Battle for China's Luxury Drivers: GM, VW, and Tesla Motors Inc.

By 2020, China could account for 35% of the global new car sales, and General Motors and Volkswagen are battling over who can win this market.

Jul 7, 2014 at 11:48AM

Audi China A
VW's luxury brand, Audi, presents its A3 in China. Source: Audi.

There is a reason car makers are battling to have the leading car brand in China. The auto market in China overtook the U.S. market as the single largest new car market in the world in 2010, after posting an average of 24% growth each of the five years prior. Nearly 22 million vehicles were sold in China last year, compared to 15.6 million in the U.S. Analysts expect that number could reach 30 million in the next six years.

The projected growth through 2020 is estimated to be 8%-10% a year, meaning this market could account for 35% of the world's new car sales in 2020. For General Motors (NYSE:GM) and Volkswagen (NASDAQOTH:VLKAY), it means a battle over who can win over more Chinese drivers. These companies need to beware, however, because just as it's proving to do in the U.S., Tesla Motors (NASDAQ:TSLA) is working to disrupt the car market in China.

The battle between GM and VW
The two most aggressive automakers trying to take over the Chinese foreign car market are General Motors and Volkswagen. GM has stated that it plans for $12 billion in new investment in China in the next three years, and has five new plants on the way. GM plans for greater than 10% growth in its China sales this year, and hopes that more investment in the next three years will translate into even higher growth. This follows after Volkswagen opened factories in two major cities in western China, Chengdu and Urumqi, which are not included in the $20 billion the company plans to invest in the country going forward.

Cadillac China Advert Via Cadillac

Cadillac markets to the new money of China. Photo: Cadillac China

General Motors and its joint ventures posted record sales in China last year with 3,160,377 vehicles sold in China in 2013, up 11.4% from 2012. That's an average of one vehicle every 10 seconds, almost 9,000 each day of the year.

GM's largest growth segment in China was its luxury Cadillac models. Cadillac sales in China were up 67% from 2012, to a record 50,005 units. The company is ramping up production with the goal of continuing this trend.

China is already the largest market for unit sales for General Motors, and for a while, GM was the largest seller in China. However, Volkswagen took over as the No. 1 seller last year, with 3.2 million units sold in China. VW's luxury brand, Audi, is already incredibly well respected in China. Audi is opening dealerships in western China at the incredible rate of one per week, and it's on track for double-digit growth in 2014.

The luxury car disruptor: Tesla
The typical Western luxury brands, such as General Motor's Cadillac and VW's Audi, made up about 70% of the luxury market in China last year, but one company that has already proven to be a disruptor in the luxury car market in the U.S., Tesla Motors, is seeking to do the same thing in China.

Tesla China

Tesla made a stop in Beijing on the company's first round-the-world tour by a zero-emission car. Source: Tesla Motors.

Tesla's outspoken and trend-savvy CEO Elon Musk said, "China is very important to the future of Tesla. We're going to make a big investment in China in terms of charging infrastructure." With that, the company is building a network of battery charging stations in China, starting with its Superchargers in Beijing and Shanghai. Musk said that the company will continue to invest hundreds of millions of dollars in China over the coming years.

Tesla has been somewhat of a fringe car maker in the U.S. until recently. Now, the company is reported as the fourth-largest U.S. automaker. Tesla seeks to increase global sales by 56% this year, which will be helped by what Musk has guessed will be 5,000 unit sales in China its first year alone.

Part of this growth will include local manufacturing in the next three to four years. By making the cars in China, the company will be able to avoid the 25% tariff imported cars face, lowering the cost to the Chinese consumer. While the company has not yet presented any serious partnerships with Chinese companies to create a Chinese joint venture, you can bet there are plenty of companies in China that will be fighting over the chance to win a partnership with Tesla.

Foolish investing takeaway
China's auto market is estimated to account for 35% of the world's new car sales by 2020, but what is really amazing is that those sales will still only be garnered from 15% of China's population. Carmakers have generally been focused on the major cities in the east of the country, but the western cities are now the new centers of growth for auto companies. General Motors and Volkswagen are each already making huge gains from their Chinese operations. With their new investments in China, the companies should make even bigger gains in the coming few years.

For investors looking at growing trends, China is still the market to watch for sales growth for Audi and Cadillac. For investors looking for fresh growth, Tesla Motor's high stock price might soon be much more validated if the company can disrupt the luxury car market with its high-end, all-electric vehicles. Either way, Foolish investors are sure to find prospects for growth in this expanding market.

Warren Buffett's worst auto-nightmare (hint: It's not Tesla)
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Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool recommends General Motors and Tesla Motors. The Motley Fool owns shares of Tesla 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 considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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