Ford Motors (NYSE:F) has outlined an aggressive plan to accelerate the activities of its newest business unit, the Middle East and Africa. Leveraging its One Ford Global Portfolio, the company will launch at least 25 new vehicles in the Middle East and Africa by 2016.  South Africa and Sub-Saharan Africa will see the most of this acceleration with 17 of the 25 vehicles to be launched in this region.  The U.S. based automaker is targeting growth opportunities in the small, mid-size and large vehicle segments in the regions. In addition to the new vehicles, Ford also announced that it will be bringing several vehicles and technologies from its global portfolio to the region. These include:
- A new version of the Ford Focus, which goes on sale in the Middle East in 2015.
- A new version of Ford’s Fusion, the company’s large car, featuring premium design and smart technology.
- The iconic Ford Mustang, which will go on sale in 2015.
- A roll out of EcoBoost engines, SYNC in-car connectivity, inflatable rear seat belts, MyKey. 
We have a $18.66 price estimate for Ford, which is about 10% more than the current market price.
The Final Frontier
Through 2013, it appeared as if Ford was closing the gap in share of the overall U.S. auto market between GM and itself, reducing it from 2.1% in June to only 1% in December. But that trend has reversed and the gap in June 2014 was even larger than in June last year at 3.3%.  Even though Ford appeared to be closing the gap, we are skeptical about the proposition that Ford could overtake GM and retain that lead for long, given the much larger capacity for vehicle production that GM possesses.  Furthermore, amid fears that the growth in the U.S. auto market is being driven by a sub-prime lending boom  and the secular stagnation hypothesis , the prospects for the overall U.S. auto market do not look too bright. In contrast, Ford has maintained a 50% growth rate in China for the last year and a half. But even in China, where public debt has doubled in the last five years raising fears that the growth rate of the economy might soon hit an upper bound ((China debt tops 250% of national income, Financial Times, July 2014)), the long term growth prospects for the auto market need to be treated with skepticism. The European car market has recovered from the sluggishness in the aftermath of the sovereign debt crisis, but car companies are still cutting production capacity in order to keep a check on their margins. All of this means that car manufacturers have to look elsewhere to derive their growth from. The Middle East and Africa might be the region that satisfies this requirement.
Driven by the growing exports and prices of commodities like gold, diamonds, oil, gas, coffee, sesame seeds and beans, the gross productivity of sub-Saharan Africa is booming. The region posted an annual GDP of 5.2% in the first decade of the 21st century, a higher rate than Brazil and Russia, two countries which alongside China and India, are considered the benchmark for developing economies.  The strong growth coupled with the copious oil reserves held in Nigeria, Egypt, Algeria, Angola and Sudan, has boosted GDP per Capita to solid levels. The GDP per capita for South Africa and Botswana surpassed $8,000 in the beginning of this decade, putting them on par with China.  Consequently, Foreign Direct Investment has boomed in these countries, rising from just $7 billion in the 1990’s to $33 billion between 2001 and 2010.  Automakers like Renault, Nissan and Tata Motors saw these trends and started importing manufactured vehicles into the region in the previous decade. Ford too, identified the region as a receptacle for the excess produce in its India factories.  According to Ford’s projections, the driving age population in Africa will increase from 540 million people to 840 million in the coming decade.  Ford forecasts car sales in Africa to grow by 40% and surpass 2 million vehicles per year in the next six years. 
Meanwhile, according to a 2012 report by Ernst & Young(EY), the Gulf Cooperation Council(GCC), the largest economic block in the Middle East, is set to grow at a rate of 4.3% per annum in the 2012-2016 period, driven by high infrastructure spending, high oil prices, increased private sector activity and low interest rates.  These economic trends combined with demographic trends, like half of the population being under the age of 25, a high share of expat population in the region, point towards a future where the demand for light vehicles will rise at a fast rate. The EY report projects light vehicle sales to grow at a 70% CAGR in the 2012-2016 period.  According to Ford’s projections, driving age population in the Middle East will grow 31% to reach 1.7 billion people in the next 10 years. Ford expects the combined car sales in these two regions to reach 5.5 million vehicles per year by the end of this decade, implying a 40% growth rate. 
Every country has a potential level of productivity implied by its population growth rate, demographic trends and past performance, but very few actually manage to attain it. The presence of these growth projections does not guarantee that these levels will be reached. Even if these economies do fulfill these expectations, Ford will still have a fight on its hands in order to capture a large share of this market. Competitors like Renault, Nissan and Tata Motors have already jumped into the fray, and other companies like Toyota, Volkswagen and General Motors cannot be too far behind. In addition, the growth of the auto market requires the support of many factors such as:
- a growing need for mobility
- the transport infrastructure in order to support the for mobility
- subsidies from governments, in the form of sales tax breaks, reduced import duties, low barriers to the development of distribution networks and low registration costs
- credit facilities to support people with need of transportation but not the wherewithal to finance it.
Currently, Ford will mostly be importing vehicles into the region, and given that the costs of shipping are the same regardless the size of a vehicle, the prices of smaller vehicles will be affected more than larger vehicles. The consumers will be onto this and this will keep the sales of smaller vehicles below the level they would be at if they were manufactured closer to the destination. Ford will have to negotiate all these challenges and allocate resources adequately in order to make the best of this growth opportunity.Notes:
- Ford Launches Product Acceleration in Middle East & Africa, Bringing at Least 25 New Vehicles by 2016, ford.com, July 2014 [↩] [↩] [↩]
- Market Share by Manufacturer, Edmunds, July 2014 [↩]
- As Ford sales surge, can the blue oval catch GM?, CNBC, September 2013 [↩]
- In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates, New York Times Dealbook, July 2014 [↩]
- On secular stagnation, Reuters, December 2013 [↩]
- Global Car Companies Hunt Big Game In Africa’s Growing Automotive Market, International Business Times, August 2012 [↩] [↩] [↩] [↩]
- Ford to launch 25 new cars in Middle East, Africa, WSJ Market Watch, July 2014 [↩]
- Ford Wooing Drivers in Africa, Middle East With New Cars, Bloomberg, July 2014 [↩] [↩]
- Mega trends shapingthe Middle Eastlight vehicle market, EY.com[PDF] [↩] [↩]