market share. Sales of luxury vehicles are more consistent during the up and down swings of the economy, since wealthier consumers can consistently afford to make larger purchases. And, of course, there are the higher transaction prices and juicy margins.

In anticipation of a recovery in the U.S. economy, the luxury segment has exploded with new competitors. There are 27 luxury-segment models priced between $25,000 and $35,000, according to Edmunds. And as the U.S. market continues to mature, automakers will be looking to emerging markets for further growth. Believe it or not, China's luxury market is about to surpass the U.S. for the largest in the world, giving a catalyst to the companies best prepared to meet the demand.

Let's look at how lucrative this market can be and why I think General Motors  (NYSE: GM  )  is best prepared to profit from China's luxury boom.

By the numbers
By 2016, China is expected to overtake the United States for the world's largest luxury-vehicle market. It's estimated to be selling more than 2.3 million high-end vehicles by that time. Its luxury market has increased by 36% annually over the past decade, according to China Daily. That's impressive growth, compared with the 26% annual growth for the overall market. 

Look at it this way. In 2002, the Chinese luxury market sold 57,000 vehicles, making it the world's 14th largest market. Ten years later it accounted for 1.24 million vehicles sold, bringing it up to the No. 2 spot. If you compare the U.S. market over the same period, we've grown from 1.67 million to 1.7 million. It's clear that while there's not tremendous growth at home, the number of luxury consumers in China is increasing rapidly and isn't projected to slow down anytime soon.

Lincoln can't cut it
Before I get to why GM is capable of cashing in on China's luxury market, I'll explain why Ford  (NYSE: F  )  and other rivals won't get it done. Lincoln hasn't been relevant since the mid-'90s, when the Navigator was the top seller. In fact, last year the Mustang was responsible for more sales than the entire Lincoln brand. The redesigned Escape more than doubled it.

Ford has mostly left its luxury line alone because the recession highlighted more glaring issues to address first. Now that Ford has paid down its debt and is producing a higher-quality vehicle, it can focus on reviving up its luxury brands. But if it can manage to bring Lincoln back to relevance, it will have to happen here in the U.S. first, and we're a long way from seeing that happen. We're even further from seeing that happen in China, where Ford still has a lot of ground to catch up.

Lexus sinks itself
Japanese automakers saw their sales plummet after a September territorial dispute with China. The dust-up initially fueled anti-Japanese protests and dropped Toyota  (NYSE: TM  )  and Honda vehicle sales almost in half. Seven months later, the automakers have yet to fully recover. They probably will by the end of 2013, but Toyota's struggles in China will remain.

Toyota's Lexus brand is popular in the U.S. but has had difficulty gaining traction in China. In the global picture, Toyota outsold all companies worldwide last year -- yet it trailed GM, Volkswagen, Nissan and even Hyundai in China. Toyota, much like Ford, has a lot of ground to make up before it can take full advantage of China's luxury boom.

GM for the win
With Ford and Toyota out of China's luxury picture, the door is wide open for General Motors to take a huge chunk of the profits. Its one true rival will be Volkswagen, whose Audi brand has been a hit with the Chinese. But it helps that GM is already the top-selling automaker in China and recently announced that its sales there for January and February climbed 7.9%. It already has joint ventures if it wishes to try that route into the expanding luxury market. If not, it already sells the Cadillac brand in China.

Another thing that bodes well for GM's future success is its new marketing campaign. The "Find New Roads" push will replace its predecessor, which didn't translate well internationally. The new campaign showcases a higher-quality vehicle, and its first commercial has been well received.

Bottom line
Early in the year, GM watched its Cadillac sales decline in China, I fully expect this trend to reverse. I think GM will continue its success in China and expand through its premium brand. Within a couple of years, we should see the effects of China's luxury boom on GM's bottom line. As an automotive investor, I'll be watching GM very closely.

It's true that decades of mismanagement of General Motors led to a painful bankruptcy in 2009, but it emerged a leaner, stronger company. GM's turnaround, however, is still a work in progress. Investors around the world are wondering if GM has what it takes to reclaim its former glory. John Rosevear has put together a brand-new premium research report telling you what you need to know about GM and its turnaround. If you own or are thinking about buying shares of GM, then you don't want to miss this report. Click here now to get started.


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  • Report this Comment On March 10, 2013, at 11:29 AM, robliou wrote:

    Hmm, not sure I agree here. Yes, GM / Ford sell well in China, especially in the upper-middle class markets, and Japanese brands definitely lag behind due to non car-related issues. But luxury? At that point, the Chinese know what's good, and by that I mean world-class brands like Porsche, Audi, Mercedes, etc. The Chinese who can afford these nameplates (often paying 2-3x higher prices due to import duties) are educated and well-travelled, going for world-class prestige, and with the internet making knowledge available at the fingertips, i don't think they will be buying Cadillac if luxury buyers in other markets aren't buying them either.

