Why GM’s Sales Growth In China Might Not Be All Good News
General Motors (NYSE:GM) reported a 7% increase in year-over-year sales in China in the month of November, with Cadillac sales growing by 70%. For the first nine months of the year, the company has seen its new vehicle sales in the biggest auto market in the world grow by 4.4%. However, the equity income derived from those sales has declined by 2.5% over the same period. This suggests that the equity income per unit sold has declined by 6.6% over the period.
Most of GM’s growth in sales is attributable to the reduction of the purchase tax on new vehicles with engine displacement less than 1.6 liters to half its old value. This tax relief is set to expire at the end of the month, which could result in sales in 2017 being much slower than those this year. There is precedent for this: in 2009, when the purchase tax was cut in half, sales grew by 53%. Following the removal of the tax, growth slowed down to 33%. In 2011, when the sales tax reached its original level of 10%, sales growth slowed down to 5.2%.
In addition to this anticipated slow down, GM’s lower transaction prices pose a problem for the company, since it implies that its sales mix is tilting towards lower margin models. Turning around this trend will take considerable effort for the company and a failure to do so could result in lower profitability for the company going forward.
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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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