Ford Motor Company (NYSE:F) said last week that its sales in China fell 6% in July.
China's huge new-car market has been slowing. Sales across the industry fell 2.5% in July. A stock market slump, together with increasing signs that the once-hot Chinese economy is slowing, have kept buyers away from new-car dealers.
Worse for companies like Ford, inexpensive vehicles from domestic Chinese automakers are now competing seriously with the (more expensive) models from the global giants. That competition has put big pressure on prices, which in turn could squeeze profit margins.
With the Chinese government now moving to devalue the yuan, which makes every yuan worth less in dollar terms, the pressure on Ford's profit from the region will only increase.
Ford has spent a fortune -- roughly $5 billion and counting -- to build a huge presence in China and other Asian markets. Is that starting to look like a bad bet?
Mark Fields still thinks China is a great bet for Ford
Ford executives don't think so. The pressures in China have been apparent for several months now, but Ford surprised Wall Street with a $192 million profit in its Asia Pacific region in the second quarter.
During Ford's second-quarter earnings call, CFO Bob Shanks said that the profit was due to great cost control, the quick adjustments to spending and production that were made by regional executives as they recognized the onset of the slowdown.
But CEO Mark Fields wanted to address the bigger picture:
"It's clear we've seen a marked slowdown in the [Chinese new-vehicle market across] industry. We've seen commercial vehicles actually come down more the past year than other vehicles which is a bit of an indicator to us." Slowing sales of commercial vehicles can be an early indicator of an economic downturn, as businesses and tradespeople start to cut back spending.
Fields acknowledged that Ford's pricing in China has come under pressure, though he said those pressures had been evident for a while.
"But we have to put this market into perspective," he said. "This is the biggest market in the world right now. By our forecast it's going to grow to about 30 million vehicles [per year] in the next 5 to 10 years. So we're still very bullish on China. It's going to go through fluctuations. That's what happens in emerging markets. We're going to work our way through it in a positive way and grow the business."
Put simply, Ford isn't too worried about the potential for a downturn. It's taking the long view.
Ford's China team is already moving to weather the storm
Ford may be a relative newcomer to China, but the company has done business in places like South America for decades. As a company, it has accumulated plenty of experience around managing volatility in developing markets.
Shanks emphasized that Ford's leadership team in Asia acted "very quickly and very proactively as we saw the softening" of China's new-vehicle market, moving to cut back production in Ford's local factories.
"That's what we do anytime, anywhere that we see something like that happening," Shanks said.
Shanks said that Ford had lowered its outlook for industrywide new-vehicle sales in China this year, to between 23 million-24 million vehicles, from its earlier projection of 24.5 million-26.5 million.
But Ford didn't change its overall profit guidance for 2015, which remains quite upbeat. For investors, that's the takeaway: Ford has already taken steps to mitigate risk in China, and it's confident that it can ride out the storm.