    I could be wrong, but as someone who's lived in China the past 2 years, I very rarely see Caddy's anywhere. When people have money to spend, it seems to be the fancy Euro cars that get all the attention, much like everywhere else in the world. The world is indeed getting smaller. If GM wants to rebound, they need to develop prestige in the developed markets of the world first. When it comes to high-end brands, Chinese are followers- they will never set the trend for luxury goods.

  • Report this Comment On March 10, 2013, at 11:36 AM, TMFTwoCoins wrote:

    Good points robliou,

    You very well could be right. VW has great success with the Audi, and that will likely continue. Personally I was hoping Ford would be able to take share with Lincoln but I just don't see that happening. GM has the best chance from Domestic automakers, but has some work to do for sure. I'll be watching to see how its vehicle portfolio refresh helps its luxury segments. If it doesn't, GM will be in a world of hurt, and not just in China.

  • Report this Comment On March 10, 2013, at 12:00 PM, armyairborne72 wrote:

    Generous Motors as it is called back in my home town of flint, michigan will turn it's back on the U.S just like it did to my home state of michigan. then it can call itself shangai motors!

  • Report this Comment On March 10, 2013, at 12:03 PM, alphian wrote:

    That's not what you see on the road in China. Mostly people will buy Audi in the mid range. For the luxury market you will more than likely see BMW ,Benz, or even the Japanese brands like Infinity etc, though that's been a bit less than several years ago ever since higher tension with Japan. You almost never see Caddy though in Beijing or Shanghai, there's even more Mini copper than Caddies.

    To sum it up, Audi, and BMW makes up the bulk of the luxury cars you see in China. I personally have seen more Porshe than Caddy, heck there are even more Ferrari, just check any big malls like IFC.

  • Report this Comment On March 10, 2013, at 12:05 PM, LungsOfSteel wrote:

    You're missing one very important thing about Lincoln - product. Lincoln is the new Buick, not having been poised with models that reflect the prestige of the brand. Instead, they have had badge-engineered Ford products and have moved the brand down-market. There is absolutely no model that is unique in the Lincoln line-up. Are they fine cars? Certainly, but Lincoln is no longer the luxury brand of presidents.

  • Report this Comment On March 10, 2013, at 12:12 PM, TMFTwoCoins wrote:

    @LungsOfSteel -- As a Ford investor I was worried about that exact point you make. I was really hoping it could revive its luxury brand but if they can't differentiate it from common Ford platforms, it will likely fail. That said, the new MKZ has had more hype and demand than anything since the Navigator in the 90's. We'll see how the consumers respond after a year of it's launch.

  • Report this Comment On March 10, 2013, at 12:45 PM, dwduke wrote:

    If not for GM's sales in China, GM would be back in DC with hat in hand for another handout. NAO sales are not enough to keep GM going and pay the huge pension obligations. Who would have thought that back in the last emperor days when GM gave the Chinese emperor a Buick that it would be the wisest thing GM could ever do other than make the mid 50's Chevrolets that cemented GM as the leader until the combination of poor quality, greed by both GM and the unions, and ugly cars would take GM off its perch as the best car make in the world of production cars.

  • Report this Comment On March 10, 2013, at 3:00 PM, dennypat38 wrote:

    Gm has MAJOR TROBLES in Europe and they are giving away TRUCKS and FORD still out sells GM. Plus after all stock is sold GM still owes taxpayers 30-40 BILLION FACT. Gm is not out of woods by a mile check BOOKS

  • Report this Comment On March 10, 2013, at 3:01 PM, LungsOfSteel wrote:

    To take this a bit further:

    - I think the article looks at a lot of numbers and charts about the auto industry (as is typical with stock market analysis), but it fails to get into the passion of the automobile. Whether it's a toaster-on-wheels like a Camry or a road-carver like a Porsche 911, the auto industry needs to be evaluated with an ingredient of subjectivity that's not quantifiable. Not intending to appear impolite, but if the author approached the article from this manner, then Lincoln wouldn't have appeared on the radar.

    - GM in America is doing fine, with competitive products and at least average quality. But we need to see GM from a global perspective and see how they going to establish their place in the global environment. Sure, we know Buick is a strong brand in China, but I can't trust the Chinese government, nor do I know Opel's standing in the European market when there are so many other strong players that weren't as strong 15 years ago.

    I will be attending the NY International Auto Show with the press in a few weeks. It's all about PR and not about the passion. Certainly there are passionate people building cars, but those at the helm make the auto show seem like I'm attending a boring introduction for the next iPad.

