Will Ford Make a Comeback?
Asia is a key market for Ford (F). In 2014, Asia Pacific accounted for 45% of global auto sales and grew 4.7% as compared to the preceding year. Ford takes the Asia-Pacific region as one unit that encompasses 12 primary markets – Australia, New Zealand, Japan, Korea, China, Taiwan, India, Thailand, Indonesia, the Philippines, Vietnam, Malaysia – and 31 additional emerging markets.
Excluding Australia and New Zealand from this list, all are Asian countries.
China and India have been favourites among them. These countries are among the fastest growing economies of the world and the two most populous countries at the same time. That for the automobile industry means that they are the fastest growing markets for automobiles despite all the economic weakness in Asia in general and China in particular. China still remains the largest single market for automobiles.
The opportunity and how Ford is tapping it
It is natural for Ford to expect 60% to 70% of its growth to come from the Asia Pacific region in the next decade. China and India are undoubtedly going to play a pivotal role in that. Ford projects that the Chinese automobile industry will be hitting sales of 32 million vehicles in 2020, up from 23 million in 2013. Meanwhile, in India, sales are expected to double to 6 million in the same period.
However, investors should note that Ford itself had lowered the sales guidance to 23 million to 24 million vehicles for China for the year 2015, which is not much progress after having sold more than 24 million units in 2014. But, for a longer term, like for 2020, we can’t write-off Ford’s projection for this market.
This is because China accounts for nearly 60% of total vehicle sales in the Asia Pacific, so it will account for most of the growth in the region. Now, to fulfil its Asian ambitions, the company is weaving its web in key parts of the region. For instance, Ford is expanding its dealer network and manufacturing capacity in the region.
At present, Ford has 10 new plants in the region, including new vehicle assembly plants in and Hangzhou, China, and Sanand, India, that were inaugurated early this year. Including these new plants, Ford’s combined capacity in the Asia-Pacific region is expected to be about 2.7 million vehicles by the end of this calendar year. The workforce is also a key metric to track the progress of a company, and Ford has been increasing its headcount in the region which is a direct indicator of progress. At the end of 2014, Ford had employed 25,000 people in the region, up from 20,000 in 2013.
Looking past the current slowdown
However, the picture painted by the long-term projections is absolutely in contrast to the current situation. There was negative growth in third-quarter revenue in the region as compared to last year, while the number of wholesale units declined from 346,000 to 306,000 units for the same period. Similarly, the pre-tax profit declined from $298 million to $253 million, while the operating margin in the Asia-Pacific region also took a hit.
Now, one interesting thing to observe here is that out of $315 million of YTD pre-tax income, $253 million has come in the third quarter. This means things have improved for Ford as far as the Asia-Pacific is concerned, although compared to last year, it is all negative.
But the company is hopeful about a seasonal increase in China that we always see in the fourth quarter as the industry prepares for Chinese New Year early in the following year. The Chinese government is also keen on stabilising the free fall that the markets have had this year. The government has taken a number of stimulating measures recently including the purchase tax reduction and the effect is evident in the showrooms.
China is the biggest single automobile market in the world. This makes it the most important market in Asia too. The weakness in Chinese economy alone is the reason why Ford Asia-Pacific suffered like it did. And the positive signs from the same market are the reason why Ford is hopeful of a strong fourth quarter and beyond into the long term future. The company has maintained its market share in the region while the others are losing it to the local players. It has a great presence in the other big market that is India. With all the development work going on in terms of capacity and dealer network expansions, Ford will be able to extract the maximum advantage of the growth that Asia is expected to show in the next one decade.