GM’s July Sales In China Were Great, But Can The Growth Last?

-8.63%
Downside
45.50
Market
41.57
Trefis
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GM
General Motors

When General Motors (NYSE:GM) reported its second quarter earnings last month, the company’s performance in China, its biggest market, provided reasons for both optimism and concern. The optimism came from the fact that the market was growing at a rate of close to 9% compared to sales in 2015 through June. Now that July sales numbers are out, the year-to-date growth rate for the market is close to 9.8%. However, the biggest reason why sales have been growing is the halving of the sales tax on small engine vehicles to 5% in October last year. The tax relief lasts till the end of 2016 and it is quite possible that the 26% year-over-year sales bump in country-wide auto sales was affected by its consideration. General Motors itself benefited in July, with sales growing 18% year over year. Sales of all brands except Chevrolet grew in July. The silver lining for Chevrolet was that the newly launched Chevrolet Cruze was the brand’s best selling vehicle in China.

gmchina

The reasons for concern were two-fold:

1) The market has been growing at a much faster rate than GM’s overall sales. Even July’s 18% bump was not enough to save the company from losing market share, as the overall market grew by 26%. One caveat to these numbers is that industry-wide sales are reported by China Automobile Manufacturers Association, which reports sales made by companies to dealerships.  In contrat, sales reported by companies themselves are those made to end users, i.e. deliveries and not  wholesale figures. Moreover, the growth numbers are so large because prior year sales figures were so low and because of the impact of the sales tax cut, which raises doubts about whether it can be sustained into next year.

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2) The growth in sales is being driven by lower transaction prices. Auto companies already fear that most of the future growth in China will be delivered by Tier 3 and Tier 4 cities, where consumers generally are first time buyers purchasing compact cars and hatchbacks, which command lower unit prices. Therefore the sales growth numbers might not translate into higher profitability.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for General Motors

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