Ford's China Initiative Overshadowed by Other Woes
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Ford (NYSE: F) may be the latest, but will not be the last, to announce an expanded production initiative in China, the world’s largest auto market. The automaker, which recently opened its fourth plant in the nation in February – a $490 million, 150,000 units per year factory in Chongqing – has announced a new cash infusion of an additional $600 million to further expand production. Now with over $4.1 billion invested in infrastructure in China, Ford’s hopes of reaching a total of 950,000 units per year in production by 2014 will include the building of four additional plants and the introduction of 15 new models in the market.
Ford’s mission is by no means pocket change, but the automaker is far from being the national volume leader. The company did see a nice 7% year-over-year jump in 2011 to hit nearly 520,000 units, yet Volkswagen (NASDAQOTH: VLKAY), which enjoyed an 18% increase, and General Motors (NYSE: GM), which saw an 8.3% sales jump, sold 2.26 and 2.55 million units in 2011, respectively.
Although the auto market’s growth has slowed after the Chinese government rolled back sales incentives – the 2.5% volume increase to 18.51 million in 2011 compares with the 32% rise in 2010 – China will still remain one of the most important market’s going forward and there is plenty of room for Ford to take additional market share. Ford’s future, not only in China but around the world, should not simply focus on ramped up volume but instead should continue to put an increased emphasis on creating a well-rounded global portfolio.
Ford’s “One Ford” initiative, now several years old, has done much to boost the relevance of its flagship Ford brand, but as a whole (including Lincoln), the entire package is less attractive. Lincoln, despite its significantly redesigned line-up and motivation to attract younger luxury auto shoppers, is still a heavy anchor in the automaker’s progress going forward. Lincoln sold 8,800 units in the U.S. in March, and with around 20,850 units in the first quarter of 2012, the brand controls an industry-low market share of 6%.
The Lincoln brand’s sales volume peaked over two decades ago with 231,000 units in 1990, and the segment’s volume in the first quarter of 2012 implies a run rate that is likely to be within 85,000 to 90,000 units for the year.
Although Ford should be commended for its ability to shift away from larger sedans, trucks, and SUVs to its award-winning line-up of compacts including the Focus and Fiesta, the model structuring that would allow for the greatest return on investment in the long run includes a more successful completion of its Ford One plan. More specifically, the design of universally marketable vehicle platforms would allow for much greater scale in operations and the maximum spreading of the huge fixed costs with which all automakers are burdened.
Popular luxury automakers Mercedes and BMW (NASDAQOTH: BAMXY) offer a suitable example. The corporations need to do very little in terms of redesigning for individual markets to make their vehicles highly demanded the world around. Such a demand profile is highly advantageous because individual vehicle platforms (the basic structural components that underlie a vehicle’s design) can cost upwards of around $200 million or more. Although the initial investment cannot be avoided, having the ability to design multiple models from a single platform and having those models sell in high volumes in many different markets results in a higher-than-average return on investment.
Spending hundreds of millions of dollars on a particular Lincoln vehicle line-up and having those vehicles sell minimally (or not even being sold at all) in certain markets is a waste of effort and a waste of shareholder funds. The same generally holds true for General Motors and its Buick and Cadillac luxury wings, although these models do sell in much greater quantities on a worldwide basis than Ford’s Lincoln brand.
GM CEO Dan Akerson has reinforced the importance of such a “global brand,” and has made it clear that the ideal General Motors structure going forward will make Chevrolet and Cadillac the automaker’s global leaders and have GMC and Buick provide regional support. The end goal will be to look more like Mercedes or BMW in terms of universal appeal, but with simultaneously juggling multiple brands like a Toyota (NYSE: TM)–Lexus set up.
Ford and General Motors' investment in the fastest growing nations including Brazil, China, India, and even the United States has allowed for a piece of this goal to be unlocked. Another portion of the goal has been attained with the creation of certain global models including the Ford Fiesta and Focus and the Chevrolet Cruze and Sonic. However, the huge investment in new plants to ramp up volume is always a positive, but without a long term and universally sound portfolio, Ford will never live up to its full potential on a worldwide basis.
gibbstom13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.