Ford China Sales Hit Overdrive, Headed to $14

by Trefis Team
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While the overall Chinese automotive market grew by only 2.5 percent in 2011, Ford (NYSE:F) managed to grow its sales by 7 percent to 519,390 units. [1] [2] While Ford China sales volume is only one-fifth that of its rival GM‘s (NYSE:GM), Ford is aiming to capture larger share of the market by introducing 15 new vehicles by 2015 and ramping up its domestic production by adding four new plants in the country. But macro-economic concerns and unfavorable government policy can upset Ford’s sales ambition in the near-term.

Our price estimate of $14 for Ford’s stock is around 15% above the current market price.

See our full analysis for Ford’s stock here

Macro-economic concerns can result in continued Chinese auto-market slowdown

Auto sales in China grew by only 2.5 percent in 2011, its slowest growth in over a decade. The most significant factor for this slim growth was phasing out of government incentives during 2011, which made cars more expensive for buyers. This decelerated auto-sales as Chinese customers are comparatively more price sensitive than their western counterparts.

Moreover Ford’s near-term sales growth can be adversely affected by high levels of benchmark one-year lending rates in China as The People’s Bank of China (PBC) strives to control inflation. [3] High levels of benchmark rates will also make auto-loans more expensive for customers which will likely further decelerate auto sales in the near-medium term.

In the medium-long term we expect that as inflationary pressure in Chinese economy ease, government will adopt monetary policies favorable for industrial growth such as through easing of benchmark rates. This should support Chinese automotive market growth and in turn expand opportunities for Ford’s market share growth.

Unfavorable government policy can hurt Ford’s expansion plans going forward

China recently announced that it will end its seven-year policy to attract foreign investments by the end of this month in order to promote a “healthy” level of competition and to protect local manufacturers. [4] [5]

This will likely make it more difficult for Ford to get government approval to set up new facilities and can also end reduced tariffs on imported plant equipment. Though we don’t expect that the change in Chinese policy will result in Ford shelving its expansion plans in the world’s largest auto-market, but it will likely increase Ford’s capital expenditure and hurt margins in the medium-long term.

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Notes:
  1. Ford China 2011 Sales up 7% []
  2. China auto sales slow in 2011 []
  3. China Interest Rate Graph []
  4. China National Development and Reform Commission’s Original Statement on New Rules - in Chinese []
  5. China’s End of Policy to Attract Foreign Investment []
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