China is the second most important market for General Motors (NYSE:GM), behind the U.S. As a result, investors have become increasingly worried this year about slowing economic growth in China: a development that has hurt auto sales there.
Sure enough, on Monday, GM reported that retail sales in China declined year over year for the fifth consecutive month in September. Last month's decline was 3.9%, dropping GM's year-to-date unit sales growth in China to just 1.6%.
Fortunately, the worst is probably already over. GM's improved portfolio of vehicles in the faster-growing SUV/crossover and luxury segments is already driving growth there. Meanwhile, a recently implemented vehicle tax cut in China should jump-start demand for smaller cars and crossovers.
GM catches up with the market
As my Foolish colleague John Rosevear recently pointed out, General Motors was slow to react to the market shift in China toward crossovers and SUVs, despite its strength in those segments in the U.S. However, new GM crossovers for the Chinese market -- such as the Buick Envision at the high end and the Baojun 560 (which has a starting price near $12,000) at the low end -- are finally on sale.
As a result, GM's SUV and crossover sales in China nearly tripled year over year in September, reaching 17.3% of GM's sales there. That compares to just 6.1% of the sales mix a year earlier.
GM is also getting growth -- albeit on a more modest scale -- from its Cadillac luxury brand. Cadillac posted double-digit growth for the fifth time this year during the month of September, with sales up 12.4% year to date.
A big government-sponsored boost is coming
The Chinese government is clearly worried about slowing auto sales. Last month, it announced a tax cut for passenger vehicles with 1.6 liter and smaller engines, running from October through the end of 2016. The vehicle purchase tax for qualifying models will be 5% instead of the usual 10%.
This move could provide the impetus for many Chinese consumers who have been holding off on buying a new car to take the plunge. GM recently stated that 30 of its models across four brands -- representing most of its sales volume -- are eligible for the tax break.
The great thing for General Motors is that the tax cuts will bolster sales of the worst-performing part of its vehicle lineup in China. Eighteen of the 30 GM models eligible for the tax break are under the Chevy and Wuling brands; sales of both brands are down about 9% year to date. Additionally, the tax savings probably matters more among the most price-sensitive buyers.
If General Motors experiences a sales revival for its smaller, entry-level vehicles in China and can also maintain its momentum in the trendy crossover and luxury markets, it should be able to end 2015 on a high note and post solid growth in 2016 as well.
The big question
Even if GM's sales are about to rebound, investors would be wise to ask what will happen to GM in China after the latest tax break expires. As much as China would like to manage its economy to drive steady growth, it's hard to believe that it can compensate for weak underlying demand indefinitely. Unless the Chinese economy returns to faster growth in the next year or so, the auto market could need an even bigger stimulus in 2017 to keep sales on the right track.
Nevertheless, GM has already shown in 2015 that it has the ability and discipline to respond to demand weakness with production cuts. That's a big reason why it's still on pace to hit its goal of a 9%-10% profit margin in China this year, despite the recent sales declines.
In other words, General Motors would love to see robust auto sales growth in China for as long as possible -- but it won't be devastated if sales stagnate again after the recent auto stimulus expires at the end of 2016.