How Can Ford Benefit From Manufacturing Lincoln Vehicles in China?

Recently, Bloomberg reported that Ford Motors‘ (NYSE:F) is in talks with its partner in China, the Changan Automobile Group, to produce its Lincoln luxury brand vehicles in China.  The company is considering a major manufacturing presence in the southwestern Chinese city of Chongqing that would serve the domestic market and function as its Asian export base. As Chinese citizens experience higher disposable incomes  and shift spending towards consumption, demand for luxury products is on the rise. Ford is aiming to make China Lincoln’s largest market by 2020. Lincoln sales currently account for less than 5% of Ford’s total sales, much lower than luxury brands of other competitors.  Moreover, sales have not grown significantly in the last year. The company launched the Lincoln brand in China last year and hopes to sell 300,000 units of the brand in the region by 2020, implying a growth rate of nearly 20% from the 11,600 units sold in the year of launch. China holds a strong growth potential for this luxury brand.  If the company is able to meet its sales target, it can have a significant positive impact on Ford’s valuation. Manufacturing these vehicles in China would save the company a significant amount of import tax and logistical expense, allowing it to price the vehicles competitively and improve profitability.

Competitive Pricing Can Attract More Buyers

Ford is working towards reviving its Lincoln brand, which is not very popular in the U.S. Currently, as per our estimates, Lincoln cars and SUVs account for less than 1% of Ford’s valuation.  We expect the number of Lincoln vehicles sold to increase from 131,000 in 2016 to 209,000 by the end of our forecast period.

However, if the Lincoln division is able to meet the ambitious growth target and grow at a CAGR of 20% in the next few years, there can be a 20% upside to our price estimate. (Read Ford Can Boost Its Stock Price 20% By Meeting Lincoln Sales Target).  Ford is working on several initiatives to meet its ambitious growth target in China. Features such as reclining back seat with massage options and infotainment controls within easy reach have been introduced to target wealthy Chinese consumers who prefer to be chauffeured. However, reducing costs to competitively price the vehicles can be a key factor to meet the sales targets. Manufacturing in the region will allow Ford to save a 25% import tax, and these savings can be used to price the brand more competitively. Ford already has a manufacturing plant set up in China that can be leveraged to include the Lincoln brands. The company’s performance in China remains strong, as it registered a 5% increase in year to date sales in the region as of May 2016.  This figure for its partner Changan Ford automobile was 11%.  While its popularity in China is increasing, competitive pricing through domestic manufacturing can provide a boost to Lincoln’s sales in the region.

View Interactive Institutional Research (Powered by Trefis):

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