China is on lots of investors' minds lately, and investors in Ford (NYSE:F) have been no exception.
The Blue Oval has spent the last few years ramping up its presence in China in a big way, making its biggest expansion in production capacity since the 1950s. But now, just as Ford's shiny new Chinese factories are reaching full speed, the world's largest auto market is starting to slump.
Ford CEO Mark Fields says that he's taking a long-term view of China -- and in the long term, there's still a lot to be bullish about. That's almost certainly true.
But in the near term, things are starting to look dicey. How will Ford minimize the impact?
Sales are slowing at both of Ford's joint ventures
Global automakers that want to build cars in China are required to do so via joint ventures with local Chinese automakers. Ford has two big joint ventures in China. Its venture with Chang'an Automobile Company, called Changan Ford, has six factories that build Ford passenger cars and SUVs. The other, with Jiangling Motor Corporation, or JMC, builds commercial vehicles -- mostly vans from Ford's Transit lineup.
JMC has been hit a little harder as China's market has slowed. Changan Ford saw its sales dip 4% in July, but JMC's fell 12%, as the overall industry's sales dropped 7.1%. During Ford's earnings call last month, Fields said that the slowing commercial-vehicle market had been visible to Ford for several months. Ford executives recognized that trend as an early warning sign of a slowing economy, and Ford's leadership in China moved quickly to adjust spending and production in the second quarter. The result was a solid second-quarter profit in the region despite a slumping market.
We can expect Ford's leadership in China will continue to carefully adjust production and spending to match shifting demand as the situation evolves. But that's not all that Ford is doing.
Overall auto sales are down, but SUV sales are still growing quickly
While overall new-vehicle sales in China have been down for the last three months, one market segment has continued to do well: SUVs. Overall sales were down 6.6% in July, but SUV sales rose 34% over year-ago totals.
Inexpensive SUVs made by domestic Chinese automakers are capturing a lot of that growth. But there's plenty of room upmarket for the global brands, too, and Ford is hardly an SUV slouch.
Earlier this year, Changan Ford began building the all-new Edge in a brand-new factory, both the familiar five-passenger version and a special-for-China seven-seater with an extended wheelbase. It joins the Kuga (a twin to the Ford Escape), the subcompact EcoSport, and the Explorer in Ford's China lineup. (The Explorer is imported from the U.S.)
JMC has mostly focused on Ford's commercial vehicles so far, but it jumped into the SUV ring last week when it began local production of Ford's Everest SUV. The Everest is a midsize SUV based on Ford's Ranger pickup platform, which is still sold in many parts of the world. It's a rugged, truck-based vehicle with substantial off-road capabilities that will complement the more urban-oriented Edge in Ford's China lineup.
Near-term looks OK, but expansion efforts could slow
Ford's moves to expand its SUV offerings in China have been in the works for a while, but the timing of the launches may turn out to be a boon. As they do here in the U.S., premium SUVs in China command good prices and deliver fatter profit margins.
Ford's overall level of sales in China may fall for a while as the Chinese economy slows. Cuts in production and spending will help minimize losses, while enhancing Ford's product mix with profitable new SUVs will help boost earnings.
Long story short: Unless things in China get very bad, Ford's bottom line should be able to weather this storm without taking a heavy hit. But if the slowdown deepens, Ford could end up ratcheting down its ambitious expansion plans -- and that would affect our expectations for the company's growth over the next few years. Stay tuned.
John Rosevear owns shares of -- and The Motley Fool -- 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.