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Can Ford Win in China? Do the Math

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Ford (F) has high hopes for China, as it must.

Sales figures in May tell both sides of the Ford story in China, which is not only the world's biggest auto market but also one of the fastest growing. For the month, Ford sales climbed 23%, GM (GM) sales climbed 21% and total sales by all manufacturers climbed 16%. But GM sales totaled 231,183, while Ford sales were 34,550, about 14% of GM's total and about 2% of the market.

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For Ford, China presents the classic glass half empty/glass half full dichotomy. Ford is tiny in China. Yes, but it has room to grow!

Tim Dunne, director of global automotive operations for J.D. Power and Associates, who lived in China for 12 years, said he "would never discount Ford.

"Was Honda (HMC) too late when it set up its first U.S. plant in 1982? And who would have expected the ascendance of Hyundai and what they've done here over the past 10 years?"

Dunne said it takes leadership to fuel auto company advances and noted that Carlos Ghosn turned around Nissan (NSANY). Similarly, Ford does not suffer from a leadership vacuum. "A lot depends on who's running the show and their vision," Dunne said. "That is true at every company. Look at what Alan Mulally has done (in the US)."

Another key consideration is to have product available, and here Ford is making a major commitment in China and Asia, projecting a total $4.1 billion in spending.

During an investor conference presentation last week, Joe Hinrichs, Ford president for Asia Pacific and Africa, laid out the case for Ford growth in China. Hinrichs' slides showed growing demand and Ford's growing manufacturing capacity, vision of entry into new market segments and continuing expansion of its dealership network.

Looking at demand, China bought 24% of the world production of 79 million vehicles in 2011, and will buy 29% of 112 million vehicles in 2020. That is 32 million vehicles, up from 19 million today. Two other markets -- India and ASEAN (Thailand, Indonesia, Malaysia, Philippines and Vietnam) also have rapid demand growth projections. The reason, in each case, is that once people reach an income level of $5,000 to $6,000 annually, they become potential car buyers. Ford assumes a 2% purchase rate by more than 2 billion new car buyers by 2020. In China, over 74% of vehicles are sold to first-time buyers.

So even though Ford is far behind competitors it gets "a chance to compete for first-time buyers (who) want the strength of an international brand," Hinrichs said. In fact, according to Dunne of J.D. Power, the recent slowdown in Chinese auto sales has revealed the intensity of demand for international brands as opposed to Chinese brands.

"Before, everything was selling," Dunne said. "Inventories were low and people didn't want to wait for name brands, so they bought a domestic vehicle. Now, they can get what they want, instead of buying their second choice." This is why Ford and GM sales rates in China seem to exceed market growth each month.

"Who would have thought that slowing sales would hurt the people who are growing at the bottom end of the market?" Dunne asked.

In terms of manufacturing capability, Ford plans to create three regional hubs in China, to introduce 15 new vehicles by mid-decade, and to fill niches where it does not currently compete. Hinrichs identified 11 market niches in China, including seven for cars. Ford today is in just six niches. Similarly, it is in two of seven niches in India and in five of 10 in ASEAN markets.

"We don't have the product portfolio," he said. "We're going to fix that in the next couple of years. We need to play in the spaces where the volume is."

Ford knows it must spend money to make money and is building at three sites. A $300 million commercial vehicle plant built with partner Jiangling Motors in Nanchang, Jiangxi Province will open in 2013. A $760 million plant build with partner Changan Ford Mazda Automotive in Hangzhou will open in 2015. A $600 million expansion in Chongqing was announced in April. The $4.1 billion in spending will bring Ford's capacity to 950,000 vehicles in 2014 and, in 2015, to 1.2 million vehicles, about double its existing capacity.

Additionally, a $1 billion plant in Sanand, India, will open in 2014 with the capacity to produce 240,000 vehicles annually. By 2015, Ford will have the capacity to produce 1.9 million cars annually in Asia Pacific and Africa.

Of course, you cannot sell vehicles without dealers. In China, Ford and its partners will have 960 dealers by 2015, up from 242 in 2009. In India, Ford dealerships will go to 315 from 92, and in the ASEAN region dealerships will grow to 280 from 143.

Dunne said he is not troubled by slowing growth in China. Auto sales grew 30% in 2009 and 2.5% in 2011. LMC Automotive projected 9.7% growth this year.

"I've heard over and over that China needs to grow at 7% to 8% to 9%," Dunne said. "Now, it is at a more rational pace."

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