Ford Returns To Rapid Growth In China After Overcoming Production Constraints

+15.77%
Upside
12.18
Market
14.10
Trefis
F: Ford Motor logo
F
Ford Motor

Ford Motors (NYSE:F) had a tremendous 2013 in China, with sales up 49% for the year. However, the sales growth slowed down in 2014. The company management blamed the slowdown on capacity constraints. Since then, with the opening of a new assembly plant in the region, the company’s sales have picked up again.The U.S. automaker posted double digit gains in the first seven months of 2014, but its sales growth slumped to only 9% in August and sales declined marginally in the months of September and October. Some of the slowdown was attributable to tough year-on-year comparisons, but the company was also utilizing its production capacity to the fullest.

Ford has enjoyed an extraordinary spell in China in recent years. In 2012, the company laid out a plan to double its production capacity and sales in China by 2015. However, in 2013 and 2014, sales rose even faster than the growth in production capacity. Consequently, it was not surprising that the company hit production bottlenecks by the end of the year 2014.

New Production Capacity Arrives

Relevant Articles
  1. With F-150 EV Production Cut 50%, What Lies Ahead For Ford Stock?
  2. What To Expect From Ford’s Q3 Earnings?
  3. Will Strong F-Series Sales Power Ford’s Q2 Results?
  4. Can Ford Stock Return To Its Pre-Inflation Shock Highs
  5. Higher Truck Sales Will Drive Ford’s Q1 Results
  6. Ford’s Q4 Results Were Tough, But Things Could Get Better

In November of 2014, Ford opened a third assembly plant in China. The plant, which opened in Chongqing, will increase the company’s production capacity in the region by 360,000 units per year. [1] Another plant is expected to come up in Hangzhou sometime next year and will add another 250,000 units in production capacity. Concomitantly, the company’s sales targets will also increase from 1.1 million units a year to about 1.5 million units a year. [2] The Chongqing plant will build the recently launched Ford Escort, which is a major part of Ford’s attempts to gain market share in China. The Ford Escort is an entry-level offering which is positioned in between the Ford Fiesta and Ford Focus. [3] The car has deliberately conservative styling and its main target audience is budget conscious families. The car also offers a big backseat, which is a major selling point in China. Ford’s China sales have been dependent on the strong growth in SUV models, the Ford Kuga, and Ford EcoSport. The addition of the Ford Escort will allow the company to reach a different demographic and hence boost its sales. The company also started selling its luxury vehicle Lincoln in China late last year and plans to open eight Lincoln retail outlets in seven different cities in the region. [4]

Growth Picks Up Again

The added production capacity from the new Chongqing assembly plant helped Ford pick up growth again in China. In the month of December, the company returned to the double digit growth rate it posted in the first seven months of the year, with sales growing by 13%. This brought the full year sales growth to 19%. In January, sales grew again by 19%. [5]

As the company continues to introduce new models, the demand for its vehicles should continue to increase through the year. Moreover, the company should be able to do this without running into capacity constraints over the next two years. With the addition of the Hangzhou plant, the company’s production capacity should reach about 1.5 million vehicles a year. This is about 35% greater than Ford’s 2014 sales in China. Ford still imports some of its vehicles into China and its two assembly plants have been running beyond capacity in recent times. As a result of the added capacity, the company should be able to grow sales by over 50% and post sales figures of around 1.7 million or 1.8 million in 2015.

In the long run, the company might need to increase its production capacities again in a couple of years. By 2017, it is quite likely that the company will again run into production constraints and might need to add more assembly plants in the country. Therefore, investors should watch out for an announcement related to the expansion of production capacity in the country later this year.

See full analysis for Ford Motors

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

 

Notes:
  1. Ford says new plants, models to boost China sales after Sept. dip, Autonews, October 2014 []
  2. Ref: 1 []
  3. Ford Escort, revived in China, could land in U.S., Mulally says, Autonews, April 2014 []
  4. Ref: 2 []
  5. Ford sets January sales record in China, GM declines, USA Today, Februaru 2015 []