By SHARON TERLEP
BEIJINGâ€"For years bare-bones compact cars have dominated China's roads, but now more and more consumers here are opting for more-upscale vehiclesâ€"and that is opening the door for global auto makers to bolster profits in the growing market.
Relative to the China auto industry's massive size, most car companies don't earn nearly as much money in China as they do in countries where buyers demand pricier cars and sport-utility vehicles. Profits also are slimmer because foreign auto makers must team with a Chinese company to do business in the country, thus splitting any earnings. General Motors Co., for instance, sold more cars in China than in the U.S. last year. It earned $1.5 billion from its Chinese joint ventures, compared with a $7.2 billion profit in North America.
To be sure, the fast-expanding Asian market, and China in particular, has delivered much of the industry's volume growth in recent years. Most auto makers say margins in the region are strong as well: Cars sell cheaply, but low-end models are also less expensive to build and labor costs are less than in Europe and the U.S.
But in a market that is expected to grow to as much as 30 million vehicle sales by 2020, from 18.5 million last year, auto companies see opportunity in boosting the sticker prices on new cars and trucks.
"We expect our profitability to be more balanced than it is," Kevin Wale, GM's China chief, said in an interview Sunday.
That dynamic is changing as Chinese consumers amass more wealth and begin to demand cars more like the ones on U.S. and European roads, with more options, space and safety features. The new wave of offerings will be on display this week at the Beijing auto show, where many auto makers will exhibit luxury cars, larger sedans and SUVs.
On Sunday, Ford Motor Co., said it will bring new SUVs to the Chinese market: the Kuga, a Chinese version of the company's Escape compact SUV; the small EcoSport; and the larger Explorer. Italy's Fiat SpA, known primarily for small vehicles in Europe, plans to re-enter the China market with a new midsize sedan. GM, which is bringing new Cadillac vehicles to China, will use the show to display the premium brand's luxury Marquis model.
Mr. Wale said GM expects margins to grow as it moves toward higher-end cars. Cadillac is still a minor player in the lucrative Chinese luxury market, where cars such as the Mercedes S-Class from Germany's Daimler AG can sell for more than $200,000, a price that includes China's tax on luxury imports.
Squeezing more profits out of China won't be easy. Competition is intense and growing as more auto makers rush to cash in on China's expanding vehicle market.
Mr. Wale said sales growth is likely to be a bigger driver of profitability than a richer mix of vehicles. Demand for pricier vehicles, he said, "is not a silver bullet that will lead to an explosion in profitability."
Though Chinese consumers are being drawn to more-upscale vehicles, their preferences are still far different than those of U.S. or European consumers. The SUVs now on sale in China are small, such as the CRV from Japan's Honda Motor Co., and there is virtually no market for the big pickup trucks and SUVs that drive profits at Detroit's auto makers in the U.S.
At a Ford dealership outside of Shanghai, the most popular model by far is the Focus compact car. Hu Jun, a salesman at the store, said the Focus, which costs about $16,000, often appeals to young families or couples buying their first car. Shoppers buzzed around the Focus and a smaller Fiesta on Saturday, while a lone Ford Edge SUVâ€"costing about $57,000â€"drew no interest. Mr. Jun said he is eager for Ford to put its smaller SUVs in stores, and Ford expects those vehicles to hold more appeal to consumers on a budget.
Huang Yi, chairman of Zhongsheng Group Holdings Ltd., one of China's largest auto retailers, said he sees the ultra-cheap, high-volume cars that once defined China's market as a shrinking segment. Though luxury cars are still a small part of the marketâ€"about 9%â€"they are becoming more popular, along with midsize and large vehicles, he said.
Write to Sharon Terlep at sharon.terlep@wsj.com
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