GM doesn't sell the new Buick Envision SUV in the U.S. -- at least not yet. But it's racking up big sales numbers in China, where SUVs are helping GM gain ground in a very tough market. Image source: General Motors.
Is the Chinese auto boom headed for a bust?
Mighty Volkswagen Group (VLKAY +0.32%) reported that its sales in China fell almost 4% in the first six months of 2015. Will General Motors (GM +0.83%) be next?
The new-car market in China has become the world's largest. But in recent months, slowing economic growth, new limits on car ownership in certain cities, and volatility in China's stock markets have kept buyers away from dealers.
VW and GM are the two biggest players in China's auto market. Nowadays, GM sells more vehicles in China than it does anywhere else, even in the U.S.
Is VW's sales decline a warning for GM shareholders?
GM's SUVs are keeping it going in China, for now
All of the automakers doing business in China have felt the impact of the slowdown to some degree. But so far, at least, GM is faring better than Volkswagen and some of its other rivals.
GM said it had "record" sales in China during the first half of 2015, with total sales up 4.4% from a very good result last year. But GM may have something going for it that VW doesn't: SUVs.
It might be surprising to learn that General Motors -- of all companies -- was late to respond to the booming demand for SUVs in China. Chinese buyers started turning toward SUVs a few years ago, and GM's Chinese dealers had very little to offer them at the time.
But that has changed recently, in a big way. GM said that retail sales of its SUV models rose almost 83% in the first half of the year, led by the Buick Envision -- a model that isn't (yet, at least) sold in the United States.
The Envision is a midsize crossover SUV that slots between the two Buick SUVs that are familiar to Americans: the small Encore and the big Enclave. Both of those are also sold in China, and demand for the three Buick crossovers as a group more than doubled in the first half of 2015, with almost 100,000 sold.
But will that be enough to keep GM's growth going if the Chinese market continues to sag?
The slowdown is hitting all of the key players in China
If not, GM will certainly have a lot of company.
Ford (F +1.46%) has posted huge growth in China over the last few years, but it managed just a tiny 0.1% gain in the first half of the year. Toyota, Honda, and Nissan all did somewhat better, but all were hurt by anti-Japanese sentiment that was more prevalent in China a year ago that made the year-over-year comparison look especially favorable.
The real story is that the Japanese brands have recovered in China, but for them, for Ford, and for the others, recent growth has been sluggish, and further growth may be scarce.
GM, Ford, and Volkswagen all cut prices on key models in China earlier this year in a bid to keep sales going -- and to fend off increasingly strong competition from China's domestic automakers, particularly in small SUVs.
All of these factors will continue to put pressure on China-market earnings at each of these automakers.
Is it time for GM and Ford investors to worry?
So is it time for investors in GM (or these other automakers) to worry?
The quick answer is "not necessarily." The auto business is cyclical; this happens. Automaking profits get squeezed during economic downturns, as sales fall and automakers feel pressure to discount prices. But China is still a massive market, and so far -- with the exception of VW, which is facing challenges around the world, not just in China -- we've only seen stalled growth, not significant declines.
And the impact on bottom lines, at least at GM and Ford, shouldn't be too significant in the near term. Both sell lots of vehicles in China, but the profits generated in North America still dwarf income from China in both cases.
A significant slowdown in the U.S. would be cause for concern. It will happen. But until it does, both GM and Ford should continue to post solid profits, even if growth in China is scarce for a while.
