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Why Ford Motor Company (F) and General Motors Company (GM) Are Rushing SUVs to China

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Ford Asia Pacific chief Dave Schoch showed off an Explorer in Beijing last year. The Explorer is set to arrive at China’s Ford dealers soon. Photo credit: Ford Motor Company (NYSE:F).

What’s hot in China right now?

At last weekend’s Shanghai Auto Show, the answer was pretty clear. While automakers showed a dizzying variety of models, two big trends were pronounced: luxury cars and SUVs.

Growth in the overall Chinese new-car market has cooled from the double- and triple-digit gains common just a few years ago. But there’s still growth to be found in some corners of the market, and as Chinese incomes continue to rise, their tastes in upscale vehicles are looking more and more like Westerners’.

Suddenly, SUVs are big in China
Many of the SUVs set to hit China’s market will look awfully familiar to Americans. General Motors Company (NYSE:GM) said it planned to introduce nine new or revised SUVs in China over the next five years, as a big white Cadillac Escalade was featured on its auto-show display stand.

Ford Motor Company (NYSE:F), which has been on a tear in China, launched the new Escape (under its European market name, Kuga) there earlier this year. Sales totals in March, its first full month on sale, reflected strong consumer interest in the compact SUV that has received good reviews in China’s auto press. More Ford Motor Company (NYSE:F) SUVs are on the way: The EcoSport, a smaller SUV originally developed for emerging markets, and the familiar Ford Motor Company (NYSE:F) Explorer are both set to debut in China soon.

Meanwhile, Chrysler – a very late arrival at the Chinese auto party – said that it would start making its just-launched Jeep Cherokee at a plant in China by the end of 2014. Other manufactures including Hyundai and a whole slew of Chinese domestic brands showed off entries in the smaller and mid-sized SUV segments

Why the sudden popularity of SUVs in China? According to some reports, Chinese car-buyers were down on the idea of SUVs for a while because they seemed unsophisticated, like farm trucks. But tastes have evolved, and now buyers see vehicles that can be luxurious and prestigious – and well-adapted to roadways outside of China’s big cities, which are not always in top condition.

But another part of the story has to do with rising incomes and the continued Westernization of Chinese consumer tastes, which is also driving big gains in the luxury-car market.

Luxury cars drive big profits
Luxury cars have already turned out to be big business in China’s largest cities. Volkswagen‘s Audi brand is already the hot ride among China’s elite. Between Audi and rivals BMW and Daimler  AG (OTCBB:DDAIF)‘s Mercedes-Benz, the German brands have about three-quarters of China’s fast growing luxury-car market.

China growth has been a significant driver of profits for all three. That profit growth – and the fact that luxury cars have fatter margins that mainstream models – has attracted attention from rivals. General Motors Company (NYSE:GM) is in the midst of a major, multi-year push to overhaul its Cadillac brand and turn it into a global contender, hoping to have 10% of China’s luxury-car market by 2020.

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