Why Ford and GM Will Thrive in China
The China slowdown continues: Auto sales in the Middle Kingdom fell 1.1% in October, according to the China Association of Automobile Manufacturers, the third monthly drop this year. Through October, auto sales in China have grown just 3.2% over the year-ago period.
After years of double-digit growth, declines like this are sobering. But does the Chinese auto slowdown mean trouble for the giant global automakers hoping to find growth in China?
Interestingly, it might not.
Who's hurting ... and who isn't
Here's who isn't hurting in China: market leader General Motors (NYS: GM) . Across all of its brands and joint ventures, GM's sales in China were up a healthy 10.4% in October, putting GM over 2 million vehicles sold in China so far in 2011.
A big chunk of that sales growth came from the SAIC-GM-Wuling joint venture, which makes small utility vans and pickups under the Wuling brand name. Wuling sales were up 19.2% year over year, a nice sign of strength after earlier struggles had led GM to resort to incentives during the third quarter. Shanghai GM, the General's long-standing venture with SAIC, saw sales rise a more modest (but still solid, given the overall market) 4.3%.
But it's Shanghai GM -- specifically, its hot-selling Buick and Chevrolet models -- that helps illustrate what's happening in the Chinese market. Three of the five top-selling cars in China in October were Shanghai GM products: Buick Excelle, Chevrolet Sail, and Chevrolet Cruze (the same Cruze that has been a hot seller here in the U.S.).
The other two? Both Volkswagen (OTC: VLKAY) products -- the Lavida (a China-only model) and Jetta. Year-to-date sales in China for VW, which trails only GM in market share, were up 14.8% through October. VW isn't hurting either. Nor is Ford (NYS: F) , an up-and-coming player in China, which posted a 9% gain for the year through October.
So where are the hot-selling Chinese companies like Chery, Volvo's new owner Geely, and Berkshire Hathaway favorite BYD (OTC: BYDDF) I know where they're not: topping the sales charts.
China's own automakers have to step up
In October of 2009, BYD's F3 was China's best-selling car. Last October, it was seventh. Now? Fallen off the charts. BYD's sales were down 15% through September, and the company's profits have all but disappeared. To be fair, the F3 is an older model and a new version is due next year. But the problems go beyond a dated design.
China's carmakers made their hay at the low end of the market, with small, cheaply made cars that qualified for tax breaks meant to encourage buyers to choose fuel-efficient autos. But a couple of things have changed: First, those tax incentives went away at the end of last year. Second, the global automakers started offering Chinese consumers the same kinds of small, basic cars -- but wearing global nameplates, and built to global standards of quality and finish.
It's no accident that the Chevy Sail has sold so well -- the car was designed and built entirely in China, with Chinese consumers and that particular corner of the Chinese market in mind. VW's Lavida and the Buick Excelle are also China-only models, based on global platforms but tailored for Chinese tastes and budgets, and both have been hot sellers for the last couple of years as well.
GM also offers its "global" small Chevys in China, the Cruze, Aveo ("Sonic" in the U.S.), and Spark, but those are a significant step up in price and features from the Sail. Even the tiny Spark starts at 77,800 renminbi, a big jump from the 56,800 RMB price tag on the Sail.
But it's the models tailored specifically for Chinese consumers that have displaced China's domestic automakers on the sales charts. The strength, global prestige, and longevity of brands like Chevrolet and VW and Ford and Toyota (NYS: TM) -- Chevy's China website prominently celebrates the fact that the marque is celebrating its 100th anniversary -- hasn't been lost on Chinese consumers, especially when the quality of the domestic offerings still suffers so clearly in comparison.
This bodes well for other global automakers like Toyota, which recently launched a car designed specifically for India and would like to become a bigger player in China. And it shows a pretty clear path for other automakers like Honda (NYS: HMC) , which has a reputation for quality and engineering that should play well in China.
But for the Chinese automakers like BYD and Geely, it means that the global giants have finally met them on their own turf. To compete with the likes of VW and GM at home, never mind in the West, as BYD had once hoped, they'll have to up their game significantly. Can they do it? We'll find out.
- Add General Motors to My Watchlist.
- Add Ford to My Watchlist.
- Add Toyota to My Watchlist.
- Add Honda to My Watchlist.
- Add Berkshire Hathaway to My Watchlist.
Ford's dividend may be returning soon, but you don't have to wait to put the power of reinvested dividends to work in your portfolio. In a special new report, Motley Fool analysts identify "11 Rock-Solid Dividend Stocks," all great additions to a long-term investor's portfolio. This new report is completely free for Fool readers -- click here to get instant access.
At the time this article was published Fool contributorJohn Rosevearowns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by@jrosevear. The Motley Fool owns shares of Berkshire Hathaway and Ford.Motley Fool newsletter serviceshave recommended buying shares of General Motors, Ford, and Berkshire Hathaway. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.