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GM, Ford Report Sales Decline in January in China

- By Mayank Marwah

Detroit auto giants General Motors Co. (GM) and Ford Motor Co. (NYSE:F) reported massive January sales declines of 24% and 32% in China. The automakers blamed Lunar New Year and a tax hike on the purchase of new vehicles as the prime causes for the decline.

Peter Fleet, Ford vice president of marketing, sales and service for Asia Pacific, said that not all of its sales were affected however.

"Sales of vehicles not affected by the tax incentive were strong," Fleet said. "In fact, the Edge, Explorer and Mustang all saw an increase over a year ago despite the fewer selling days. So the underlying market conditions and customer demand for our exciting new products remains strong."

What led to sales drop?

Earlier in the year, the Chinese government reduced the purchase tax rate on vehicles with 1.6 liter engines or lower from 10% to 5%. This lifted the sales volume of the two automakers substantially. The government, however, later increased the tax rate up to 7.5%. The government plans to further increase the purchase tax to 10% starting Jan. 1, 2018.

Another factor that hit sales hard was the Lunar New Year (also known as Chinese New Year), which reduced the number of selling days during the month.

The key numbers

General Motors, in collaboration with its joint venture, reported selling 321,264 units in China in January. Cadillac put up a strong performance with a mammoth sales hike of 116% to 18,011 units. This, however, did not impact the overall performance or compensate for the steep decline since it is not a mass model. The luxury brand's models, the ATS and XTS sedans, saw impressive gains of 115% and 46%.

"We are seeing strong growth momentum with Cadillac as we continue to build our product lineup in the fast-growing luxury segment," GM China President Matt Tsien said in a press release. "We are well positioned to meet the demand from consumers for higher-end vehicles. As a result, we expect 2017 to be another year of positive results."

General Motors plans to launch 18 new and revitalized models in China during the year, half of which are supposed to be SUVs or multipurpose vehicles. The automaker is slated to add the 2018 Chevy Equinox to its portfolio in the first half of 2017 and plans to introduce 20 new vehicles under the Chevrolet brand in China over the next four years. The company expects to further solidify its presence by catering to the fast-growing SUV market in this Asian economy.

GM rival Ford said it sold 88,432 vehicles in China in partnership with its joint venture in January. Ford's sales plunge was quite expected given the increase in the purchase tax. This dented the demand for smaller cars that form the basis of its sales portfolio in the mainland.

This, coupled with fewer selling days during the month due to the Lunar New Year, made Ford's sales tumble to 88,432 units from 130,832 units in January last year. On the bright side, the Blue Oval saw record-breaking sales of the Edge SUV and Mustang sports cars. Ford's passenger car joint venture, Changan Ford Automobile, saw sales decrease 41% to 66,163 vehicles. On the other hand, joint venture Jiangling Motor Corp. said its January sales surged 17% from last year to 20,249 vehicles.

Last word

The impact of the increased purchase tax will take some time to fade. As such, the first quarter of the year is expected to see softer numbers compared to 2016. China, however, is the world's largest auto market with a low car ownership rate. As such, sales should see a favorable trend over the next few months.

Disclosure: I do not hold any position in the stocks mentioned in this article.

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This article first appeared on GuruFocus.