Ford (NYSE:F) was late to the Chinese auto boom, but the automaker has been making up for lost time in impressive style.
Ford's recent sales gains in the world's largest auto market have far outpaced the industry, and the company is investing big to support even more growth over the next few years. But being a latecomer in China has cost Ford: It's unlikely to catch up with market leader General Motors (NYSE:GM).
Ford CEO Alan Mulally isn't one to make the same mistake twice. Ford has also been investing big in India, hoping to "get in on the ground floor" in what many have suggested is likely to be the next big emerging auto market.
But sales gains in India have so far eluded Ford. On Wednesday, the Blue Oval announced a big change in strategy: It's going to turn India into a key export hub.
The problem: a big investment in factories for a market that hasn't quite materialized
Here's why this is a big deal. Ford already has a big manufacturing site in India, at Chennai, that can make up to 200,000 vehicles a year. It currently makes the Figo, an India-only model based on an older Fiesta design, the current-generation Fiesta, and the Endeavour, a midsized SUV geared toward emerging markets. It added the EcoSport, a subcompact SUV that shares some underpinnings with the Fiesta, at the end of June.
Ford also has another facility under construction in Sanand that will add another 240,000 vehicles a year in potential production capacity. (Ford hasn't yet announced what it will be making there, but versions of the Focus and Escape seem like a good bet.)
That's a lot of production capacity. But lately, Ford's sales in India have been running around 11,000 a month – including the vehicles that Ford makes in India and exports.
Do the math, and you see the problem: Ford will soon have the ability to build 440,000 vehicles a year – and over 600,000 engines – for a market that is taking fewer than 150,000 Fords per year right now.
Put another way, Ford invested big bucks in anticipation of growth that hasn't arrived – at least, not yet. And nothing piles up losses for an automaker faster than factories that aren't working at anywhere near their capacity.
That's a sour lemon for Ford. But on Wednesday, Ford explained how it is going to try to make some lemonade.
The solution: build popular models for other ready markets
"Despite current macroeconomic factors and ongoing market challenges, India is a big part of our global strategy," Ford's Asia Pacific chief Dave Schoch said in a statement on Wednesday. "Exports from India have always been an integral part of that strategy and will help us to stay on track for turbocharged growth in the region, while going further to provide our customers with the vehicles that they want and value."
Or put another way, Ford is committed to making vehicles in India, but the reality of the market right now means that Ford will be exporting the majority of them.
That's not necessarily a bad thing, given the relatively low cost of production in India. Ford is likely to find plenty of willing customers in Asia for vehicles like the Fiesta and the EcoSport. The company didn't give specifics on where they'd be going, but did say that its Indian facilities would be exporting to "more than 50 markets around the world".
One safe bet is that finished vehicles won't be exported to China (though engines and other parts might be), because of the big tariffs China places on imported cars and trucks. But they could go to markets throughout Asia, and possibly Africa and Australia as well.
The upshot: another victory for "One Ford"
Long story short, this is the "One Ford" strategy at work. Ford's flexible assembly lines – and its lineup of genuinely global models and platforms – mean that excess capacity can be profitably put to work helping to support sales growth elsewhere in the world.
Ford's struggles in India haven't been encouraging. But the fact that the company is recognizing the struggles, and is able to put its shiny new Indian factories to work serving other markets, is a good sign for Ford shareholders.
Fool contributor John Rosevear 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.
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