Ford Outsells Toyota in China as $4.9 Billion Bet Pays

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Ford Motor Co. is on a tear in China, with sales up 54 percent this year on the strength of its Focus small car. Long an also-ran in the world’s largest auto market, Ford is now outselling Toyota Motor Corp. there.

While Ford is benefiting from Chinese consumer backlash against Japanese products, the second-largest U.S. automaker also is beginning to reap the rewards of spending $4.9 billion to expand its lineup and double production capacity in China. Its pretax operating losses in the Asia Pacific Africa region narrowed to $77 million last year, from $92 million in 2011.

“We are about at break-even and we’re also at the height of our investment,” Chief Executive Officer Alan Mulally said in an April 9 interview. “We’re doing that with the biggest investment we have ever made. Think about when those plants are in. Just think about where those margins go.”

Mulally has put a priority on gaining ground in China, where Ford lags behind market leaders General Motors Co. and Volkswagen AG. Two years ago, he set a target to derive one-third of Ford’s sales from Asia by 2020. He’s backing that by introducing 15 models in China by 2015 and building Ford’s largest-ever factory complex in the southwestern city of Chongqing, which he visited last month with Chief Operating Officer Mark Fields.

“China is now our No. 2 market in terms of sales,” surpassing the U.K., Fields said in the April 9 interview. “There might be some months this year that our sales in China may outpace our sales in total Europe. So in terms of our business, it’s becoming more and more important.”

Catching Up

Still, Ford has a lot of catching up to do. It formed its first passenger-vehicle joint venture in China in 2001, six years behind GM and more than a decade after VW. That helps explain why Ford had 2.5 percent of the Chinese market last year, while VW controlled 14.5 percent and GM had 15.6 percent, according to consultant LMC Automotive. GM outsells Ford in China by more than six-to-one.

LMC forecasts Ford’s market share in China will grow to 3.4 percent by 2017, narrowing the gap with Toyota, which will decline to 3.6 percent from 4.4 percent last year.

Ford aims to take 6 percent of the market by 2015, said David Schoch, the group vice president who runs Asia Pacific operations.

“I think we can get to that,” Schoch said. “This can be a turbocharged year for us, to really kick us into high gear.”

Mulally knows his way around China. As an executive at Boeing Co. in the 1970s, he helped open the Chinese market to western aircraft, even working to set up the first air-traffic control system there.

“I have a long history in China,” Mulally said. “President Nixon and Henry Kissinger flew on a Boeing airplane to normalize relations with China 40 years ago.”

Mulally’s Mission

Ford fell 4.3 percent to $12.95, the biggest one-day drop since Jan. 29. The shares are unchanged so far this year compared with an 8.8 percent gain for the Standard & Poor’s 500 Index.

The decision to drive Ford deeper into China was one of the first Mulally made when he arrived at the automaker from Boeing in 2006. It came at a time when Ford was losing $30 billion from 2006 through 2008.

“When we laid this out six years ago, this was the most important decision that we made,” said Mulally, who added that he has quadrupled the amount of time he devotes to China. “The minute we made those, then we started acting on them, especially me.”

Slowing growth of China’s gross domestic product doesn’t worry Ford, Schoch said. The National Bureau of Statistics said yesterday in Beijing that the economy grew 7.7 percent, compared with the 8 percent median forecast in a Bloomberg News survey of 41 analysts and 7.9 percent in the fourth quarter.

“I haven’t seen anything that has caused me concern,” Schoch said. “Yes, it has slowed, but 10 percent, 11 percent growth was not sustainable. Our forward-planning base has been about 7.5 percent” over five years. “What other country around the world wouldn’t die for a 7.5 percent GDP growth?”

European Style

Ford’s own growth in China is driven by its Focus small car, with sales more than doubling last month to a record 37,814 models. Ford said the Focus became the top-selling automotive nameplate in the world last year, helped by growth in China. Toyota, using a different methodology, disputed Ford’s assertion and said its Corolla is the best-seller.

Chinese consumers are embracing Ford’s new models, such as the European Mondeo sedan coming this year, said John Zeng, director of Asia Pacific forecasting for LMC in Shanghai.

“Ford’s image at the moment is quite strong in the compact and medium-sized car segments,” Zeng said. “They’re bringing a lot of European-style technology and design into China. The new Mondeo is actually viewed as having Aston Martin styling.”

Besides the Mondeo, which is sold as the Fusion in the U.S., Ford this year plans to roll out sport versions of the Focus and Fiesta small cars in China as well as the EcoSport and Explorer sport-utility vehicles.

Challenging VW

“The market coverage of Ford is moving from like 20 percent to nearly 55 percent” by 2015, Mulally said, describing how many more vehicle categories in which Ford will have offerings.

By broadening its SUV lineup, the Dearborn, Michigan-based automaker is fielding “the right products for China,” Zeng said.

And Ford is pricing them to sell. The EcoSport small SUV, for example, starts at 90,000 yuan ($14,500), compared with 160,000 yuan ($25,900) for GM’s subcompact SUV, Zeng said.

Ford is going after Volkswagen by bringing technology and products from Europe, such as small, turbocharged engines and the Kuga small SUV, a direct competitor to the VW Tiguan, Zeng said.

“Ford is looking at aggressive expansion in China,” Zeng said. “We think they’ve got a chance to catch up.”

Japan Dispute

The tensions between China and Japan over disputed islands in the South China Sea have also given Ford an opening to accelerate its growth. Chinese protesters last year began calling for a boycott of Japanese goods, which helped lead to a 6 percent decline in Toyota’s sales in China in 2012, according to LMC.

In the first quarter, Ford sold more than 186,500 vehicles in China, compared with 184,700 by Toyota, according to data compiled by Bloomberg. In March, Ford outsold Toyota 81,387 to 75,900.

Last year, Toyota, the world’s largest automaker, outsold Ford in China by 43 percent, according to LMC.

“The recent conflict between China and Japan helps Ford,” Zeng said. “In March sales, Japanese brands fell by over 10 percent.”

Toyota’s struggles have coincided with Ford’s new-model push, which is boosting the American automaker’s market share.

Growth Accelerating

“Clearly, the Japanese had a sales downturn,” Fields said. “Our share almost hit 4 percent in the month of March, up 1.3 points versus a year ago. If you look at the first quarter, our share is up a little over 1 point. As we’re introducing these new products, our share growth is accelerating.”

The Focus is taking sales away from the Japanese compacts such as the Corolla, Zeng said. Ford is building the Focus at its second assembly plant in Chongqing, which opened in February 2012 and boosted its China car capacity by a third, to 600,000 vehicles.

By mid-decade, Ford said it will have the factory capacity to build 1.56 million vehicles in China, more than double what it manufactured in the country last year.

“That’s a big number and a very strong statement of what Ford sees in the Chinese market,” said Jeff Schuster, an LMC analyst based in Troy, Michigan. “But it’s not too big when we’re talking about a market that’s growing to 30 million units.”

Ford also is doubling its employment in China by 2015, adding 1,200 salaried staff jobs. It’s in the middle of doubling its dealer network to 700 by mid-decade from 340 in 2010 and 460 last year, Ford said.

“We’re just getting started,” said Mulally.