Please ensure Javascript is enabled for purposes of website accessibility

1 Risk Ford Motor Company Needs to Take in China

By Daniel Miller – Oct 18, 2016 at 1:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It's simple: Ford needs Lincoln to succeed in China. That means it's time to pull the trigger on producing Lincolns in the country to avoid import tariffs.

Lincoln's launch in China. Image source: Ford Motor Company.

China is a very intriguing market, with wild potential and equally wild regulations and consumer preferences. Even some of the biggest and brightest companies have failed to crack the market -- eBay and Uber serve as good examples. Despite the challenges, Ford Motor Company (F 2.52%) has made immense progress selling its mainstream vehicles there over the past few years, as you can see below.

Chart by author. Data source: Ford China sales releases.

With no plans to roll out Lincoln in Europe, Ford sees China as an important opportunity with its rapidly growing luxury-vehicle market. Let's dig into how Lincoln has fared in China recently, why China's potential is so great, and why Ford needs to begin producing Lincolns in China despite risks.

What have you done for me lately?

Lincoln store in Shanghai, China. Image source: Ford Motor Company.

The third quarter brought some good news for Lincoln, as its sales nearly tripled in China to 8,546 units. Better yet, Lincoln sales in China soared 191% compared to last year, to roughly 21,000. Ford's pressing down on the pedal still, on pace to have a total of 65 open Lincoln stores by year's end, and as many as 80 by the end of next year. Also, Lincoln's flagship sedan, the Continental, is going to hit Chinese dealerships this quarter. 

Here's the issue, though: Ford's Lincoln is gaining excellent traction with Chinese consumers early in the game, but to catch rivals, it's going to need to begin production in the country to avoid a steep 25% tariff on imported vehicles. Consider that despite Lincoln's surge this year, Cadillac has still outsold Ford's luxury lineup by a factor of three, reaching nearly 77,000 units sold through September.

No risk, no reward

As Lincoln rolls out more units and aspires to catch the competition, avoiding a tariff on imported vehicles is obviously important. But it's a risky time to invest in Lincoln production in China. Consider that Ford's profit engine, the U.S. market, is plateauing, immense capital is being poured into electrifying its vehicles and developing smart mobility projects, and China's new-vehicle tax incentive is likely to end as the calendar flips to 2017. That's enough to make a major automaker think twice.

Fortunately, in my opinion, China has so much potential it's worth the risk and investment required. Despite already being the world's largest automotive market, there's quite a bit of room to grow there in terms of market saturation. Consider that only 34 of every 100 Chinese households own vehicles, according to Automotive News China, citing state analysts. For comparison, the U.S. has 220 vehicles per 100 households, and Western Europe, Japan, and South Korea own a rate closer to 150 vehicles per 100 households. If China were even to reach half the rate of the U.S., the numbers would be mind-boggling considering that China's new-vehicle sales could reach 28 million units this year -- compared to a number in the low to mid 17-million-unit range for the U.S. market.

At the end of the day, luxury sales carry much higher margins and profit margins, and having a successful global lineup is becoming increasingly important for investors. Ford needs Lincoln to be successful globally, and with no plans to enter Europe, China is critical. If Lincoln is to catch competitors and take advantage of its early traction in China, Ford needs to pull the act now, despite the risks, and produce Lincolns in the country. 

Daniel Miller owns shares of Ford. The Motley Fool owns shares of and recommends eBay and Ford. 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.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.