Two Things Ford Is Doing To Tackle The China Slowdown

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Ford Motors (NYSE:F) 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.

The company addressed its production constraints by adding two new plants in the region and sales started to pick up again. But since then the Chinese economy seems to have hit a roadblock, jeopardizing the company’s future prospects. Ford CEO Mark Fields has said that he is taking the long term view on China.  And while it is true that there is a lot to be excited about in the long run with China, in the short term there could be a lot of hiccups. Below we talk about how Ford plans to minimize the impact of the slump in China over the near term.

Background

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In 2013, sales went up 49% for the year but the sales growth slowed in 2014. The company management blamed the slowdown on capacity constraints. In November of 2014, Ford opened a third assembly plant in China. The plant, which opened in Chongqing, increased the company’s production capacity in the region by 360,000 units per year. [1] Another plant opened in Hangzhou in March this year, its sixth in the country. The plant added another 250,000 units in production capacity. [2]

The Chongqing plant assembles 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.

Sales Slowdown

Ford operates in China through two joint ventures — Chang’an Automobile Company, which builds passenger cars and SUVs, and Jiangling Motor Corporation(JMC), which builds commercial vehicles. Both these companies have seen their sales dip in July. Sales of Chang’an fell by 4% in July, while sales of JMC fell by 12%. [4] JMC’s decline is disconcerting because overall sales in July fell by 7.1%. However, during the earnings call last month, Ford’s management stated that the forthcoming decline in commercial sales in China had been visible to the company for a while and the company had already adjusted production and spending in anticipation. [5] This is why the company posted a strong profit in the second quarter in China despite the sales decline.

SUV Sales Are Still Growing

Over the last three months, overall vehicle sales have been down, but the SUV segment has continued to do well. In July, as overall sales dipped by 6.6%, SUV sales grew by 34%. While most of that growth is being captured by inexpensive SUVs manufactured by local companies, international companies are still hopeful of benefiting from the trend.

Ford, which sells the Kuga, EcoSport and Explorer SUVs in China, added a five-passenger version and a seven-passenger version of the Edge to its lineup in China through its Chang’an Joint Venture earlier this year. [6]  Now JMC is also entering the SUV market by beginning production of the Everest SUV, a midsize SUV based on the platform of Ford’s Ranger pickup. [7] The Everest is a rugged vehicle that provides many off-road capabilities and hence is a good compliment to the mostly urban lineup that Ford currently has in China. The timing of these introductions could turn out to be a boom for the company. As overall growth slows, rising SUV sales can help the company maintain its margins as they sell for higher prices.

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Notes:
  1. Ford says new plants, models to boost China sales after Sept. dip, Autonews, October 2014 []
  2. Ford to open $760M Chinese assembly plant, Detroit Press, March 2015 []
  3. Ford Escort, revived in China, could land in U.S., Mulally says, Autonews, April 2014 []
  4. Ford China Sales July 2015 []
  5. Ford Motor’s (F) CEO Mark Fields on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, July 2015 []
  6. Ford Edge to be built at new $760 million plant in China, mLive, March 2015 []
  7. Ford Everest production starts in China, GoAuto, August 2015 []