Has Ford Missed Out on China?

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It's the world's largest auto market, and in recent years it has grown at a spectacular rate. It's a market dominated by familiar brands like Chevrolet and Volkswagen, as well as brands and badges most Americans wouldn't recognize.

It's China, and it's a party that Ford (NYSE: F  ) has been left out of for years. But now that the Blue Oval is finally ramping up its Chinese efforts, that spectacular growth is stalling. Has Ford missed out?

It's the General's party now
Say what you want about the ineptitude of General Motors (NYSE: GM  ) management over the last couple of decades (and I've said an awful lot) but they did one thing very, very right: GM has built an impressive organization in China. Working with well-selected local partners, the General has built Buick, Chevrolet, and the local Wuling small-truck brand into popular, strong-selling powerhouses -- and the rumor mill is suggesting that Cadillac may be next.

Likewise, China's other foreign juggernaut, Volkswagen. Working through several joint ventures, VW has made big inroads in all segments of the market, including the (very profitable, and booming) high end: Two of the top three selling luxury cars in China are Audis, and Volkswagen is China's top-selling car brand.

Ford's starting from behind
Other familiar brands, later to the party, are also finding new fans in China. Honda (NYSE: HMC  ) and Toyota (NYSE: TM  ) lead the midsize sedan sales rankings with the Accord and Camry, and Honda's tiny City subcompact and small CR-V SUV are leaders in their respective segments. Unsurprisingly, Hyundai and Nissan have also found significant sales success in the Middle Kingdom.

But where's Ford? Way down the list, as it turns out. The Blue Oval brand trails all of the above names and several less familiar ones, including deeply troubled Berkshire Hathaway (NYSE: BRK-B  ) holding BYD, whose sales are presently falling off a cliff. The Ford brand's share of the Chinese passenger car market for the first three months of 2011 is a minuscule 2.5%, with sales nearly half of what GM gets just with Buick.

Getting outsold by Chevrolet or VW would be one thing. But by Buick? That has to hurt.

Can Ford claim a bigger piece of the pie?
It's fair to say that CEO Alan Mulally has had higher priorities than China since arriving at Ford, with tasks such as saving the company from total collapse and driving a major product renaissance a bit higher on his to-do list. But Ford's China effort is finally picking up steam, with the company saying that it intends to add 15 new products and double its Chinese workforce by 2015.

But there's a problem: China's auto sales growth is slowing. After a 48% increase in sales in 2009 and another 33% surge in 2010, analysts are expecting more moderate growth rates going forward. Year-over-year growth in the 5% to 15% range will still offer plenty of opportunities, but the days of explosive growth, when Ford could have made big inroads (and big profits), may be history.

Ford executives say there's still plenty of opportunity, and they may have a point. Three-quarters of auto purchases in China are still being made by first-time buyers, meaning that a new-to-market brand can still grow quickly, at least in theory. And Ford already has 340 dealerships in China, another number it hopes to double by 2015, as well as a strong global brand.

Long story short, to date, Ford has mostly missed out on the explosive growth of China's auto market. But Ford expects 70% of its growth over the next decade to come from emerging markets, and much of that will be from China. Will Ford be able to break out of its niche and become a major player in China even as the market cools off? I wouldn't bet against Mulally and Ford right now, but becoming a big player in China will be a big challenge.

Fool contributor John Rosevear owns shares of Ford and General Motors. Berkshire Hathaway and General Motors are Motley Fool Inside Value choices. Berkshire Hathaway and Ford are Motley Fool Stock Advisor selections. BYD is a Motley Fool Rule Breakers recommendation. The Fool owns shares of Berkshire Hathaway and Ford.

You can try any of our Foolish newsletter services free for 30 days, with no obligation. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (5)

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  • Report this Comment On May 03, 2011, at 12:07 PM, klkoswal wrote:

    All of the Chinese sales figures look real impressive until one looks a the profit contribution which on a per unit basis is miniscule. Ford's Asia Pacific profit was somewhere around $30 million. GM's should be pulished this week but will certainly be a very small fraction of the North American profit anbd if I recall the sales in both markets are about equal

  • Report this Comment On May 03, 2011, at 12:42 PM, TMFMarlowe wrote:

    @klkoswal: It's not miniscule, but at least in China it's definitely much smaller on a per-vehicle basis because profits are split with the joint venture partner(s). I dug into GM's numbers a bit (but the point applies to everyone's JVs in China) here:

    Thanks for reading.

    John Rosevear

  • Report this Comment On May 03, 2011, at 7:38 PM, Bujutsu wrote:

    GM still has to actually build a car that someone might want to buy...

  • Report this Comment On May 03, 2011, at 9:13 PM, TMFMarlowe wrote:

    @Bujutsu: Try a Cruze. Or a CTS-V.

    John Rosevear

  • Report this Comment On May 03, 2011, at 10:38 PM, baldheadeddork wrote:

    I lean towards kikoswal's take. There is huge volume in China but the profit margins are ridiculously thin. It's not just because the profits are split. If you're selling cars to the bottom 95% of Chinese (or Indian) wage earners like GM and Ford are, the average selling price is going to be small and the profit margins even smaller.

    About GM's International Ops, John, that includes Australia and Russia, which pull up the profit margins significantly. (Also, too, my BS detector screams when GM can't wait to break out sales volume for China but they're silent when it comes to profits.)

    Automakers have to get in early on emerging markets, but with maybe the single exception of VW/Audi in China, it will be years or decades before they are profitable on the level of first world markets. GM has to go big in China (and Ford has to push hard in India), but it will be years before anyone can say if it was worth it - or who missed out.

    This isn't the conventional wisdom, but I think the most important markets for profitability over the next decade are going to be almost anyplace but China and India. It's going to take at least a decade for the Chinese market to develop to the point where B and C segment cars can be shared with first-world markets. The Chinese and Indian markets just can't afford it. Until then, those markets are going to be dominated by A and sub-A cars that will have razor thin margins and limited appeal elsewhere.

    The market that I think is going to be most influential for Ford and GM over the next several years is Europe. North America and Europe are the most profitable markets, the broadest product lines, and a high level of commonality on safety and emission standards. Being strong in both markets is the only reason Ford is able to pull off One Ford, and the collapse of Opel is going to be a major hurdle for GM as it moves forward on new platform development.

  • Report this Comment On June 23, 2011, at 12:55 AM, timincal wrote:

    Ford may be not as foolish as you lead people on to believe.

    Ford already had plants in China prior to the Communist take over.

    The Chinese now in charge, conveniently took control of the plants and decades massed produced the same exact vehicle missing the Ford logo!

    Ford is family ran and I am sure the Ford in charge knows this history well.

    Is it just happenstance that Ford is the only automaker that did not crawl on their knees to the White House and ask for bail out money?

    Don't ever trust the Chinese.They are laughing at our friendly nature.

    Once we have totally destroyed our capability and knowledge to manufacture anything,they will leave us high and dry.

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