If you're an investor in the automotive industry you likely know how important a global luxury brand is for automakers. The three best-selling automakers globally all have established luxury brands that serve as flashy sidekicks to their mainstream sales attacks. Volkswagen has its highly successful Audi, and General Motors (NYSE:GM) has committed a mountain of cash to expand its Cadillac lineup. Not to be forgotten is Toyota, which is rallying to improve its Lexus brand's global presence.
Unfortunately for investors cheering Ford Motor Company's (NYSE:F) impressive turnaround with its namesake Blue Oval brand, its Lincoln brand's performance has been disappointing. If you're thinking Lincoln's entry into China could quickly propel the brand onto the global stage and provide a catalyst for Ford's stalling stock price, you should temper those lofty expectations. Here are the hurdles Lincoln faces in the world's largest automotive market, and what investors can expect in the years ahead.
Lincoln faces an incredibly tough uphill battle against powerful brands that are well established in China. It's a battle that Lincoln will face for decades if it plans to become a global luxury contender. Competition in China's luxury market is dominated by German automakers, and therefore Lincoln will remain a niche brand for some time.
Before we look at the leaders in China's luxury market, let's look at a competitor closer to home.
First, consider that General Motors' Cadillac brand has more money behind it than what Ford has committed to Lincoln, at least so far. Just as important as cash, or perhaps more important, is time; we have to consider that Cadillac entered China a decade ago. With the larger cash stockpile backing it and a decade-long head start, Cadillac has only recently topped 50,000 units sold for the full-year 2013.
To put that in perspective, those 50,000 Cadillacs are 10% of what China's luxury leader, Audi, sold last year. Audi's results -- 500,000 vehicles sold -- were far ahead of second and third place BMW Group and Mercedes-Benz, which posted sales of 326,444 and 228,000 vehicles, respectively.
Another hurdle that Lincoln faces in its initial plan to import cars into China is that it will get a 25% tariff slapped onto each vehicle. That will make it more difficult to compete on pricing, or more difficult to rope in the better margins typically associated with luxury vehicles. That's a hurdle that will stay in place until Ford sets up a production facility for Lincoln vehicles in China.
With the hurdles Lincoln faces in China clearly defined, it will take a solid strategy and many years before success can be attained. With that said, here are a couple of reasons for long-term investors to be optimistic.
Lincoln's learning curve
Similar to how Ford's mainstream brand was years late getting into the world's largest automotive market, its luxury Lincoln brand followed the same fashionably late trend entering China. On the bright side, Lincoln's late arrival could help the brand reduce a steep consumer learning curve. The Lincoln team will be able to tap into the knowledge Ford's team has gained regarding Chinese consumer preferences and tastes.
Since Ford announced its mainstream Blue Oval brand strategy for China in 2012 the company has grown its monthly sales from just over 30,000 units in January 2012 to breaking 100,000 for the first month ever in March 2014 -- on schedule to meet its goal of doubling market share from 3% in 2012 to 6% in 2015.
Not only can Lincoln's team learn from Ford's mainstream successes and failures, but it also went a step further over the last three years to gain an even deeper understanding of the luxury automotive customer in China. Lincoln spent that time learning from customer focus groups, mystery shopping studies, data mining, and benchmarking of luxury goods and services.
Ford has done its homework on the consumer -- the question now is whether Lincoln can make up ground on its luxury competitors as fast as Ford did against the mainstream competition?
One factor working in Ford's favor for a fast start in China's luxury auto scene is that Lincoln is entirely new to the market. That means that Lincoln can focus on getting its wheels on the pavement in the best-selling cities and markets.
Lincoln will begin selling vehicles in China this autumn through eight dealerships in seven key cities: Beijing, Shanghai, Nanjing, Xi'an, Guangzhou, Huangzhou, and Chengdu. It is planned that those eight will balloon quickly to 20 by the end of the year, and reach a total of 60 dealerships selling in 50 cities by the end of 2016.
Just as important as selecting key cities to place Lincoln dealerships is aiming its products at the hottest vehicle segments.
When dealerships in China allow consumers to drive Lincoln vehicles off their lots they will only have two initial choices: the MKZ and MKC. Those two vehicles will be Lincoln's respective entrants for two of the most important luxury markets: midsize sedans and compact crossovers. By 2016, Lincoln plans to bring its vehicle count in China to five, all aimed at key segments that combine to cover more than 80% of the luxury auto segment in the country.
Lincoln has a well thought out plan for its introduction to China, and it includes a focus on new and elaborate dealerships that will emphasize creating a strong customer relationship and positive initial brand image.
Lincoln's move into China, as part of an attempt to become a more prominent global luxury brand, is a must-do for Ford Motor Company. Its progress in the region will also become one of the most exciting aspects covered during each monthly and quarterly sales report.
However, investors would be wise to temper short-term expectations of Lincoln's entry into China being a catalyst for Ford's stock price. This is a move that will be a long uphill battle and will take many years to pay off; it's a move for long-term investors to follow enthusiastically.