This Could Crush General Motors Company (GM)’s China Chances: Volkswagen AG (ADR) (VLKAY)

China has been a big contributor to VW’s growth in the last few years, helping to offset sales declines and pressure on margins in Europe. The company made 3.7 billion euros in China in 2012 (about $4.8 billion), a 42% increase over year-ago numbers. Again, the contrast with GM is stark: GM’s international operations unit earned just $2.2 billion last year – much (but not all) of that from China.

Why the huge gap, given that General Motors Company (NYSE:GM) sold (slightly) more vehicles in China than VW did last year? While Volkswagen AG (ADR) (PINK:VLKAY), like GM, splits its China earnings with the local joint-venture partners required by Chinese law, VW is selling more of its more profitable vehicles in the Middle Kingdom, giving it a larger pile of profits to split.

About half of GM’s China sales are Wulings, inexpensive little minivans sold mostly to commercial buyers. VW’s Audi brand, on the other hand, dominates the immensely profitable (and rapidly growing) Chinese luxury-car market. Audi’s share of the Chinese luxury market was almost 30% in 2012, while GM’s luxury brand, Cadillac, barely registers on the Chinese sales charts.

Keeping up with Volkswagen AG (ADR) (PINK:VLKAY) will be a challenge for GM
General Motors Company (NYSE:GM) is thought to be investing heavily in new products that will take Cadillac sharply upscale in coming years, making it a true rival for the German luxury brands. That’s a move widely believed to be spurred in part by the desire to gain ground on Audi in China. But keeping up with VW in China (or elsewhere) won’t be simple.

The German automaker’s big profits mean that it can continue investing aggressively to expand. And while GM is sure to make its own big investments, VW’s product strength – and its commanding lead in the increasingly important luxury space – means that keeping pace with its German arch-rival will be a big challenge for the General.

The article This Could Crush GM’s China Chances originally appeared on Fool.com.

Fool contributor John Rosevear owns shares of General Motors and Ford. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors.

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