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 (GM 0.60%) 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 (F 0.80%) 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 (TM 1.92%) 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.
