Ford: Don't Worry About China
Ford (F) released a strong second-quarter earnings report last week. It beat analysts’ expectations on the back of an exceptional performance in North America and Asia, while its profit in the European region was flat. Ford's revenue rose to $37.3 billion from $35.37 billion a year ago, while net income surged 44% to nearly $1.9 billion as compared to a year earlier. Wall Street analysts were expecting the company to deliver quarterly earnings per share of 37 cents on revenue of $35.34 billion. But, Ford outperformed the forecasts by posting earnings of 47 cents per share, up from 40 cents a share in the year-ago period.
However, despite such an impressive performance, there was one point of concern for Ford investors -- China.
The China problem
Ford had to lower its 2015 forecast for industry sales in China to 23 million to 24 million vehicles, down from the prior forecast of 24.5 million to 26.5 million at the start of the year. The low end of that forecast represents the first decline in at least 17 years in vehicle sales in China, according to official sales data. Sales in China in 2014 were about 24 million. Moreover, the state-backed China Association of Automobile Manufacturers this month slashed its 2015 growth forecast to a 3% increase in sales, the slowest expansion in four years.
The factors to be blamed for this hard time that major automakers are having in China are many. Still, the major ones are the economic slowdown, the stock market rout, and the restrictions on new car registrations in some major cities of the country. Until the start of June 2015, the Shanghai Composite Index had surged 150% in the preceding 12 months. But, what followed was a crash of more than 30% since June 12. This created an adverse situation for automakers as consumers were reluctant to spend on an aspirational item such as a vehicle.
The U.S. and European car makers have done well to adjust their production schedules according to the cooling demand in China. But, they are also facing a price-cut challenge from domestic rivals who are increasingly luring value-conscious customers with cheaper sport-utility vehicles.
In the first six months of the year, passenger-vehicle deliveries in China rose 8.4%, led by a 57% gain in SUV demand. But, in June, deliveries of cars, multipurpose vehicles, and SUVs fell 3.2% as compared to last year to 1.43 million units as auto sales slumped for the first time in more than two years. Thus, we can clearly see that the Chinese auto market is losing momentum, and this could have a negative impact on Ford's performance in the second half of the year.
Ford's China strategy
But, Ford's CEO Mark Fields says, "We're still very bullish on China." Despite the cooling down of automotive sales in China, Ford sees a big opportunity. More specifically, Ford is targeting the country's smaller cities for growth. Ford is eyeing larger percentage growth in the so-called tier 3 to 6 cities, which are small but burgeoning metro areas located closer to rural populations.
These cities don't have the same restrictions as the largest metropolitan, such tier 1 cities that include Beijing, Shanghai, Guangzhou, and Shenzhen. As a part of this strategy, Ford is going to appoint 85% of its Chinese dealerships in smaller cities this year.
Ford held 4.2% market share last year in China, which means that the company has a lot of runway to pursue growth. In order to increase its market share, Ford will open four factories in China this year as a part of its growth strategy. The company is readying 5 soon to be launched new products, which include the new Ford Everest, the new Ford Taurus, the new Ford Focus, and the new Ford Explorer. Driven by the launch of these new models, Ford will be able to gain market share from other car manufacturers in the country.
Ford has a small market share in China, which means that a slowdown in this region will not have a huge impact on the company's financial performance. However, China is the world's biggest auto market, so it is important for Ford to focus on this market for long-term growth. According to me, the company's strategy for China looks solid, and could help it improve market share despite an economic slowdown.