Ford to Invest USD760 Mil. in New Plant in China's Hangzhou
Ford is essentially playing catch-up with rivals such as General Motors and Volkswagen in China, but its commitment to local production comes at a time when the Chinese market is slowing down.
IHS Global Insight Perspective
Ford's Chinese vehicle manufacturing joint venture, Changan Ford Mazda Automobile (CFMA), has announced an investment of USD760 million in the Chinese city of Hangzhou.
The investment, following closely on the heels of an earlier announcement by Ford that it was boosting the Chongqing assembly plant's production by 350,000 units per annum, will double CFMA's annual production capacity to 1.2 million units by 2015.
With its recent investments, Ford is looking to catch up with its established rivals in China, but slowing market growth and increasing competition seem to have narrowed its window of opportunity. Ford may have to take a hit on its margins to attract customers now.
Ford has announced that its vehicle-producing joint venture (JV), Changan Ford Mazda Automobile (CFMA), will invest USD760 million to construct a new plant in the city of Hangzhou in Zhejiang province in eastern China. In a statement sent to IHS Automotive, Ford says that its fourth vehicle-producing plant in China will have an initial production capacity of 250,000 units per annum (upa) and will boost the JV's total capacity to 1.2 million upa by 2015, doubling output from current levels. Construction of the plant is scheduled to start later this year and the facility is likely to begin production in 2015. Ford did not indicate which models will be produced at the facility, but details of this may be disclosed at the upcoming Beijing Motor Show.
This latest investment follows the opening of a new production plant in Chongqing in February, which boosted the JV's annual production capacity to 600,000 units (see China: 24 February 2012: Ford Opens USD490-Mil. Production Plant in Chinese City of Chongqing). This was followed by a USD600-million investment in the Chongqing facility, to equip it with a new assembly line and body and paint shop, which is likely to add another 350,000 units to annual capacity by 2014 (see China: 6 April 2012: Ford Expands Capacity at Chinese Chongqing Production Plant). Besides its vehicle assembly plants in Chongqing and Nanjing, Ford's JV also operates engine and transmission plants in China.
"This expansion will help us realize an increase in global sales by about 50% from 2010 to about 8 million vehicles annually by mid-decade", said Joe Hinrichs, president of Ford Asia-Pacific and Africa, adding that the investment has taken Ford's total outlay in China to approximately USD4.9 billion.
Outlook and Implications
Ford's rapid moves to invest in China look almost hurried and come in stark contrast to its strategy for the country in recent years, which although affected by the global recession was generally much more relaxed. Ford's recent moves could almost be seen as a desperate attempt to catch up with rivals, which have also been busy ramping up production in China in recent months. However, Ford's long wait has also been down to the restructuring of its three-way JV in the country. As it becomes clear that JV partner Changan will not be able to free up a production licence (see China: 7 February 2012: Changan-Suzuki Chinese JVs to Stay Separate, CFMA's Break-Up Delayed), it is natural for the companies to move ahead with the current arrangement.
Ford's growth in China in recent years has been somewhat hampered by the fact that its production plants are located in inner regions, far from the coastal cities where the benefits of economic growth are most obvious. The Hangzhou plant will not only provide it with greater access to the large customer base in China's affluent coastal cities but will also help it export vehicles to global markets when required.
However, Ford's aggressive push in China is not free from headwinds. In the first three months of 2012, Ford China sold 121,393 vehicles, down 13.64% year-on-year (y/y; see China: 11 April 2012: Ford's Chinese Sales Drop 13.64% Y/Y in Q1). This was well behind General Motors (GM) China's sales of 745,152 units during the same period, up 8.7% y/y, and it alludes to some design problems with Ford vehicles. Chauffeur-driven customers in China opting for global brands prefer comfortable rear seats, something that Ford's vehicles have not been able to provide as they are largely based on its global platforms and have not been customised for local preferences. In fact, many of Ford's dealers in China are reportedly losing money. The OEM plans to address this by upgrading its entire portfolio in China. Ford aims to bring in 20 new engines and transmissions as well as 15 new vehicles by 2015.
Another issue concerns the timing of the investments, which are clearly late and come at a time when the Chinese market seems to have moved to the next level. Although the Chinese market is still far from becoming a "zero-sum game" like the United States market, it is fast becoming characterised by falling growth rates and intensifying competition. By 2014–15 when Ford ramps up production, competition is likely to have become even more intense. Even if Ford's prediction that the Chinese vehicle market will grow at an annual compounded rate of 5% comes true, it will be an uphill task for Ford to snatch back market share from its traditional rivals such as GM and Volkswagen (VW), both of which have become fairly established in China now. To be fair to Ford, it stands a fighting chance as its current product line in China does not do justice to its stature of a global automaker, and following new product launches it can expect to see its market share increase from the current level of around 2%.
From a wider perspective, Ford's chances of challenging the market leaders on the back of its aggressive investment strategy are doubtful and the automaker may have to suffer slightly on profitability as it looks to attract customers.
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