Far behind rivals, Ford tries to play catch-up in China

Reuters (Chongqing) - Frank Chuang proudly surveys his immaculate new car plant as partly assembled versions of the Ford (F.N) Focus travel down the production line.

Glancing at the small cars in the massive manufacturing complex in the city of Chongqing in southwestern China, the 32-year Ford veteran is satisfied with the way production has ramped up since the plant opened in February.

"This is just the starting point," Chuang, the 58-year-old head of manufacturing at Ford's China joint venture, said in an interview last month. "At this moment, I'm very excited."

The plant will need to be a success if Ford is to get a better foothold in the world's biggest car market, where it badly lags rivals such as General Motors Co (GM.N) and Volkswagen AG (VOWG_p.DE), which together produced the six top-selling cars in the country in 2011. Ford -- which was late getting into China -- had just 2.8 percent of the 18.5 million vehicle market last year, against GM's 14 percent and VW's 12 percent.

In 1997, Ford lost out to GM in the bidding to form a joint venture with Shanghai-based SAIC Motor Corp (600104.SS), which is China's largest automaker. It was another four years before the Chinese government allowed Ford to establish its own partnership and it made slow progress after that, including a misstep when its joint venture's first vehicle in 2003 was the small Fiesta car, when buyers were craving larger sedans.

"Ford had huge potential and I've always been very disappointed at how slow they've been," said Shaun Rein, author of "The End of Cheap China" and a corporate consultant in China. "They should have come in strong five to seven years ago."

Ford does not officially acknowledge it was late to the party. "I wouldn't say we were late," Ford Asia head Joe Hinrichs told reporters at the Beijing auto show last month, adding: "We just didn't aggressively add to our product portfolio as much as many others did."

But it is now trying to go on the offense. It plans to double production capacity in China to 1.2 million vehicles by 2015, when it will add plants in Chongqing and Hangzhou along the east coast. Ford currently has two plants in Chongqing and a third in Nanjing.

FACING HEADWINDS

It will face headwinds.

The supercharged growth of the Chinese auto market in the past 10 years has slowed the last two years, with Chinese automakers now looking to export markets to keep expanding at a fast pace. [nL4E8GB99Z] The Chinese market has also become a lot more crowded with more foreign and domestic manufacturers becoming established, making it tougher for Ford.

For example, market researcher LMC Automotive estimates that Ford's market share will hit only 3.1 percent by 2015 and stay there through 2020.

"Certainly Ford is going to be a significant presence in China, but is it ever going to be the level of Volkswagen and GM?" Fred Hubacker, executive director at consultant Conway MacKenzie, said. "I can't see that happening; at least not in the next decade or so."

Mind you, Ford will still have higher sales as the Chinese market is widely expected to climb to 30 million vehicles by 2020, which would make it roughly double the current size of the U.S. market.

"You just need a very small percentage of that number and you've got a huge industry," Hinrichs said in an interview at his Shanghai office. "That's why people are saying the Asia Pacific auto industry by 2020 is half the world's industry."

Ford and some of the analysts that cover the company expect that over the next few years it will report improved earnings in its Asia Pacific Africa operations, which includes China.

Ford does not disclose financial figures for China, but it is a significant part of the Asia Pacific Africa region that lost almost $100 million in the first quarter, largely due to aggressive spending to boost vehicle production. Ford has said it will be profitable in the region for the full year, and forecast it will contribute about one-third of global vehicle sales by 2020, up from 15 percent today.

Goldman Sachs analyst Patrick Archambault estimates annual profits from Asia and Africa will swell to $700 million by 2015, compared with small losses or smaller profits in recent years. While it will trail North America, South America and Europe in profits, China is still Ford's fastest-growing market.

"This is still a fairly small exposure for them," he said. "But it ought to be material over the next couple of years. There's real growth there that's got some legs to it for Ford."

Ford plans to bring 15 new vehicles and 20 engines to China by 2015, starting with the redesigned Focus compact now hitting showrooms. That is a big increase from its current six vehicles, but still leaves Ford far short of GM, which will roll out 60 new models over the next five years to add to its more than 35 nameplates in China. Last year, GM said it sold a car or truck every 12 seconds in China.

So far, Ford has invested almost $5 billion in China and operates in a three-way tie-up with Chongqing Changan Automobile Co Ltd 000625.SZ and Japan's Mazda Motor Corp(7261.T).

Ford certainly has its fans. At a dealership in Shanghai, 52-year-old engineer Shao Xiao Lin was visiting with his family to buy a silver-gray Ford Mondeo -- stepping up from the bicycle he has long used. The family saved their money and picked the Ford sedan over a Buick.

"It's a very famous car," he said approvingly of the Ford.

CATERING TO CHINESE TASTES

Unlike Buick, Jeep and VW, late-comer Ford does not have a brand name that resonates as well with typical Chinese consumers. Early on, the Dearborn, Michigan, automaker made a decision to market vehicles in China that were mostly designed and developed by its European unit. That did not go over well and hurt its brand recognition.

The company is now designing more vehicles that cater to Chinese tastes, but Ford's Mondeo midsize sedan, for example, has long struggled in China in part because of the model's understated, clean interior design that many Chinese consumers, who prefer more ornate and warm styling, disliked.

Ford is focused on filling out the Ford brand by adding more SUVs and small cars, but its luxury Lincoln brand will remain on the sidelines for now. Ford wants to steal a step on GM by quadrupling SUV offerings in China over the next year -- GM has admitted to being behind in the booming Chinese market for sport utility vehicles.

"You don't beat an existing, well-established player by going where they are," Jim Press, chief executive of Chinese dealer group Yanjun Auto, said. "You find the cracks and build your own image."

GM, whose Chinese joint venture began building vehicles in 1999, sells under the Buick brand -- called the "home brand" by one China dealer -- as well as Chevrolet, Cadillac, Opel, Wuling, Baojun and Jiefang. It also offers Chinese consumers its best or latest technologies: it sells the Chevy Volt plug-in electric car in China and plans to add the electric Cadillac ELR luxury coupe after it debuts in the U.S. market next year.

Despite its commitment, even GM has had troubles reading the tea leaves in China.

"Our failure and the failure of every other company in China in the last 15 years has been to underestimate the potential for growth," GM's China chief Kevin Wale told reporters during the Beijing show. "When we looked at the market for 2010 in 1998, we had a very aggressive projection. We missed the market forecast by 50 percent."

It does have critics here, however. One risk is that SAIC may someday look to spread its own brands in China and overseas, and no longer be satisfied with selling mostly GM brands. And some experts are skeptical of GM Chief Executive Dan Akerson's goal of having Cadillac sales in China -- which hit 30,008 last year -- rise in the next five years to the level of the 152,389 sold last year in the U.S. market. LMC estimates Cadillac sales in China will only reach half that level by 2018.

Also, as Buick's sales grow beyond the early wealthy clientele, it risks devaluing the brand, according to consultant Rein. "People who are rich don't buy Buick. They did maybe 10, 15 years ago, but not anymore."