General Motors (NYSE:GM) and crosstown rival Ford are neck and neck in many aspects of their business. However, one thing that GM investors can boast is that Detroit's largest automaker has successfully built a second pillar of strength with its business in China -- while Ford still largely depends on North America alone for its financial success.
In fact, glancing at GM's sales this year through September, China generated nearly 35% of the automaker's total global sales. That's right behind its North America region and more than sales in Europe, South America, and its International region combined.
The problem is that China's light-vehicle sales are growing at the slowest pace in three years, and the uncertainty surrounding its economy is troubling investors. Let's take a look at the situation and what GM's plans in China are going forward.
Here today, gone tomorrow
China, which was once the land of guaranteed double-digit sales growth every year, has hit a major speed bump. Last month, only the SUV segment saw sales rise in China, but it was enough to pull overall sales up a meager 2.5% compared to last year. At General Motors, sales in China fell last month for the fifth time in six months, which is certainly a speed bump for one of its key markets.
All is not lost, GM investors! Detroit's largest automaker has a near-term catalyst and a long-term plan.
VW woes and tax cuts
GM's near-term outlook in China might be less rosy than it has been in recent years due to the overall economic slowdown, but there are certainly catalysts to help it trudge through the sales slump.
First, in recent years GM has been locked in a tight battle with Volkswagen to be the best-selling foreign automaker in China -- and both are far ahead of the nearest competitors. Because of the potential consumer backlash from Volkswagen's very public diesel emissions cheating scandal, GM might finally be able to take valuable market share from its German competitor and establish itself as the clear No. 1-selling foreign brand in the world's largest automotive market.
Second, the China State Council announced an automotive stimulus package that started this month and extends through the end of 2016. The plan calls for a reduction in vehicle purchase tax on vehicles with engines 1.6 liters or smaller, from 10% down to 5%, which Barron's estimates will pass on about $1,500 to the consumer. The kicker is that an estimated 80% of GM's passenger-vehicle and light-van sales in China will fall under this criteria -- and that could provide a boost to its sales.
While those near-term catalysts will help GM weather China's current slowdown, the automaker also has a plan to improve its business over the long term. The focus of GM's strategy will be to maintain a well-balanced brand portfolio, as well as target launches in segments of higher growth.
As you can see above, GM has a good mix of local and global brands, but more important, the company is going to focus on surging segments, which will help mitigate slower total growth.
Between 2008 and 2014, China's compound annual growth rate for new-vehicle sales reached 17%, but as the market matures, that rate is expected to check in between 3% and 5% from 2014 to 2020. However, GM will have 26 new and refreshed entries in three critical segments, which are supposed to nearly double the market's total growth by the end of the decade.
While investors have reason to be less optimistic about GM's business in China amid a slowdown, there are still a couple of near-term catalysts as well as a long-term strategy aimed to deliver profitable growth for investors.