You know the saying "A rising tide lifts all boats"? To use that saying for the growth of new-vehicle sales in China would be doing it a disservice; the tide in this case more closely resembles a tidal wave. Consider that just last year China became the first country to sell more than 20 million automotive units for the full year, far ahead of the world's second-largest market, the U.S., which sold 15.6 million units in 2013. Here's the kicker, though: China's new-vehicle sales growth could still skyrocket. Let's take a look at why that is, and why it's especially important for the folks at Ford Motor Company (NYSE:F).
The sky's the limit
Many analysts are predicting China's new-vehicle sales will reach 30 million by the end of the decade, and some are calling for this to happen as soon as 2018. These estimates were made despite China's overall GDP slowing down, and that's because vehicle ownership in the country is still very low.
At the end of 2013 China had roughly 120 million vehicles on the roads in a country of 1.4 billion people, according to the website China Briefing. That's fewer than 100 cars for every 1,000 people; for context, Europe and Japan have roughly 600 vehicles for every 1,000 people, and America tops 800 vehicles per 1,000 people.
Those figures should put into perspective why automakers are climbing over one another to get their fair share of China's explosive vehicle sales growth. If China sells 30 million vehicles annually by the end of the decade, as many forecast, that would mean nearly one-third of all vehicles sold on the planet will be sold in China.
SUV sales drive higher
On top of overall vehicle sales growth, there's something for Ford investors to be even more excited about: the growth of China's SUV segment. As more and more Chinese consumers are supported by rising incomes, they are migrating from smaller sedans to bigger vehicles such as SUVs and multipurpose vehicles. In November, SUV sales in China jumped a staggering 38% to 414,600 and MPV deliveries rose 43% to 200,800. For context, those two segments accounted for a large chunk of China's 1.7 million light-vehicle sales, which was a meager 5% increase over last year's November.
The reason that's great news for Ford investors is simple: If there's one thing the automaker knows how to do as good as, or better than, any competitor, it's how to design and produce popular and high-quality SUVs. For that reason, among many others, Ford's sales have been strong this year as the company continues to build production plants and dealerships to expand its market share to 6% by the end of 2015.
In fact, Ford just recently hit a sales milestone in China as its year-to-date sales through November crossed over the 1 million threshold, a 20% gain from the 840,975 sold during the same time period last year.
While the prospects of a surging automotive market in China bode well for Ford, there are risks that investors should keep an eye on.
China's automotive market had seen annual growth surges of 30% or higher, but this year and 2015 are expected to check in closer to an 8%-9% gain. That's still a healthy gain, but if China's economy grows less than 7% it could hurt automotive sales. Another major risk is that with traffic congestion and pollution becoming a big issue in the country, more cities could restrict new-car sales. So far only five cities -- Shanghai, Beijing, Guiyang, Guangzhou, and Tianjin -- have placed restrictions on new-vehicle sales to ease traffic congestion. If that list continues to grow, it could slow Ford's and other automakers' financial performance.
Investors should keep an eye on those risks, while evaluating Ford's performance on each of its goals in the region: reaching 6% market share next year, and growing revenue from its Asia-Pacific region from 8% of company revenues currently to nearly 40% of revenues by the end of the decade.
Daniel Miller owns shares of Ford. The Motley Fool recommends and 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.