We all know that automakers have been looking toward China, the world's largest automotive market, for its enticing growth potential. And while auto sales in the country slowed from their higher growth rates last year, its growth potential remains lucrative in the years ahead. That's what makes General Motors' (NYSE:GM) overtaking Volkswagen Group (NASDAQOTH:VLKAY) for No. 1 sales volume in the country a big deal.
What's more important, though, is understanding whether this is a temporary setback for Volkswagen or a bad business strategy that will enable GM to maintain its newfound lead. Let's dig in.
Not just the diesel scandal
Investors have heard for months about the endless negative publicity in regard to Volkswagen's diesel emissions scandal, and rightfully so. Executives have been fired, recalls have been issued, and the company's brand image, along with its stock price, have been beaten down day after day. Sure, that certainly had some impact on Volkswagen's sales decline in China last year, but the truth is that there might be more to the matter -- and that bodes well for GM and its investors.
Despite China's automotive sales slowdown over the summer, and for much of the year until the fourth quarter, General Motors managed to increase its deliveries by 5.2% during 2015, to a whopping 3.61 million vehicles. Volkswagen, on the other hand, had been China's largest automaker for consecutive years during 2013 and 2014 but recorded a 3.4% sales decline last year, down to 3.55 million vehicles sold. The difference between VW and GM has always been a narrow gap, but for the first time in quite a while, it seems the two are headed in different directions for the foreseeable future.
That's not because Volkswagen's diesel emissions will continue to be a huge issue; it's because Volkswagen's strategy took a couple of missteps.
GM's lead should widen
First, it just about entirely missed on the consumer movement toward SUVs and similar vehicles. Consider that over the past two years, General Motors introduced twice as many crossover vehicles in China as Volkswagen offers in total. More specifically, GM launched four new crossover vehicles over the past two years under its Buick, Baojun, and Chevrolet brands compared to the two total crossovers Volkswagen offers in China currently. Furthermore, I would bet that GM continues to produce more SUV/crossovers than VW does, because GM is pretty good at the whole selling SUVs thing.
Here's proof the SUV strategy is working, from a GM press release on its excellent January sales in China:
Increasing demand for SUVs and luxury vehicles continued to support GM's robust sales last month. The Buick Envision and Baojun 560 led the growth in sales of GM's SUVs in January. Demand increased 188% year over year.
The second strategic misstep from Volkswagen was missing entry-level demand in smaller, but faster-growing, Chinese markets. When most automakers enter China's automotive market, the focus on growth leads them to the big coastal and tier 1 cities (large, densely populated cities with economic, cultural, and political influence in China). However, as sales growth in those cities has slowed thanks to pollution issues and vehicle saturation, the focus for clever automakers switched to China's inland, where demand has stayed strong. According to LMC Automotive, during 2015 China's auto sales in coastal cities declined while smaller cities maintained double-digit growth.
The key to those markets was to produce a smaller, cheaper, and in some cases multipurpose vehicle. General Motors was on the ball years ago when it launched the Baojun brand for the rural market as well as a Chevrolet-branded subcompact car with a starting price under $10,000. For perspective, GM was executing that strategy around 2010, when Ford was just entering the Chinese market with meaningful force. Volkswagen, while still selling plenty of vehicles in China, has spent more time figuring out what to do with its old lineup of vehicles in the coastal cities than it has expanding its vision to where demand would remain strong.
Sure, Volkswagen's diesel emissions scandal hurt the automaker's sales worldwide, including in China. However, it's clear that GM has made sound business decisions increasing its SUV lineup and switching its focus to China's inland, while Volkswagen failed to do so. That means the gap between GM and VW, the two automakers perennially grasping for the title of No. 1-selling foreign automaker in China, will likely only widen in the years ahead. That's all great news for GM investors, and just another setback for Volkswagen, which had so much global momentum only a couple of years ago.
Daniel Miller owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.