It's real easy to forget the level of concern analysts and investors had about China's automotive market last summer, when there were multiple months of sales declines. Many wondered if the good times were over, and if so, what it would mean for automakers like General Motors (NYSE:GM) which sells more cars in China than it does in any other market.
Uncertainty about China remains, with its overall economy growing at its slowest pace in roughly 25 years, but in part thanks to a government incentive that cuts the 10% purchase tax on smaller vehicles in China in half through 2016, new vehicle sales growth has returned, and GM plans to push forward with ambitious plans.
SUV love affair continues
China already accounts for about one-third of GM's global deliveries, and it believes the world's largest automotive market will post sales growth between 3% and 5% annually through 2020. "GM is very well positioned to participate in this growth," said GM China President Matt Tsien in a press release. "We will continue to focus on the segments where the demand is strong and growing. This has been a key to our success from day one."
GM's plans in China moving forward are focused on two clear goals: Increase the amount of value-added services, and roll out more SUVs and MPVs (multi-purpose vehicles, or what most Americans think of as minivans).
Detroit's largest automaker will roll out 13 new vehicles in China this year, and before the end of the decade plans a total of 60 new and refreshed models in the country. In line with GM's strategy to focus on SUVs and MPVs, about 40% of those new vehicles will be aimed at those segments; GM believes those two markets, plus the luxury market, will post a total of 4.2 million units of growth through 2020.
What's this "value-added" services stuff about?
What's intriguing for investors here, though, is GM's strategy to value-added services. GM believes there's plenty of opportunity to drive revenue from its joint venture with Shanghai Automotive Industry Corp. SAIC-GMAC is the largest dedicated automotive finance company in China, and by the end of this decade, GM believes 40% of Chinese car buyers will finance their purchases, compared to about 30% in 2015.
Finance divisions can be very profitable for automakers. Ford is a great example: Ford Credit drove about $1.9 billion in pre-tax profit last year -- which made it a greater profit center than any of the automaker's regions other than North America. General Motors Finance posted full-year net income of $646 million last year, and while its U.S. finance division is years behind Ford's, there's solid growth to be had from SAIC-GMAC in China.
Ultimately, with GM and other automakers continuing to consolidate platforms and create vehicles that can sell well in any market -- rather than developing vehicles to sell specifically in one market -- fresh global portfolios will become critical for automakers to maintain market share. For instance, about 40% of GM's global sales will come from its new and refreshed models this year, and over the next few years. New and refreshed models accounted for only about 25% of sales last year.
So not only are GM's ambitious plans for new vehicle roll outs and value-added services in China good news for investors, they also reflect that the automaker's global story is improving.