Ford Motor Company Is Being Crushed By General Motors in This Critical Market

Ford Motor Company has many things going for it, even though General Motors is crushing it in the world's largest automotive market, China.

Jul 8, 2014 at 1:41PM

Automakers are increasingly looking to China for top-line growth. Photo source: General Motors

If the big-time global automakers are looking for explosive growth, there's one market guaranteed to be at the top of their lists: China. It is already the world's largest automotive market, yet its growth looks like something investors would see from an emerging market.

In fact, despite new vehicle sales surging 7.6% to 15.6 million vehicles in the U.S. last year, China's growth was nearly double that with a 13.9% gain to 21.98 million vehicles sold. 

That growth is expected to continue throughout the decade, with most estimates having China breaking 30 million in sales between 2018 and 2020; that would nearly equal the next two largest markets, the U.S. and Europe, combined. 

If that isn't enough to blow auto industry investors away, let's put it another way: If new vehicle sales in China hit 30 million around 2018, as expected, the country would account for nearly one-third of vehicles sold on the planet -- no wonder automakers are scrambling to crank up production capacity in China.

This brings up two important questions for potential investors: Which automakers are dominating in China currently, and which automakers are poised to succeed over the next few years?

Let's take a look at how America's two largest automakers, General Motors (NYSE:GM) and Ford Motor Company (NYSE:F), are positioned in China going forward, and why booming sales in China aren't all they're cracked up to be, at least not yet.


Ford and other automakers are designing vehicles aimed at the Chinese market. Source: Ford Motor Company

Different wavelengths
When it comes to sales in China, Ford and General Motors were on opposite ends of the spectrum a short time ago. General Motors got into the market many years ahead of Ford, and has been competing with German rival Volkswagen to retain the title of best-selling foreign automaker in China. GM and VW dominate all foreign competitors in this market.

Meanwhile, Ford is funneling capital into the Chinese market to make up for lost time, and it's doing quite well. Over the previous half decade in China, Ford's annual year-over-year sales increases have checked in at more than 40% three times and only under 20% once. Ford's sales are 35% higher this year through June, compared to a record first half in 2013, and is on pace to break through a milestone this year -- 1 million new vehicle sales in China. 

That's an impressive surge in China by Ford, especially considering it was playing catch-up to the global automakers with more established brands in the region. In fact, last year, Ford's sales in China surpassed those of Japanese rivals Honda and Toyota, and they are on pace to overtake Nissan's during the next 12 months. Put simply, the fact that Ford is already within striking distance of being the third-best-selling foreign automaker in the world's largest automotive market -- after being half a decade late to the game -- is worthy of a applause. 

While Ford's gains have been impressive, when compared to automotive behemoths General Motors and Volkswagen, it becomes quickly apparent how far the Blue Oval has to go if it plans to catch the dominant players. Here's a comparison of vehicle sales in China, as well as the automakers' year-over-year sales gains through June 2014, compared to the first six months of 2013:

Graph by author. Information from respective automakers' press releases.

The road ahead
If China is going to reach those expectations of 30 million new vehicle sales annually, it will take more than an increase of sales in megacities. Automakers are preparing for increasingly strict pollution and vehicle regulations in China's largest cities and are now focusing on adding dealerships in smaller cities where future growth is expected to be generated.

For example, according to Volkswagen, a smaller Chinese city such as Yaan, with a population of roughly 2 million, has 18 cars per 1,000 inhabitants. As China's middle class continues to expand, it leaves plenty of growth to reach the 123 vehicles per 1,000 inhabitants level found in larger cities such as Shanghai and Guangzhou. If you want to drool even more over China's latent potential, the entire country's average of 183 vehicles per 1,000 inhabitants is a far cry from the roughly 797 vehicles per 1,000 inhabitants rate in the United States.

Are Ford and GM well positioned?
To take advantage of this growth it will require automakers to ramp up production capacity to meet increasing new vehicle demand. Ford and General Motors are doing just that by pouring capital into their respective operations in China. GM plans to drop about $12 billion into its operations in China between 2014 and 2017, which will, among other things, fund the building of four assembly plants and one engine factory in the region. GM's capital spending will also help fuel new vehicle launches in China; GM expects to roll out 60 new or significantly refreshed models in China by the end of 2018, including 11 SUVs -- an increasingly popular segment in China -- over the next five years.


Ford's Fiesta has been a huge success overseas. Source: Ford Motor Company

Ford isn't throwing quite as much money at China as GM, at least not yet, but it did place a cool $5 billion two years ago to aid the company in its goal to double production capacity and market share by the end of 2015. This boost will be driven by 15 new model launches, and Ford will even introduce its struggling Lincoln brand into China for the first time, which could serve as a key turnaround point for the luxury line. Late last month Ford even had a new dealership bonanza when it opened the doors to 88 new dealerships aimed at smaller central and western cities in China, right where future growth is expected. The mass openings increased Ford's dealership footprint by roughly 13% and even lured former Ford CEO Alan Mulally for a personal visit, just before his retirement. 

Bottom line
Currently, automakers are hoping to push sales and revenues higher, all while climbing the overall global sales rank, are pouring in capital to expand their operations and market shares in China. Because of large capital spending by automakers in China, the fact that cheaper vehicles remain a popular option among Chinese consumers, and the requirement for foreign automakers to split profits with domestic Chinese joint venture partners, China won't be as explosively profitable as investors think -- at least not yet. As Chinese consumers continue trending toward larger SUV and luxury vehicles, profitability per vehicle will improve for automakers in addition to total rising sales.

The United States will still drive profits for the majority of the global powerhouse automakers, but it's clear that China is the land of future growth opportunities. When considering investments in automakers, it would be very wise to select an automaker with high sales potential in both the United States and China, as well as a luxury brand with a growing global presence. Both Ford and General Motors seem to fit the bill, even if they are on slightly different wavelengths when it comes to sales in China and the success of their respective luxury brands. 

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Daniel Miller owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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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