Ford and GM have renewed faith in Chinese consumers

The two most important auto markets in the world are the US and China.

The US is the most competitive — if you can make it here, you can make it anywhere.

China is going to be be the world’s biggest market; already, it’s surpassed the US, with more than 20 million in annual sales versus about 17 million in North America.

In the past, big car makers were betting on China as their key play for the future. Aggressively bullish projections for the scale of yearly auto sales in the Middle Kingdom were coming in at 40 million.

But in 2015, some concern set in, as China’s runaway growth rates endured a pullback.

For several quarters, automakers like GM and Ford were routinely asked to address their China expectations and gauge whether they were anticipating too much.

Now the industry seems to think that China has stabilised and that solid growth for both mass-market and luxury sales will resume.

This couldn’t be happening at a better time because the US market is finally beginning to show some signs of plateauing at a sales pace of 16-17 million new vehicles per year.

For example, after running at a 17.5-million pace for the first few months of 2016, matching last year’s record, sales retreated by a notable 1 million units in March: the pace was 16.5 million, due largely to a pullback by GM on fleet sales, which could take nearly half a million in low-margin deliveries off the table by December.

The problem here us that when sales growth vanishes in the US, a downturn doesn’t generally follow. Usually, the market flattens, and this means that the automakers selling cars and trucks here start to revert to bad habits. They raise incentives, cutting into their profits, and they compete against each other to maintain market share. This leads to a frittering away of margins and a lack of bold spending on future models.

Car dealership
US auto sales may have peaked. Justin Sullivan/Getty

Basically, the industry pre-emptively hunkers down when times are good because no one wants to be caught off guard when the market slips from its plateau and really starts to decline.

Thus, the renewed China enthusiasm: If the US market weakens, China can make up for it and keep the industry on track for continued profitable quarters.

Naturally, the automakers wants to make as much money as possible in China, and that’s where the luxury market comes in.

Bloomberg’s Bruce Einhorn reported on the ambitions that both GM and Ford have for, respectively, their Cadillac and Lincoln brands:

Service — at-home test drives, live videoconferences with maintenance and repair staff — is a central piece of Ford’s plan to boost Lincoln sales in China. The brand entered the country in October 2014 with only three showrooms; by year end 2016, there will be 60.

Meanwhile, in January, General Motors opened a Cadillac factory in Shanghai, its first built solely to support the luxury brand in the country. The $1.2 billion plant has the capacity to produce as many as 160,000 Caddys a year….

Luxury brands generate higher profits than mass-market brands (often, the mass-market brands just break even on sales, but give automakers a chance to make money on leasing and loan financing). So it makes sense that GM and Ford would be aiming to grown these nameplates if strong growth resumes in China. But everyone else is thinking the same thing, and neither Cadillac nor Lincoln holds a major piece of the Chinese luxury market (yet).

The China play had better pan out because if the US slows, there isn’t really anywhere else to look for growth. Europe is flat, Latin America is in recession, the Russian market is a catastrophe, and newer regions, such as African and the Middle East, are promising only modest short-term sales.

That’s why all eyes will once again be on China in 2016.

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