Ford Betting On China’s Love For Luxury Cars To Raise Its Profits

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Ford Motors (NYSE:F) has done really well over the last two years, thanks to the huge popularity of its F-150 series of trucks and some smaller sedans. The company has been doing exceptionally well especially in the world’s largest auto market of China, where it has grown by over 30% cumulatively for the last two years. [1] However, in terms of profitability, the company still lags behind some competitors because of low numbers posted by its luxury brand, Lincoln. According to industry data, only 10% of the total units are sold in the luxury segment, but they bring in around 20% of the revenue and one-third of the profits. As a result, it is highly important for an auto maker to have a successful luxury brand in order to be profitable. With this in mind, Ford has announced the latest edition of its Lincoln Continental. [2] However, it seems like the company’s plans for the vehicle have only China in mind. Below we take a look at what Ford plans to do with the new Lincoln.

Average Engineering

The new Lincoln features a classic exterior and a middle-of-the-road V6 engine. In terms of overall engineering, the car is nothing out of the ordinary. However, once we begin to peer inside the car, some features really begin to stand out, especially the back seat. The back seat has a built-in touchscreen offering seat control and an entertainment system. The seat features a remote control that allows the passenger to make more room for himself and a footrest that can expand at the expense of the front seat. This is to say that this is a car for someone who prefers to be driven around over driving.  Indeed, as Tesla has discovered,  many in China who can afford luxury vehicles prefer to be chauffeured as they enjoy a complete back-seat luxury experience. [3]

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Brand Perception

Last November, Lincoln brand head Kumar Galhotra revealed that the company’s market research team found that Chinese customers held the prestige of Ford’s Lincoln on par with Toyota’s Lexus and ahead of Audi’s. [4] While in the U.S., the brand’s perception has been tarnished by poor quality vehicles mainly used by U.S. car services, Chinese consumers think of the brand as the U.S. President’s vehicles. While the Lincoln is perceived to be a luxury car optimized for fleet sales in the U.S., in China it is viewed as the vehicle of choice to be chauffeured around in. This is true even though the company has never sold Lincolns in China.

What’s more, China’s luxury market is booming and the boom is expected to continue for several years. According to the company’s estimates, luxury vehicle sales are expected to rise from 7.5 million in 2013 to 10.7 million by 2020, with China driving much of that growth, and the U.S. and China representing half of that market. That’s why Ford thinks China is a huge opportunity for Lincoln. If it can capture a significant piece of the rapidly growing luxury market in China and modestly expand its market share in the U.S., it can solidly improve its business. It will also boost the company’s profits significantly. According to the company’s guidance, it plans to increase the sales of Lincoln from 100,000 in 2013 to about 300,000 in 2020, with most of the growth coming from China. [5]

Luxury Experience

In addition to designing a car specially keeping the Chinese customer in mind, the company thinks that it can achieve its targets by combining the product with exceptional service. The company opened its first few dealerships in China late last year. The company studied luxury hotels and high-end retailers in China before opening those dealerships, which feature comfortable space for leisurely discussions over beverages. The dealerships are fitted with a number plate recognition system that immediately alerts all employees as soon as a vehicle arrives at the premises, allowing them to identify the customers by name and guide them directly to their appointments.

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Notes:
  1. Ford, GM post double-digit sales gains in China, Automotive News, January 2015 []
  2. Giant luxury: up close with the Lincoln Continental concept, The Verge, March 2015 []
  3. Musk Reboots Tesla’s China Strategy, Bloomberg, March 2015 []
  4. Ford Motor Company (F) Presents at 2014 Barclays Global Automotive Conference (Transcript), Seeking Alpha, November 2014 []
  5. Ref: 4 []