On Monday, General Motors (NYSE:GM) gave investors a big dose of good news, announcing that its U.S. vehicle deliveries rose 19% in December. Even better, the sales gains were led by some of GM's most profitable vehicles: full-size pickups and large SUVs.
Less than 24 hours later, GM investors got even more good news. After two months of relatively slow growth in China -- GM's sales in China rose 3.2% during October and 5.3% in November -- the sales pace accelerated dramatically in December.
GM sold 357,375 vehicles in China last month: a new monthly sales record. That was up 31.9% year over year. This strong performance shows that slowing GDP growth in China is not impacting GM's sales yet, which is a good sign for 2015.
China growing more important
China has already overtaken the U.S. as GM's largest market in terms of unit sales, though it still produces a smaller proportion of the company's earnings. Through the first three quarters of 2014, GM received equity income of $1.6 billion from its China joint ventures, up from about $1.4 billion in the same period of 2013.
GM's strong December sales performance probably translated to another quarter of solid profit growth in China, allowing GM to surpass $2 billion in equity income from China for the first time.
More growth in the works
In total, GM and its joint ventures sold 3.54 million vehicles in China during 2014, up 12% year over year. The company estimated that the overall market grew about 7.5%, meaning that GM gained share.
Looking ahead, GM has big ambitions for continued growth and market share gains in China. Last year, it announced a plan to invest $14 billion in China between 2014 and 2018 to open five new plants and launch 60 new or refreshed vehicle models. This investment will increase GM's annual vehicle production capacity in China to nearly 5 million.
GM has particularly big ambitions in the luxury segment. The company expects China to become the largest luxury vehicle market in the world within the next few years, and projects that sales of luxury vehicles in China will reach 3 million by 2020. GM wants to sell 300,000 Cadillacs annually by then, capturing 10% of the high-margin luxury market.
GM sold just 73,500 Cadillacs in China during 2014, though that represented a 47% year-over-year increase. GM has two main levers to quadruple Cadillac sales between now and 2020. One is new model introductions. GM has stated that it plans to launch nine new Cadillac models in China during the next five years. This will allow Cadillac to compete in more market segments.
A second key growth driver is local production. Until now, most Cadillacs sold in China have been imported, meaning that they were subject to a steep tariff (usually 25%). This leads to higher prices and -- all else equal -- lower sales.
In 2013, Cadillac began producing the XTS sedan in China to avoid these tariffs. The results have been promising so far. In 2014, its second year on the market, the XTS accounted for 43% of Cadillac's sales in China.
Later this year, GM and its joint venture partner will open a new dedicated Cadillac plant in Shanghai. It will have an annual production capacity of 160,000 vehicles. This will give GM the capacity to support several years of Cadillac sales growth in China through local production.
GM's new model pipeline in China and its promising growth plans for Cadillac create a recipe for continued growth in its China joint venture earnings between now and 2020. This will allow GM to further diversify its earnings over time, reducing risk for long-term investors.