China’s embrace of the sport-utility vehicle has made it the most profitable type of car for foreign and Chinese auto makers in the world’s No. 1 auto market. But those profits could dwindle as sales growth slows in line with the broader auto industry.
SUVs have found an audience with drivers like Gary Guo, who want spaciousness, height on the road and off-road capabilities. “I like the feeling of sitting higher, especially when driving on the highway roads, and my parents have no need to bow to ride in my car,” said the 35-year-old Shanghai-based banking employee, who drives a Volkswagen Tiguan.
Customers like Mr. Guo have helped annual sales growth rates for SUVs in China average 49% from 2009 through 2013, according to data from the China Association of Automobile Manufacturers, and foreign and Chinese auto makers are adding more models at lower price points. SUV sales grew 34% in the first 11 months of 2014 compared with the year-earlier period, while sales of sedans rose only 2.6%, and sales of all passenger cars rose 12%, according to the auto-industry group.
But an economic slowdown in China is damping car sales growth—market data provider LMC Automotive estimates China’s passenger-car market growth could fall to 9% this year. SUVs’ sales growth will suffer as well: Ways Consulting Co., a Guangzhou-based consultancy focused on the Chinese automotive industry, estimates that China’s SUV sales could rise 17% to nearly 5.4 million vehicles this year from 4.58 million vehicles last year. In 2016, China’s SUV sales could grow 13% to about six million vehicles, said the consultancy.
That is unwelcome news for car makers, since SUVs are particularly profitable.
Few auto makers detail the profitability of individual models, but Great Wall Motor, China’s largest maker of SUVs, said in its financial statement last year that SUVs—Great Wall also makes pickups and sedans—account for roughly 80% of its total sales. Many of those are so-called crossover SUVs, which are built on the same chassis as those used for sedans. Great Wall’s gross margin was 28.6% in the first half last year, down only slightly from 29% a year earlier.
“Great Wall’s higher profitability is due in part to a higher share of SUVs of its product lineup,” said Peng Bo, partner at consultancy firm Strategy&. “Thanks to Chinese consumers’ penchant for crossovers, discounts on SUVs are smaller than sedans.”
By comparison, SAIC Motor Co.—China’s largest auto maker, which builds cars with Volkswagen AG and General Motors Co.—had a gross margin of 12% in the first half of last year. Dongfeng Motor Group Co., which counts PSA Peugeot-Citröen and Nissan Motor Co. as partners, reported a margin of 14% for the period.
Read more at The Wall Street Journal.