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Great Wall is world's most profitable car brand

China's insatiable demand for SUVs has helped Great Wall

Hong Kong-listed Great Wall Motor has the fattest margins in the auto world, according to Sanford Bernstein's Max Warburton. It posted an operating profit margin of 18.4 per cent in the first half of 2013. That tops even Ferrari, which was at 14.9 per cent in the same period.

Great Wall's secret sauce is that sport utility vehicles, which typically yield higher profits, account for half of the autos it sells. In contrast, SUVs on average make about a third of a carmaker's volumes in North America, according to research firm LMC Automotive. That sector is about a fifth in China.

Great Wall also runs a lean operation by spending little on research and development or marketing. It has become one of a handful of Chinese companies to build a domestic brand, rather than rely on foreign partners such as General Motors.

China's insatiable demand for SUVs has helped Great Wall. Despite the economic slowdown, sales of these vehicles are projected to grow 22 per cent this year, compared with 13 per cent for passenger cars overall, says LMC Automotive. Consumers want these larger cars either as trophies or to navigate the country's rough roads.

Great Wall's SUV sales soared 78 per cent, year on year, in the first half, mostly by catering to the lower end of the market with vehicles priced below $US30,000 ($33,500). It leads China's SUV market along with Volkswagen and Honda, according to Nomura.

The next test for the company: can it move up the product ladder? It plans to launch a bigger and more expensive SUV next year. But Great Wall's low research and development budget, at just 2.2 per cent of sales, may prove a stumbling block.Toyota spends almost double that on R&D. And at the higher end of the market, Great Wall will also encounter stiffer foreign competition.

Quality is another concern. There are already complaints Great Wall's engine is underpowered. To address these problems and further automate its production, Great Wall may have to increase costs, sacrificing some of its margin.

Great Wall's Hong Kong-listed shares are up 64 per cent this year, while the Hang Seng index is down 3 per cent.