New Plants, Models Can Help Ford Achieve Even More Success In China

China continues to get better and better for Ford Motors (NYSE:F). The units sold by Changan Ford, Ford’s passenger car joint venture in China, have risen by 23% compared to those in the same period last year. Through October, Changan had sold 660,566 cars, up from 536,421 in the same period last year. Jiangling Motors Corporation(JMC), Ford’s Commercial Vehicle investment in China, sold 216,300 vehicles in the first 10 months, up 16% from 186,920 in the same period last year. Overall, Ford China’s sales have gone up by 22% so far this year. ((Ford China Sold 906,613 Vehicles in October, Annual Sales Up 22%, Ford Investor Relations, November 2014)) After selling 935,813 vehicles in China in 2013, the automaker is targeting sales in excess of 1 million in 2014. Ford’s sales jumped 49% during 2013, after the automaker debuted the Explorer and the Ecosport, in addition to earlier introductions of the Kuga and the Focus.

Due to the continual rollout of new models, the incremental sales result in unusually high year-over-year gains. The growth rate will inevitably slow down as the year progresses. Moreover, these growth rates come on top of a low base, so it is relatively easier to post growth rates of this magnitude.

Although 1 million is by no means a small figure, it is less than 5% of the overall automotive market. On the other hand, General Motors and Volkswagen command a market share of close to 15% each. Ford was a late entrant in China, primarily because it chose to concentrate more on its American operations. However, the automaker is making up for lost time by investing $5 billion in the four years beginning with 2011.

A total of 15 new models will be introduced in China through 2015. ^[1] In the same time frame, Ford’s annual production will also touch 1.2 million units, twice the level it was in 2012. In fact, Ford is so bullish on China that it expects 40% of its unit sales to come from the country by the end of the decade.

We have a $20 price estimate for Ford, which is about 25% more than the current market price.

Market Size

The Chinese automotive market is huge. In fact, it is the largest in the world, with sales touching 22 million units last year. In contrast, the U.S. automotive market totaled about 15.5 million units in 2013, and is expected to rise at a gradual rate now that the figures are close to pre-recession levels.  However, there is plenty of opportunity still left in China. After the rapid urbanization along the coastal regions that drove the demand for vehicles in the earlier years, sales are now being driven from the regions in the interior.

Through October, industry-wide sales rose 6.6% on a year-over-year basis. ^[2]  Chinese automotive sales could easily rise another 7-8% in 2014, at least that’s what the two month data suggests. Our forecasts for the Chinese automotive market are conservative; we expect sales to rise at an average annual rate of 4-4.5% in the long term. The recent economic slowdown in China, combined with increasingly stringent regulatory environment to curb pollution, are the reasons why we estimate that the growth rate could slow down in the coming years.

Additional Opportunities

Going forward, the proportion of luxury cars within the overall market should also rise. This is typically common in the development of the automotive market in a country. The initial acceleration of sales is provided by low-end cars, but as the market consolidates, more and more people opt for high-end cars. In more mature markets, luxury vehicles typically account for about 10-12% of the total sales. In China, the corresponding figure stands at ~8%.

Consistent with the growing demand for luxury autos, Ford plans to launch its Lincoln brand in China in 2015. However, the automaker doesn’t plan to manufacture the Lincoln nameplates in China and intends to export them from the U.S. As a result, Ford will not be able to circumvent the high import duty levied on foreign vehicles. This could potentially limit the upside of the Lincoln brand in China, as high prices could nudge the potential customers to opt for the locally produced German cars, which already have a better brand perception.

Despite low volumes, Lincoln could be crucial to Ford’s Chinese operations since luxury cars enjoy fatter margins. Moreover, luxury automakers often keep the prices of their luxury vehicles at a significant premium, due to the fascination of the Chinese public for Western products. This can result in significant contribution to the bottom line.

Additionally, the company is planning to bring online two new assembly facilities in China, in Hangzhou, and in Chongqing. The Hangzhou plant will add to the company’s supply capacity  by 250,000 and the Chongqing plant by 300,000 when they come online in the next year. As a result, the company’s overall production capacity for China will exceed 1.5 million units a year by 2015. ^[3]

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1. Ford continues sales growth, investing in China, Detroit Free Press, September 2014 [↩]
2. China Oct auto sales up 2.8%, China Daily, November 2014 [↩]
3. Ford says new plants, models to boost China sales after September dip, Reuters, October 2014 [↩]