GM's Big Challenge in China
It was a record-breaking month for General Motors in China: The General said on Tuesday that it had its best sales month ever in China in January, breaking the 300,000-vehicles-sold mark for the first time ever.
GM's two principal joint ventures had their best sales months ever, as did GM's three most prominent Chinese market brands: Buick, Chevrolet, and Wuling.
But Cadillac sales were down, another symptom of a frustrating challenge for General Motors in China.
Strong sales for the market leader, but GM still has concerns
Worries about Cadillac shouldn't overshadow the fact that it was a great month for GM overall. GM's sales in China were up 26% from year-ago totals, though that requires a bit of explaining. China's New Year celebrations, during which much of the country grinds to a halt for several days, happened to fall in January last year. That made last year's numbers a bit lower than they might have otherwise been.
A better comparison would be to 2011, when the New Year began in February (as it will in 2013). As it happened, January of 2011 was GM's previous all-time-high month in China - and last month's sales were up 15.9% from that former high-water mark.
That's a solid result by any measure, though a deeper dive into the numbers raises some concerns.
One of those concerns is that Cadillac sales were down about 47%. Another is this: While Buick sales were up almost 22% over year-ago totals, and Chevy sales were up 21.6%, sales of Wulings - the inexpensive little commercial vans that account for about half of GM's China sales - were up almost 36%.
Now, Cadillac - in a good month or a bad one -- represents just a tiny fraction of GM's total sales in China. And the dip in sales probably had a lot to do with the fact that it has discontinued its old big car - the China-only SLS sedan - and hasn't rolled out its successor (the XTS) yet.
And there's nothing wrong with a big jump in Wuling sales in and of itself. The little vans aren't super-profitable, but they do make money for GM.
But they're both symptoms of GM's most frustrating challenge in China (and elsewhere): making more money.
The big question: Why isn't GM making more money?
While the gap has been closing lately, GM still sells more vehicles than arch-rival Volkswagen in China. But VW makes a lot more money there: More than twice as much in recent quarters.
Both global giants split their profits with local Chinese joint-venture partners, as required by Chinese law. Both have spent big to build local design and manufacturing facilities and navigate China's often Byzantine web of rules and regulations. Yet Volkswagen's profits in China dwarf GM's. Why?
The answer comes down to the kind of vehicles each sells. GM's Wuling vans are popular, but not very profitable for the General. That's partly because the little vans are inexpensive and carry small margins, and partly because GM is a minority partner in the venture that produces them - but has the contractual right to count all of the venture's sales as its own.
Contrast with VW, which sells a full line of affordable cars - along with its Audi luxury-car lineup, which has become the preferred car brand of China's wealthy and powerful. Audis carry fat markups - fat enough that the brand accounts for almost half of VW's global profits, despite it being a relatively small percentage of the company's total sales.
GM CEO Dan Akerson would dearly love a piece of that action. That's one of the reasons why GM is rumored to be committing big resources to an elaborate retooling of its own luxury brand, Cadillac. But the fruits of that effort are a few years away
An ongoing battle for the General
Luxury cars aren't the only way to make big money in China, of course. Ford has taken a somewhat different tack in China, working to brand its global bread-and-butter cars as a premium lineup. The current-generation Focus, for instance, is positioned as a polished upmarket contender in China, a step up from the inexpensive small cars that dominate the Chinese market. That has worked out well for Ford so far, and the company is spending big to ramp up its presence in Asia - part of an aggressive plan for overseas profit growth in coming years.
But while GM is solidly profitable, it has been struggling for a while with profits that don't match up to its rivals - in China and elsewhere. There are reasons to believe that the company is making good progress, but it's clear that investors will have to be patient.
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The article GM's Big Challenge in China originally appeared on Fool.com.Fool contributor John Rosevear owns shares of General Motors and Ford. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.
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