Ford Motor Company (NYSE:F) was probably waiting for some big opportunity which it could leverage to make it big in China. And now the time has come. CEO Alan Mulally intends to spend $5 billion in the country to build as many as five-new plants. What is this new opportunity that is behind Mulally’s ambitious plans? What are the hurdles that Ford needs to overcome? Let us find out.
Opportunities
Ford Motor Company (NYSE:F)’s biggest opportunity comes from a wave of development in second-tier and third-tier cities, where the company already has been establishing its presence.
These second-tier and third-tier cities are expected to be the preferred destinations for all manufacturers and retailers from all over the world in the coming years. And the key lies in the country’s huge population, which is currently transitioning to the next economic strata. According to a McKinsey report, China will have a staggering one billion urban residents by 2030.
Clearly, there is going to be a scramble for the first-mover advantage, and this time Ford Motor Company (NYSE:F) intends to be on time. The company already has a partnership with Chongqing Changan Automobile Company based out of the namesake city in southwestern China. It will try to cash in on the growing demand as Chinese residents in smaller cities contemplate buying their own cars for the first time.
Secondly, a decline in sales of Japanese automakers is a huge plus for Ford and other automakers from the West. According to the China Association of Automobile Manufacturers, in the first two months of 2013 Japanese automakers’ market share fell to 12.5% from 19.4% a couple of years back.
Toyota sold 43% more vehicles than Ford Motor Company (NYSE:F) in 2012, as per consultancy firm LMC Automotive, even after a 6% year-over-year sales decline. Since then, the trends have completely reversed. Ford has overtaken Toyota in China, selling more than 186,500 vehicles in the first quarter compared to 184,700 vehicles sold by the Japanese auto giant. The Ford Focus, which emerged as China’s favorite car (and also the world’s favorite car) in 2012, is giving the Toyota Corolla a run for its money.
Goals
Ford Motor Company (NYSE:F) is chasing a market share of 6% by 2015 riding on its “15-by-15” model. The company will introduce 15 new models by 2015.
Scheduled for debut this year is Fusion, which will sell with its new Chinese name, Mondeo. Also making their appearances will be the EcoSport and Explorer SUVs and sports versions of the Focus and Fiesta models.
By 2020, the company seeks to generate 40% of its sales from China, which is already Ford’s largest market outside of the US. Currently it derives around 11% of its sales from the country. Ford is looking at a market share of 7.5% by that time.
Hurdles
China, like all other markets, has its complexities. For starters the market is highly fragmented with as many as 170 odd automakers building cars in the nation. Clearly, the advantage currently lies with the foreign manufacturers owing to their superior quality and brand image.
However, the Chinese government is trying to counter this dominance and is striving to bring the market share of local manufacturers to 40% by 2015 from the current 30%. Accordingly, it’s introducing reforms and support measures.
The Chinese government has asked manufacturers who built less than 1,000 cars for two years in a row to ramp up production. On the other hand, banks will allow extended credit facilities to small-car makers.
More importantly, China might experience overcapacity in the next few years with capacity additions outpacing the growth in demand. With foreign as well as local manufacturers all ramping-up production, that production is expected to almost double to 35 million units within the next three years. However, according to a McKinsey report, demand will only rise by about 8% annually until the end of the decade.
We have all seen the outcome of excess supply in Europe, and I hope China does not succumb to the same fate. Automakers will have to tread these waters cautiously.
Competition
Apart from the local forces, the biggest competition comes from Volkswagen and GM, which are reaping the first-mover advantage in China. According to LMC, GM has 15.6% market share, while Volkswagen has 14.5%. In comparison Ford has around 3% market share.
GM derives around 22% of its sales from China. It’s having a great run in the country, with sales up 9.6% in the first quarter — the company sold 816,373 vehicles. Buicks and Wuling minivans are the rage with the Chinese and represent the biggest sales drivers. The strong sales are helping GM offset the declines that it is facing in Europe.
As I write this, GM is gearing up to announce its strategic plan for China. This does not come as surprise, as after the announcements by arch-rival Volkswagen and now Ford, an announcement was forthcoming.
In March, Volkswagen disclosed its plans to ramp up production by 70% through 2018. The company will build seven more plants and increase its manufacturing capacity in China to four-million units from the existing 2.3 million.
Volkswagen derives around 30% of its global sales from China. The company enjoys excellent demand for its Audi lineup, and its Skoda sales are growing rapidly.
In the first quarter, deliveries for these two brands grew by 14.2% and 30.5%, respectively. The German automaker is now trying to get into the small-car segment and will be developing a new car for China priced in the range of $9,000 to $9,500.
Parting thoughts
It is heartening to see that Ford has a clear strategy for China, where it significantly lags its peers. Mulally’s plans sound good and his record for turning around operations is legendary. Ford is already positioned well to reap the rewards of the recovery in US market. Now if it can emerge as a beneficiary of China’s economic expansion it would be a huge upside for the investors.
The article Will Ford’s Plans Work in China? originally appeared on Fool.com.
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