Is General Motors Company's Record Month in China As Good As It Looks?

While General Motors Company continues to set monthly and yearly records in China, there are some worrisome parts in the numbers as well. Here are the details.

Feb 11, 2014 at 12:31PM

General Motors' HQ in Detroit. Source: General Motors

Another hurdle appeared last year for the rebounding automaker General Motors (NYSE:GM) as its profits took a dip in its second most important region, GM International Operations, or GMIO. That region includes China, which continues to be a bright spot for America's largest auto manufacturer, and whenever a company can top its previous monthly sales record by double digits it's cause for celebration. That's exactly what GM did in January, but there are two important factors for potential investors to watch in 2014.

By the numbers
Last month GM and its joint ventures set an all-time monthly sales record in China by increasing sales over the previous monthly record by 12% to nearly 350,000 units -- pretty impressive. Leading the charge, General Motors' Buick brand continued to surge in the region with sales increasing 15.7%, from last year's January, topping 100,000 units. Chevrolet sales came in essentially flat with just over 65,000 sales in January. Sales for GM's joint venture with Wuling reached nearly 164,000 vehicles sold in January, up 13.2% from the last year's January.

Source: General Motors Company

Ultimately January was a very strong month for General Motors in China, but the best may be yet to come. Consider that January started 2014 off at a record pace after the company set a full-year sales record in 2013 with 3.2 million sales in China. Why then has GM lost market share in the region?

Graph by author. Source: General Motors Q4 presentation

While GM's deliveries continue to surge and set records, its market share in China has trended lower over the past year. This suggests that GM's retail share isn't gaining as much traction as intended, perhaps due to the resurgence of Japanese automakers recovering from more than a year of depressed sales that resulted from a territorial dispute.

What to watch
Don't get me wrong, China will continue to be a bright spot for General Motors and its investors. But it will be extremely important to watch two things in the region going forward: market share and margins.

As General Motors continues on its most aggressive portfolio turnover in company history, redesigned and refreshed vehicles should help recapture market share over the next couple of years. The company is still on pace to refresh, redesign, or replace 90% of its vehicles by the end of 2016 -- a costly move, but one that will set the company up for long-term, and global, success.

Turning the focus to margins, investors were definitely disappointed in the results reported last quarter. Consider that GM's margins in China checked in at 11.7% in the first quarter of 2013 before declining to 9.4% in the next two quarters and dropping further to 7.6% last quarter. Some of the impact is directly due to capital expenditure in the region, namely two factories being built to increase GM's production capacity to 5 million units annually.

Once those factories are completed expect margins to improve; another factor that will help improve margins will be GM's Cadillac lineup, which brings in higher margins and larger profits. Cadillac has already been a success story and its sales in China last month were up a whopping 266%. GM believes its luxury success is still in the early innings of the game and expects Cadillac sales to triple from 2013 to 2015.

Foolish takeaway
General Motors still has a long way to go on its rebound and is currently being driven by strong results in North America. While the company continues to tout record deliveries in China, the numbers aren't as great as they would seem as its market share and margins are trending lower. GM's second most important region, GMIO, had a temporary setback which contributed to the stock's recent price pullback. I believe GM's best days in the region remain ahead, and investors looking to jump into a rebounding GM would be wise to keep tabs on its market share and margins in China over the coming years.

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