The Sky Is the Limit for Ford Motor Company in China

Last year, Ford Motor Company (NYSE: F  ) made good on its plans to catch up in China, growing sales by 49% while the total market grew 14%. Market leaders General Motors (NYSE: GM  ) and Volkswagen still sold more than three times as many vehicles in China as Ford, but Ford is quickly becoming a force to be reckoned with.

Three months into 2014, Ford seems to be well on its way to gaining more ground on the market leaders this year. Ford is bringing new factories on line in 2014 and 2015, and rising demand for Ford's existing models, along with its new model introductions, can ensure that there will be plenty of demand to keep these factories busy.

Riding the SUV/crossover boom
Ford has benefited in China from having a reputation of being a premium brand. The compact Focus is still Ford's main offering in China, representing more than half of its passenger vehicle sales last year. However, Ford is also capitalizing on its premium positioning to become a leader in the booming Chinese SUV/crossover market, which attracts wealthier customers.

Ford is capitalizing on the growth of the crossover/SUV market in China. Source: Ford

Last year, Ford introduced two new crossovers in China: the Kuga, an international version of the popular Escape, and the smaller EcoSport. Ford sold more than 155,000 of these new crossovers in 2013 -- and the EcoSport wasn't even available for the whole year!

Ford has continued to prosper in 2014. It recently noted that Kuga sales were up 26% last month. Sales at Ford's Chinese passenger car joint venture were up 52% in Q1, and total Ford sales in China rose 45% year over year.

Ford has a long way to go to challenge General Motors and Volkswagen, but it is making steady progress, even though GM and VW are both growing nicely. GM posted a 12.6% increase in Q1 sales in China. Meanwhile, Volkswagen posted a 14% sales increase in China for its namesake brand and 21% growth for its luxury Audi brand, thereby building on its lead over General Motors.

Ford's next growth lever in China
After introducing the EcoSport and Kuga last year, Ford now sells four crossovers/SUVs in China -- the others are the Edge and the Explorer, both of which are imported. This product portfolio puts Ford in a good position to continue riding the growth of this market segment.

In 2014, Ford is moving its focus back to the compact market, which accounts for 6.5 million-7 million annual vehicle sales in China. Today, Ford sells multiple versions of the Focus in the compact car segment.

The Ford Focus is a huge seller in China. Photo: Ford

The global Ford Focus vehicle (i.e. the same one that is sold in the U.S.) is positioned as a premium offering among compact cars. However, Ford also sells the "Ford Focus Classic" in China. This is basically the last generation of the Ford Focus with some modifications, and it is priced as an entry-level compact car.

Later this year, Ford will replace the Focus Classic by bringing back the Ford Escort nameplate. The Escort, being a new design aimed specifically at the Chinese market, is expected to boast features Chinese consumers want, such as more rear-seat legroom.

Ford's decision to reintroduce the Escort nameplate should make it easier for customers in China to understand the value proposition of Ford's different compact car offerings. We will probably learn more details about the Ford Escort at the semiannual Beijing Auto show, which kicks off later this month.

Foolish final thoughts
Ford is in the midst of a three-year plan to double its passenger vehicle production capacity and sales in China. Right now, Ford appears to be selling as many vehicles as it can produce. It will get 250,000 units of new annual production capacity later this year with the opening of a plant in Chongqing, and an additional 250,000 units of production capacity next year from an assembly plant in Hangzhou.

At Ford's recent growth pace, it will be able to fill this capacity almost as soon as it comes on line. By the end of next year or early 2016, Ford could be "maxed out" again, with a run-rate sales pace of more than 1.5 million vehicles per year.

As a result, I think we will be hearing more about Ford's long-term plans in China very soon. It takes time to get new production facilities up and running, and Ford will likely need more capacity in China by 2016 to keep up its pursuit of General Motors and Volkswagen. This long-term growth story is just getting started.

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