Is Ford Succeeding in the World's Biggest Auto Market?

Are auto sales really booming again in China?

It certainly looks that way, if the big global automakers are to be believed. While the eye-popping gains of years past are unlikely to be seen again, reports of double-digit year-over-year percentage sales increases have been plentiful as automakers' China sales reports have come out in recent days.

Ford (NYSE: F  ) , which has had an up-and-down ride in China as of late, reported a handsome 23% year-over-year increase in sales by its key joint venture for May. That seems like good news.

But like its rivals, Ford reports wholesale deliveries in China -- and China's auto-dealers' association says that the retail sales story isn't so rosy.

The problem with manufacturers' China sales numbers
May certainly looked like a good month for a lot of automakers doing business in China. Overall wholesale deliveries were up 12% over year-ago totals, according to Bloomberg, a number that appeared to reflect solid sales gains by a number of big global automakers.

But according to Luo Lei, who holds the title of deputy secretary general of the government-backed China Automobile Dealers Association, much of that rise was absorbed by the dealers. In an interview with Bloomberg, Luo said that average dealer inventories rose to more than 60 days' worth of sales, up from a bit over 45 days' worth at the end of April.

Luo characterized this as a dire situation, telling Bloomberg that dealers' "backs are broken" and saying that dealers were forced to sell vehicles at a loss in order to meet manufacturers' sales targets. But Kevin Wale, who heads market leader General Motors' (NYSE: GM  ) efforts in China, suggested that Luo's concerns were overblown -- and that he sees no reason to think Chinese consumer confidence is declining significantly.

What's really going on? And what does it say about Ford's claimed sales gains?

What's really going on here?
Trying to decipher what's really going on in China can often be a nearly impossible task, especially at a distance. Statements like Luo's can reflect real concerns, be driven by complex political agendas, or both.

On one hand, if Luo is right, that's a big rise in inventories in just one month. If retail sales are really in sharp decline, the resulting glut of cars at dealers -- or production cutbacks by manufacturers -- will be impossible to ignore in another month or two.

On the other hand, by U.S. standards at least, 60 days' inventory is no big deal. To take one example, Ford's U.S. dealer inventory stood at 54 days' worth at the end of May -- and that was amid reports of shortages of key models

And at least in Ford's case, some rise in dealer inventory in China is to be expected.  Here's why: Ford just launched its acclaimed Focus compact car in China, with a great deal of publicity and to considerable consumer interest. During May, the Blue Oval was focused (so to speak) on getting a supply of Focuses to its 400-plus Chinese dealers, hoping to get cars into interested consumers' hands as soon as possible.

The Focus is the first of 15 new models Ford plans to introduce in China over the next couple of years as it aggressively expands its presence in the country -- an expansion backed by nearly $5 billion in investments (so far) in new factories and infrastructure in the country. As Ford ramps up its presence and rolls out more of its global models to the Chinese market, some up-and-down in sales -- and dealer inventories -- is to be expected.

Not just a Ford issue
To be clear, this isn't just a Ford issue. All of the big-name global manufacturers report wholesale delivery numbers for China, and all of them may -- or may not -- be pushing unwelcome inventory on dealers.

And Ford wasn't the only automaker to report big gains in May. Honda (NYSE: HMC  ) , which has been struggling to gain ground in the Middle Kingdom as it recovers from last year's natural disasters, posted a huge 92% year-over-year increase, while market leaders GM and Volkswagen (OTC: VLKAY.PK) posted impressive-looking gains of their own.

But were these gains for real? I suspect the answer will be clear, one way or another, in a month or two. Stay tuned.

Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But despite this, Ford's stock price is down 23% over the past year. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Get instant access to this premium report. Or, if you'd rather take a look at a high-growth company outside the cyclical manufacturing sector, check out our special free report, "The Motley Fool's Top Stock for 2012," which features a company our chief investment officer uncovered that's revolutionizing commerce in Latin America.

Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors, and have recommended creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


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