Ford's China Strategy

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Car and truck makers sold 18.9 million vehicles in China last year, up 2.7% from a year ago, with growth sputtering from highs of 30% in 2010 and 42% in 2009. After overtaking the U.S. in 2009, China became the world’s largest auto market.

Ford (NYSE: F) unfortunately, entered the market late; in 2003. Ford CEO Alan Mulally , who plans to steer $5 billion in four new plants in China, hopes to reach 6% of the market by 2015. In contrast, General Motors (NYSE: GM) entered the market first in 1999 and reached almost 15% market share in 2012. But this was in the 13 years when the Chinese market grew like a rocket. With annual growth in the single digits, it is going to be a tougher slog for Ford.

Ford had a remarkable 2013 first quarter, growing 54% with massive contributions from the New Focus and the Kuga (sold as the Escape in the U.S.). Ford’s share is very small at 3% in China and it will have to grow by 25% each year for the next three years for the automaker to sell the 1.5 million cars it plans to make in 2015, representing more than three times the expected market growth.

Here’s how the automakers stack up: 

<table> <thead> <tr><th> <p>Estimated</p> </th><th> <p><strong>  Volkswagen</strong></p> </th><th> <p>       GM</p> </th><th> <p>           Ford</p> </th></tr> </thead> <tbody> <tr> <td> <p>2012 Market Share %</p> </td> <td> <p>                    18.2</p> </td> <td> <p>       14.8</p> </td> <td> <p>                3.6</p> </td> </tr> <tr> <td> <p>2012 Unit Sales Mn</p> </td> <td> <p>                      3.4</p> </td> <td> <p>         2.8</p> </td> <td> <p>                0.7</p> </td> </tr> <tr> <td> <p>2013 Q1 Growth %</p> </td> <td> <p>                    21</p> </td> <td> <p>       12.6</p> </td> <td> <p>              54</p> </td> </tr> <tr> <td> <p>2015 Unit Sales</p> </td> <td> <p>                      5</p> </td> <td> <p>         3.8</p> </td> <td> <p>                1.5</p> </td> </tr> <tr> <td> <p>2013-15 Growth % per year</p> </td> <td> <p>                      9</p> </td> <td> <p>         8.0</p> </td> <td> <p>              25</p> </td> </tr> <tr> <td> <p>2015 Market Share</p> </td> <td> <p>                    19.2</p> </td> <td> <p>       15.4</p> </td> <td> <p>                6</p> </td> </tr> </tbody> </table>

Volkswagen (ADR) (NASDAQOTH: VLKAY) is likely to remain the strongest competitor in China, and, like Ford, is also planning to add seven plants in China by 2018. Volkswagen is aggressive in its global ambitions and if it’s chief executive Martin Winterkorn has his way, Volkswagen would surpass both Toyota Motor and GM financially by 2018.

For Ford to penetrate the Chinese market and get to its market share it will have navigate some important trends

Important trends in the Chinese market:  Respect the Chinese

Chinese buyers started cold-shouldering Japanese cars over political differences. Toyota saw sales decrease when tensions broke out between China and Japan over the East China Sea. Ford tipped the hat in the right direction by structuring meetings around the Chinese clock. 

As Synergistics’ Auto Trends report shows, Audi’s success in China was largely due to its localization strategy – the product was different and it wasn’t a hand-me-down. It was designed for Chinese roads, the uneven quality of Chinese gasoline, and its seats were designed to fit Chinese and not European shapes.

GM is another example of localizing its China strategy. It elevated its Chinese partner by setting up a strategic management office in Beijing to oversee and execute China’s global strategy and also gave it equal share in its exports to India.

This is a very important trend, especially when you’re branching out to the less- affluent markets; Tier 3 and below markets tend to spend only $12,000 per car and have per capita incomes of $15,000.

On the other hand, even with price-sensitive consumers there are preferences for better-integrated technology, emphasis on design and a need to have an emotional bond with the customer.

Think small and local

Chinese consumers save $300 in taxes driving cars with engines smaller than 1.6 liters and Ford equipped the Mondeo (the U.S. Fusion) with the smaller 1.5-liter engine to focus on this segment.

All foreign automakers have to take a local partner, and while there is an obvious preference for smaller local manufacturers who cater to the newer, less affluent buyer, it also opens doors for foreign makers who focus on this segment

Ford, because of its late entry, can’t get much of a foothold in the developed coastal and urban areas, with most dealers already taken by GM, Volkswagen and Toyota, and has to chase the second-string, less-developed inland markets. Ironically, this market will probably show higher growth if China develops its own consumer- driven economy instead of relying only on exports.

In 2011, 87% of China’s population lived in Tier 3 or lower cities, and their market share of the Chinese market was growing faster than the Tier 1 and Tier 2 cities.

From the “do or die” approach taken by both GM and Volkswagen toward China -- as the only market capable of replacing a moribund Europe and realizing their global ambitions of being Top Dog -- Mulally sure has a tough fight on his hands in the middle kingdom.

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Bobby Shethia has a long position in Ford. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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