Ford Motor Company (NYSE:F) said that its sales in China fell 7% in July, as strong demand for the Blue Oval's commercial vehicles wasn't enough to offset a big slump in sales of small sedans. 

What's going awry for Ford in China: Small cars

Ford has had an up-and-down year in China. The Blue Oval's occasional good results have been more than offset by a general decline in sales year-over-year. Through July, Ford's sales in China are down 7% from a year ago.

What's going on? Simply put, Ford's best-sellers aren't selling like they did a year ago. 

Its two best sellers in the world's largest car market are both compacts: The familiar compact Focus, and another small sedan developed as an affordable option for China, called the Escort. Year to date, sales of the Focus are down 20%, and the Escort is down 10% -- significant declines given the total sales volumes. 

A brown Ford Escort sedan with Chinese-language license plate.

The Ford Escort, an affordable compact car developed for the Chinese market. Image source: Ford Motor Company.

A change in China's vehicle-tax laws that made it more expensive for consumers to buy vehicles with smaller engines is probably a big part of the story. The government's tax on vehicles with engine displacements of 1.6 liters or smaller rose from 5% to 7.5% at the beginning of the year. Price-sensitive consumers have increasingly turned to lower-cost models from domestic Chinese automakers. 

But another part of the story is about the Focus and (perhaps to a lesser extent) the Escort themselves. Ford recently refreshed the Focus, but the current model was first released in the U.S. and Europe way back in 2011. In China's hyper-fast-paced new-car market, that's very old news. 

What's working: Commercial vehicles -- and Lincolns 

That's not to say that it has all been bad news for Ford in China this year, though. Its joint venture with Chinese automaker Jiangling Motors, called JMC, makes commercial vehicles under the Ford and Jiangling brand names as well as the brawny Ford Everest SUV. JMC had a good month in July, with sales up 11%, and has had a good 2017 overall, with year-to-date sales up 17%.

A Lincoln new-car dealership, photographed at dusk.

A Lincoln dealership in Shanghai. Image source: Ford Motor Company.

The Lincoln luxury brand has been another good story for Ford in China. Total sales are still small, but the brand is growing rapidly and generating good margins. Lincoln's sales in China rose 68% last month, to 4,713 vehicles. (For comparison, Lincoln sold 8,875 vehicles in the U.S. in July.) Year-to-date, the brand's sales in China are nearly double those from the same period a year ago.

The upshot: What can Ford do to boost China?

Ford's struggles in China are starting to hit its bottom line. Equity income from its two Chinese joint ventures fell 34% in the second quarter, to $195 million. Ford said the year-over-year profit drop was due to the timing of incentive payments from the Chinese government, but its recent sales results surely haven't helped.  

Like other global automakers doing business in China, Ford's pricing has come under pressure over the last year or so. The latest products from the domestic Chinese automakers are much more competitive than they were even a couple of years ago -- and they've been priced aggressively as the local brands try to gain market share. 

It's not clear how Ford will turn things around. Price cuts might help sales, at the expense of margins. The real answer to Ford's troubles in China might be the same answer we hear for most automakers' troubles in most places: More new, gotta-have products. 

Those are on the way, starting with a revamped version of the small EcoSport SUV later this year. But Ford might find the going to be tough in China until they arrive. 


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.