China has been a huge growth market for Ford Motor Company (NYSE:F) in the past few years. In 2012, the company revealed a plan to introduce 15 new models in China by 2015, while doubling production there and dramatically expanding its dealership network.
Ford invested billions of dollars in China to hit these ambitious goals. Last week, it announced the next phase of its capacity expansion in China. Ford plans to spend $1 billion to buy and retool an underutilized plant currently owned by an affiliate of Ford's Chinese joint venture partner. This will allow it to bring 200,000 vehicles per year of new production capacity on line by the second half of 2016.
Rapid growth in China
Ford's growth in China took off in late 2012, helped by the launch of a brand-new Ford Focus and a territorial dispute between Japan and China that caused many consumers to boycott Japanese brands. In 2012, Ford's sales in China rose 21% to 626,616 vehicles.
This growth accelerated in 2013, helped by the same geopolitical tension as well as the launch of new SUV models designed for the Chinese market. Sales rose a stunning 49% to 935,813 for the full year.
In 2014, Ford's sales in China rose another 19%, reaching 1,114,669 vehicles. However, through the first half of the year, growth had been even faster, with sales up 35%. Beginning around August, production constraints dramatically slowed Ford's sales growth. If more manufacturing capacity had been available, Ford probably would have sold more vehicles in China last year.
New production comes on line
In the past few months, Ford has dramatically expanded its production capacity in China. In November, Ford opened a third assembly plant in Chongqing, its main Chinese production hub. This increased Ford's annual vehicle assembly capacity by 360,000 units.
Pretty soon after this new capacity came on line, Ford's sales trajectory in China improved. Sales grew 13% in December and 19% in January, although growth slowed to 9% in February.
Late last month, Ford opened a second new assembly plant in China. Its Hangzhou plant will have a capacity of 250,000 vehicles per year. It has a flexible production line that will be able to accommodate production of up to six different models. The first model being built there is a new three-row version of the Ford Edge crossover, designed specifically for Chinese consumers.
Poised for more growth
As Ford completes its new model blitz in China during 2015, demand should continue to rise. The Ford Escort, targeted at budget-minded Chinese consumers, went into production in late 2014 and is expected to be a big seller. Ford is also expected to reveal a new flagship Ford Taurus at the Shanghai Auto Show later this month.
Having just added more than 600,000 units of annual production capacity in China, Ford has the ability to grow sales in China by about 50% from last year's total. But based on Ford's explosive growth in China since 2012, capacity could become tight again by late 2016 or early 2017.
Building a new plant from scratch would probably take two years or more. By contrast, Ford's decision to buy an existing plant will allow it to boost its production capacity before the end of 2016. As a result, Ford should be able to avoid a repeat of the sales growth slowdown it suffered in China last fall.
This move will give Ford another six to 12 months to see how demand develops for its new models before it has to make another big decision about building more factories from scratch. But if all goes well, Ford will be ready for even more production capacity in the world's largest auto market in three years or so.
Adam Levine-Weinberg has no position in any stocks mentioned. 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.