F Explorer China Reveal Dave Schoch April

Ford Asia Pacific chief Dave Schoch showed off an Explorer in Beijing last year. The Explorer is set to arrive at China's Ford dealers soon. Photo credit: Ford Motor Co.

What's hot in China right now?

At last weekend's Shanghai Auto Show, the answer was pretty clear. While automakers showed a dizzying variety of models, two big trends were pronounced: luxury cars and SUVs.

Growth in the overall Chinese new-car market has cooled from the double- and triple-digit gains common just a few years ago. But there's still growth to be found in some corners of the market, and as Chinese incomes continue to rise, their tastes in upscale vehicles are looking more and more like Westerners'.

Suddenly, SUVs are big in China
Many of the SUVs set to hit China's market will look awfully familiar to Americans. General Motors (NYSE:GM) said it planned to introduce nine new or revised SUVs in China over the next five years, as a big white Cadillac Escalade was featured on its auto-show display stand.

Ford (NYSE:F), which has been on a tear in China, launched the new Escape (under its European market name, Kuga) there earlier this year. Sales totals in March, its first full month on sale, reflected strong consumer interest in the compact SUV that has received good reviews in China's auto press. More Ford SUVs are on the way: The EcoSport, a smaller SUV originally developed for emerging markets, and the familiar Ford Explorer are both set to debut in China soon.

Meanwhile, Chrysler – a very late arrival at the Chinese auto party – said that it would start making its just-launched Jeep Cherokee at a plant in China by the end of 2014. Other manufactures including Hyundai (NASDAQOTH:HYMTF) and a whole slew of Chinese domestic brands showed off entries in the smaller and mid-sized SUV segments

Why the sudden popularity of SUVs in China? According to some reports, Chinese car-buyers were down on the idea of SUVs for a while because they seemed unsophisticated, like farm trucks. But tastes have evolved, and now buyers see vehicles that can be luxurious and prestigious – and well-adapted to roadways outside of China's big cities, which are not always in top condition.

But another part of the story has to do with rising incomes and the continued Westernization of Chinese consumer tastes, which is also driving big gains in the luxury-car market.

Luxury cars drive big profits
Luxury cars have already turned out to be big business in China's largest cities. Volkswagen's (NASDAQOTH:VLKAY) Audi brand is already the hot ride among China's elite. Between Audi and rivals BMW (NASDAQOTH:BAMXF) and Daimler's (NASDAQOTH:DDAIF) Mercedes-Benz, the German brands have about three-quarters of China's fast growing luxury-car market.

China growth has been a significant driver of profits for all three. That profit growth – and the fact that luxury cars have fatter margins that mainstream models – has attracted attention from rivals. GM is in the midst of a major, multi-year push to overhaul its Cadillac brand and turn it into a global contender, hoping to have 10% of China's luxury-car market by 2020.

Ford is a few steps behind, but already thinking along the same lines. It's in the process of rolling out its Lincoln brand in China, hoping that its curvaceous new Lincoln sedans prove as popular with Chinese luxury-car buyers as its Ford brand models have proven with mainstream consumers.

The upshot: A big market is getting richer, and automakers will profit
"Our focus is on luxury vehicles and SUVs going forward," GM China chief Bob Socia told reporters this past weekend, talking about GM's plans for growth in China.

For GM, which has led VW in China sales but trailed in profits, improving margins in China and elsewhere is a major priority. That makes Socia's words no surprise: SUVs and luxury cars are among the most profitable products in the business, and with SUVs in particular, it's a market where GM is well-equipped to compete.

Likewise, Ford's high-tech SUVs should play well with Chinese customers. But the company's Lincoln brand is far behind even GM's Cadillac in the global luxury-car race, and improvement there will be a challenge. Still, the Blue Oval has staked out a premium position among mainstream brands, and stands to do well as China's incomes continue to rise.

Motley Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool recommends BMW, Ford, and General Motors. The Motley Fool owns shares of Ford. 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.