General Motors May Sell More Vehicles in China, but America Remains the Key to Success

General Motors is looking for China to accelerate its sales, but America will remain the key for profits.

Jul 7, 2014 at 6:33PM

Cq
Source: General Motors

It's no secret that China offers foreign automakers a substantial opportunity to expand their sales, and thus top-line revenues. With vehicle sales continuing to grow along with China's growing middle class, General Motors (NYSE:GM) finds itself locked in a tight battle with Volkswagen to hold the crown of China's best-selling foreign automaker. Here's how General Motors' sales checked in through the first half of this year in China, why it's important, and why investors should temper their expectations for booming profits.

What's the big deal?
If you follow the automotive industry you already know how significantly new-vehicle sales have rebounded in the United States; but consider that China grew almost twice as fast last year despite the fact it's already the larger of the two markets. Last year China's automotive market expanded nearly 14% to 21.98 million vehicles sold compared to the United States' 7.6% gain to 15.6 million vehicles sold.

Furthermore, many analysts estimate that China's automotive market will top 30 million vehicles sold annually as soon as 2018. Even if those projections don't prove true until 2020, it's mind-blowing growth when you consider that China's auto market would then account for roughly one-third of the entire planet's new-vehicle sales. 

With that amount of potential growth for automakers with secure market share in China to tap, you can understand why General Motors is clamoring to be the perennial best-selling foreign automaker in the country.

General Motors sets a record
GM's sales in China increased 10.5% to more than 1.7 million units through the first six months of 2014, compared to the same time frame last year. GM's sales performance in June, up 9.1% compared to last year, was good enough to be wholesale records for both the month and the first half of the year for company. 

Cq
Source: General Motors

In fact, despite General Motors being the best-selling automaker in the United States' auto market, GM's 1.7 million vehicles sold in China tops the 1.4 million vehicles the automaker sold here in its homeland. That isn't likely to change anytime soon as General Motors is continuing to pour massive amounts of cash into expanding its operating footprint and driving sales higher in China.

General Motors plans to drop a massive $12 billion wad of cash into its Chinese operations, between 2014 and 2017, in its effort to juice manufacturing capacity by 65% by the end of this decade. So far, GM's strategic push in the region has been successful; here's a look at how GM has increased its vehicle deliveries as well as market share recently: 

Gm
Graph by author. Source: General Motors' quarterly presentations.

Not as good as it appears
Despite that General Motors sells more vehicles in China than it does here in the United States, the former remains much less profitable for GM than the U.S. because it splits profits 50-50 with joint venture partners, a requirement of the Chinese government. In fact, when digging into GM's regional performance, GMNA, which is composed mostly the United States, and GMIO, which mostly entails China, the profitability picture becomes very clear. Combining EBIT-adjusted results in 2012 and 2013, GMNA generated $14 billion which was more than three times the EBIT-adjusted $3.7 billion that GMIO generated. 

The U.S. market will continue to dominate General Motors' bottom-line performance, but if GM can continue increasing deliveries and market share in China's booming automotive market, it will be a huge boost for earnings by the end of this decade. So far, so good, for GM and its long-term investors.

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Daniel Miller 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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