  • Report this Comment On March 10, 2013, at 3:04 PM, JonBranda wrote:

    American tax dollars is what put GM in position to gain Chinese market shares. It sickens me to know my tax dollars were put into GM to improve its presence in China. Forty years of nothing but GM products come to an end for our company the day the government got involved. We now use the only true American vehicle left on the market. Ford, Not built on American tax dollars.

  • Report this Comment On March 10, 2013, at 4:17 PM, schoeter2 wrote:

    wow the Americans a so far behind the Volkswagen development in there platforms and every other aspect of car making ! there making cars already with interchangeable parts in every part of the world ! 2% of the car sales are GM in Europe and you think there get any better in China ! get a life and stop screwing around buddy !

  • Report this Comment On March 10, 2013, at 4:46 PM, LungsOfSteel wrote:

    @JonBranda

    GM was a major player in Chine WAY before the global economic downturn. Besides, what do you want? For GM *not* to invest in global markets? GM is a global company, and it seems you're only too happy to restrict GM's business plans to suit your own false sense of patriotism.

    What makes me think that? The fact that you feel Ford is the only "true" American brand (funny, since the Fiesta, Focus, and Fusion have their origin in Europe), not to mention that Ford has received tons of money from the government (http://factcheck.org/2011/09/ford-motor-co-does-u-turn-on-ba...

    How can we dominate a market if we can't know the truths that exist?

  • Report this Comment On March 10, 2013, at 5:21 PM, pappytee wrote:

    It's about time someone started to notice that GM was ahead of the game when it comes to China. As a GM retiree, it sickens me when I hear Americans talk down GM because they asked for some help. GM uses more domestic parts in their vehicles than Honda and Toyota combined and way more than even Ford. Had our Government leaders been so foolish as to tell them no loans, our economy would be even worse than it is. I praise GM for it's hard work and commitment to building truly World Class vehicles. Keep driving all those foreign vehicles and wonder what happened to good high paying jobs in America ! I still believe that buying and driving foreign vehicles is domestic terrorism and should be treated as such, especially when all of these foreign brands have been subsidized by their governments since day one. None of them can compete without it and to call their vehicles world class is a big lie. Go get em Cadillac, show em all whats truly World Class.

  • Report this Comment On March 11, 2013, at 3:20 AM, ShanghaiRoadster wrote:

    I'm with most commentators. I hadly see Caddy here. Yes, GM has done well this go 'round as it did before. Pre WWII Buick was also popular in China. But Luxury? I don't think so. Do I see Caddys in front of the Fu Bar in Beijing? No! I see BMWs (today's poor man's ride), Lamborghinis, Maseratis, an occasional Rolls (for the oldsters I guess), Ferraris, Porsche SUVs (for young families I suppose). Those are the "luxury brands" I see in China as deffined by Chinese purchasers. GM may be the NYSE stock to buy - I wouldn't know. To look at what will "fly" in China, one must look FAR past just aggregated numbers.

    Maybe a newly designed Caddy is a good car. But "buyer perception is reality". I think that battle was won and lost at least 5 years ago. GM is not in that picture.

  • Report this Comment On March 11, 2013, at 8:55 AM, TMFTwoCoins wrote:

    Very interesting points to here from people on the front lines, I'll keep that in mind going forward!

  • Report this Comment On March 11, 2013, at 8:56 AM, TMFTwoCoins wrote:

    Hear*... Time for some coffee this morning...

  • Report this Comment On March 11, 2013, at 10:44 AM, TMFMarlowe wrote:

    This whole thing will come down to how serious they are about investing the big bucks needed to turn Cadillac into a credible global luxury marque.

    Without doing that, they have no chance of competing with Audi in China (remember that VW is for all intents and purposes just as big and well-connected as GM is in China, and is making lots more money there), much less with the upcoming domestic lux brands, which are already getting government favor.

    They seem serious about it -- the ATS is Really Good, and the Ciel show car hit the right notes. But right now, as with so many other things at GM... the jury's still out.

    John Rosevear

  • Report this Comment On March 11, 2013, at 11:32 AM, spawn44 wrote:

    Way to early to write off Lincoln.

  • Report this Comment On March 11, 2013, at 11:37 AM, TMFTwoCoins wrote:

    I've said many, many good things about Ford's Lincoln line. I just feel like it's going to be too late to take advantage of China's luxury boom which will be here very quickly, if not already. Lincoln hasn't even fully pushed out its MKZ here in the U.S. market. It's going to be late to the party in China, again. Not to say long term it can't have impact, I'm sure I'll have a take on that in the future as well.

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