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Why China's Slowdown Shouldn't Hurt Ford

By John Rosevear – Updated Apr 6, 2017 at 5:21PM

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The world's biggest auto market is slowing, just as Ford is finally ramping up. Here's why it might not matter.

"China accounts for 60% of our Asia Pacific and Africa sales now and will be a leading part of our sales growth in the next decade. Ford's growth plan [in China] is now in high gear." 
-- Ford China CEO Joe Hinrichs, in a statement earlier this month

Hinrichs' statement has been the party line at Ford (NYSE: F) for a while. Ford, facing a stubbornly stagnant market in Europe and revitalized competition in the U.S., has been aggressively looking for growth in other parts of the world, and the company's efforts in China have been positioned as a key driver of that growth -- maybe the key driver.

But here's the thing: The growth of China's auto market, which was solidly in the "eye-popping" class for several years, has stalled recently. Does that mean that Ford's opportunity for big gains has passed?

The Blue Oval in China
The Chinese auto market is a chaotic bazaar, with dozens of locally produced brands competing with offerings from nearly every global producer. Cheap, even crude offerings from small local companies share roads with finely finished products from the likes of BMW and Toyota (NYSE: TM), which sold more than 500,000 cars in China in August and commands about 5% of the market share.

But above them all stand General Motors (NYSE: GM) and Volkswagen (OTC: VLKAY.PK), the two global auto behemoths that saw China's potential early and took steps to establish a dominant presence. Volkswagen is the best-selling passenger vehicle brand in China, but GM's joint ventures (which include the Wuling commercial-vehicle brand that accounts for about half of GM's sales in China) give it top-dog status in overall sales. GM also makes China's best-selling car -- the Buick Excelle, a locallyvmade close relative of the upcoming U.S.-market Buick Verano sedan.

Ford, on the other hand, is well down the sales totem pole, selling just under 27,000 vehicles in China last month. For comparison, Shanghai GM -- a joint venture between GM and China's SAIC that produces cars sold under the familiar Chevy, Buick, and Cadillac nameplates -- sold almost 116,000 vehicles in September, and GM's Wuling brand added nearly 120,000 more.

Ford, in fact, is currently being outsold in China just by Buick -- yes, Buick! If the market were still growing rapidly, Ford shareholders could look to the company's strong product offerings and expect that that the Blue Oval would be able to draw a solid share of new buyers.

But it's not. Does that mean Ford is destined to be stuck at the bottom of China's sales charts?

Why Ford still has a great opportunity
Ford's Chinese operation produces four cars locally: Focus, Fiesta, Mondeo (a midsized sedan sold in many overseas markets, but not in the U.S.) and the S-Max, a small minivan. Ford also imports and sells the Edge SUV and a few other models, but the locally produced cars are the volume leaders. The company is greatly expanding its presence, and expects to double its employees and add 15 new models and variants by 2015.

Here's the thing that should give Ford shareholders hope for the company's chances in China: The Focus and Fiesta are really good cars -- but Ford's presence is still small enough that many Chinese haven't had the opportunity to catch on to that yet. The Focus and Fiesta compete well with the cars in their classes from Toyota and Honda (NYSE: HMC) and Hyundai (OTC: HYMTF.PK) and VW and GM all over the world. They're up against the same competition in China, and there's plenty of reason to expect that they'll find favor with Chinese consumers as Ford expands its presence over the next few years.

If there's one truth in the auto business, it's that automakers' fortunes rise and fall with the strength of their products. Trends and loyalties come and go, but for the most part, the auto companies with the strongest products tend to be the ones whose sales and profits are growing. Strong products, more than anything else, have been the key to Ford's turnaround over the past several years. They've been key to market share gains in the U.S., to strong sales in Latin America, to winning the company a surprising following in places like Russia -- where the Focus is a best-seller.

Even if the days of double-digit growth in the Chinese auto market are past, that product strength makes it likely that Ford's growth in China will continue to be strong for some time.

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Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors. 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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