Is Ford On Track To Make Asia Pacific Its Growth Engine?

In August 2016, Ford Motors (NYSE:F) reached a milestone of selling 1 million vehicles in Asia Pacific. Sales for August 2016 were 22% higher compared to those in August 2015 in the region (including China), making them the best ever August sales for the company. Regions such as Vietnam (with sales growth of 57%) and Philippines (up 90%) saw very strong growth due to an impressive line-up of vehicles launched by Ford. The company is growing its SUV line-up and introducing new vehicles and technologies in the region such as the new KUGA SUV with SYNC3 being launched in China. We believe that regions such as China and India will experience rising demand for SUVs and new energy vehicles. Ford’s focus on SUV’s and new technology vehicles will position it well in this respect.  A product mix that suits these regional at the right price points can ensure that it becomes a strong growth driver for the company.

New Product Line Up Can Continue To Build Momentum In China

Demand for SUV’s is on the rise in China as affluent Chinese families prefer to opt for more spacious vehicles. Experts believe that this trend can continue for longer as Chinese families are likely to become bigger with relaxations in the “one child policy”. Tax policies favouring vehicles with smaller engines are also boosting sales of compact and mid-sized SUVs.  As Chinese buyers prefer technological advanced products, Ford is looking to tap into this trend with the launch of its Kuga SUV with SYNC 3 in China. In August 2016 the company released the recently revamped Ford Compact, the China-only Escort compact, and the new Edge crossover; both drove the sales growth of its joint venture with Chinese automaker Changan Automobile.

However, Ford faces tough competition from local manufacturers in China that are able to offer SUV’s at cheaper rates and have more recently been able to improve their quality standards. In order to compete with these players, Ford modified its product mix in China launching more compact and budget friendly vehicles. We believe this strategy is showing results as evident from the August sales numbers. However the impact of this strategy on profitability is not yet known. Compact vehicles will have lower margins if Ford resorts to heavy discounts to attract more buyers from cheaper domestic alternatives. This in turn can impact its profitability in the near term.  The company is also facing challenges with its dealer network in China. Reports suggest that dealers don’t feel incentivised enough to sell Ford cars due to high sales targets, prompting them to heavily discount the cars. While the environment in China remains challenging, we believe Ford’s strategy to modify its product line up according to the preferences of Chinese consumers is showing results and should lead to higher revenues in the long term.

The company is changing its strategy in India as well, where reports suggest that it has decided to shelve its compact car plans in the region. Ford now plans to focus on SUV’s and crossovers in India as demand for these vehicles rise.

We believe the Asia Pacific region holds strong potential for Ford, but comes with its own set of challenges. The company appears to have got its strategy right in the region and is adapting its offerings based on consumer preferences in the region. However, to compete in the region it also needs to offer its vehicles at the “right” price without compromising on profitability. In the long term, it will be critical for Ford to produce vehicles at lower costs so that they can become competitive in the region without excessive discounts.

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