Here's Why Ford Needs a Turnaround in China

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John Rosevear, The Motley Fool

Updated Tue, Dec 12, 2017, 8:06 PM

Ford Motor Company (NYSE: F) recently announced a turnaround plan for China. Its November sales showed why it needs one.

Ford said its sales in China fell 8% in November from a year ago, as good sales of small and midsize sedan models didn't come close to offsetting a broader decline in sales, including year-over-year declines for some of Ford's most profitable products.

Including November's result, Ford's sales in China are down 6% this year, trailing the overall market and several key global rivals.

A blue Ford Mustang parked in front of a Chinese building.

The Mustang was one of just a few Ford-brand vehicles to post a sales gain in China last month. Image source: Ford Motor Company.

Not much good news for Ford in these numbers

Ford is being outpaced in China by several key global rivals.

Automaker	November 2017 vs. 2016	Year-to-Date 2017 vs. 2016
Ford	(8%)	(6%)
General Motors (NYSE: GM)	13%	3.3%
Nissan (NASDAQOTH: NSANY)	22%	12%
Honda Motor Co. (NYSE: HMC)	11%	17%
Toyota (NYSE: TM)	(1.3%)	7.5%
Overall China passenger vehicles	(0.03%)	1.9%

Data sources: Chinese Association of Auto Manufacturers and the individual automakers. Sales totals include sales by affiliated joint ventures. Year-to-date figures are through November. Overall China market figures are for "passenger vehicles," which include cars, SUVs, and minivans, but not commercial vehicles.

Ford's two established Chinese joint ventures both posted year-over-year sales declines in November. Sales at Changan Ford, or CAF, which builds and sells Ford-brand cars and SUVs, fell 12% to 84,231; sales at Jiangling Motors, or JMC, which builds commercial vehicles and the truck-based Ford Everest SUV, fell 1% to 26,083.

It's easier to list the Ford-brand vehicles that didn't suffer significant sales declines in China last month:

Sales of the affordable compact Escort sedan, a China-only Ford model, rose 5% to 34,589.
Sales of the midsize Mondeo sedan, twin to the U.S.-market Fusion, rose 61% to 11,627.
Sales of the Tourneo, a passenger version of the Ford Transit commercial van, rose 145% to 441.

Ford also saw gains in sales of the Mustang and the high-performance ST and RS versions of the Focus; all are imported to China and sell in tiny numbers.

That was it for sales gains for Ford-brand vehicles. All other Fords sold in China, including its EcoSport, Kuga (twin to the Escape), Edge, Explorer, and Everest SUVs, as well as the once-high-flying Focus, posted double-digit-percentage year-over-year sales declines last month.

There's no sugarcoating it: That's a tough result for Ford, a company that prides itself on being a global leader in SUVs. If anything, Chinese car-buyers are even more enthusiastic about SUVs than their American counterparts -- but Ford seems to be losing their interest.

What's going on, and how will Ford fix it?

How Ford hopes to turn things around in China

Here's the short answer: China's market moves fast, and Ford hasn't moved fast enough to keep up.

China has a slew of domestic automakers, most of which compete in the lower-cost market segments, and nearly all of the global automakers have a presence in China. Competition is fierce, and new models arrive all the time. The upshot: Ford's once-popular models have quickly become yesterday's news.

Earlier this month, as part of a larger plan to overhaul its China business, Ford said it will launch "more than 50 new vehicles" by 2025. On one hand, that's a big number; on the other, 2025 is more than seven years away, and when Ford says "new vehicles," it counts things like new trim variants as well as all-new models.

Ford also plans to build more models in China, which should help: Imported vehicles are hit with steep tariffs that make them expensive. It'll also add more technology to its existing models, expand its range of hybrid offerings, and begin experimenting with online sales via Alibaba Group's (NYSE: BABA) huge Tmall platform.

Last but not least, Ford will continue to build on what has been one of its few bright spots in China recently, its upscale Lincoln brand. Through November, Lincoln sales in China are up 83% this year, to 51,735; the total is still fairly small, but the growth has been impressive.

The goal? Reducing a sales slide that has hit Ford's bottom line. Through the first three quarters of 2017, Ford's equity income from its two joint ventures was down 33% from a year ago to $710 million.

Will Ford's plan be enough?

I suspect that Jason Luo, who joined Ford in August to take charge of its China operation, will be the key to a successful turnaround. In the past, Ford rotated executives through China as it does with its other global operations. That practice made for well-rounded executives, but at a price: None had time to amass the extensive local knowledge needed to succeed in China over the long term. (A related issue: Most didn't speak Chinese.)

Luo is different. A veteran American executive who speaks fluent Chinese, the plan seems to be that Luo will be there for a longer stay and will build out a more savvy local organization that is better-tuned to the nuances of the huge Chinese auto market.

The plan that Ford announced for China earlier this month was likely Luo's work. From a distance, he looks better-positioned to succeed than any of his recent predecessors, but it could take a few quarters before investors will be able to tell if Luo has things headed in the right direction. We'll be watching.

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