The Ford Motor Company (F.NYSE) operates three business groups worldwide: North and South America, Europe, and Asia Pacific and Africa (APA). In 2009, the company relocated its APA staff and headquarters to Shanghai from Bangkok in recognition of the country’s growing importance to the global auto industry. The emphasis on China was given another boost last year as the company consolidated Ford China into its APA operation. China Economic Review spoke to Joseph Hinrichs, Ford’s regional president and Chairman and CEO of Ford China, about the country’s growing auto market and Ford’s drive to fulfill the vision of its founder in China.
Q: You’re obviously expecting rapid growth here, but so far your China presence has been relatively small…
A: You have to look back over the past 12 years to understand where we are today and where we’re going. About 10-12 years ago we had a massive restructuring of our European and South American operations. That took a lot of the energy and focus from the corporate team. We also bought many brands: Jaguar, Land Rover, Volvo, Aston Martin. Then over the course of the last five or six years, we’ve been working on a restructuring plan to transform the North American business back to profitability, and we sold off all of the brands that we had acquired to focus on Ford. With all of that going on, we weren’t able to focus as much of our energy and resources on growth in China and APA as we would have liked to. Now that we’ve come full circle and we are focused on Ford globally, we have set up our business to be run globally, as one Ford organization, so we have global platforms, global manufacturing, global product development.
Q: Why didn’t the old model work?
A: It was a lot of things. Historically, Ford developed unique products for Europe, unique products for North America, and unique products for South America. And Asia Pacific, because of its size, and because it didn’t have its own presence from an engineering standpoint, took products from Europe. But the European market is a higher-revenue, higher price-point market, on average, than the Asian market. And so Ford came in at the top end of the price points, selling a limited number of products originally designed for Europe into these markets. We sold five nameplates in China last year.
Q: And now?
A: Now Ford has moved full-scale to be a global company, and all the new products we’re developing on a global platform are designed from the get-go to be sold globally. Because of China and India’s scale, they’re a big part of the equation when we develop a new vehicle. So when the next generation Focus comes to China next year, it will be 90-plus percent the same vehicle as in Europe and North America. What that’s allowing us to do is develop products right from the beginning on a global platform that have been designed with the needs of Chinese consumers in mind from the start. We can also afford many more vehicles than we could in the past, because in the past we only took what European products we could afford.
Q: Does this relate to discussions you’ve been having with Beijing about importing North American-made vehicles for sale in China?
A: We started importing the Edge, a two-row, mid-sized crossover, from North America into the Chinese market in January. Where we think there’s not the scale to be able to justify local manufacturing, we can add some products that are desirable for Chinese consumers to the portfolio, and over time we’ll be able to bring a few more of those to market. Our core products are and will continue to be manufactured locally, but the Edge is a great example of where we can bring a product in quickly, we can sell it, and if it ever reaches a sales level at which it makes sense to manufacture locally, then we can take a look at that as well.
Q: So what are the big sellers right now?
A: The most important product for us in China, volume-wise, is the Focus. It’s about 50% of our volume. That car size is very important in China – it’s the biggest segment in China, and we’re very excited about the future of the Focus. We introduced the Fiesta less than two years ago and it’s done very well for us as well. We believe the biggest growth in the auto industry in China will occur in the tier-two and tier-three cities. We added 100 dealerships last year, and most of them were in tier-two and tier-three cities. We’re going to bring more cars and especially lower-priced value offerings into the market in China to serve those markets over the next several years. So that’s where we see the volume. But the Chinese market is big enough – it’s the biggest in the world – to support basically all the segment sizes, and all the different product offerings.
Q: Are you worried about slowing growth in this market?
A: Our sales grew 40% last year, which is a phenomenal number, without any new product introductions. We’re forecasting about 10% for China’s sales growth this year. That is tempered, obviously, from the last two years, but the last two years’ growth levels were not sustainable, for a lot of reasons. And 10% growth in an industry this size is still a big deal. Total nationwide sales were a little over 18 million last year by our estimates, so 10% is an additional 1.8 million units. That’s six or seven assembly plants! When you think of it that way, every year, you see the scale of the growth that’s going on in China.
Q: Can you talk a bit about your relationship with your passenger vehicle joint-venture partner, Chang’an?
A: The Chang’an relationship was developed in the late 1990s, and is based in Chongqing, which
ends up being a great location for us given the rapid growth in central and western parts of the country. It was worked out between Ford, the National Development and Reform Commission (NDRC), and Chang’an as a passenger car venture. Mazda was brought in because Ford had 33.4% ownership of Mazda and so essentially was running the company. Currently the joint venture is structured 50% Changan, 35% Ford, 15% Mazda. Now that Ford has mostly divested from Mazda, that gives us the opportunity to think about what that structure should look like for the future. We’re having a conversation with the NDRC about it.
Q: Where do you see the domestic industry going?
A: What’s fascinating in China is there are more than 70 manufacturers here, and over time they will consolidate. Every major market went through this early growth stage in the auto industry. You see massive numbers of OEMs [original equipment manufacturers] and then there’s the consolidation phase. The key thing that’s going to be interesting over the next several years is to see how the industry shakes out in China, how much consolidation really does occur, and who really ends up being the major players. Obviously, some of them already are very big players, and that’s not going to change, but who else is going to join that group on the international stage?
Q: Do you have clear goals for your position in China?
A: We don’t throw out targets – that’s not really Ford style. Clearly, we believe that we should have more presence here in China than we do today, and we intend to have more presence. In the major markets around the world, we’re a top-two, top-three, top-four player. Obviously we’re starting from a base that’s lower than that in China, but we know how to compete against Volkswagen (VOW.FWB), General Motors (GM.NYSE, GMM.U.TSX), Toyota (TM.NYSE, 7202.TYO), Hyundai (005380.SEO), Honda (HMC.NYSE, 7267.TYO), and Nissan (7201.TYO). And so now that we’re committed to this market, we’re going to bring all the power of Ford globally to focus on this part of the world. Over time you’d expect that we would have the kind of presence here that we have elsewhere. Does that mean number one? No, not necessarily, but it does mean higher than 2.7% market share.
Q: So it’s a broader vision…
A: We don’t talk about it a lot, but it’s kind of famous inside Ford. In 1924, Sun Yat-sen sent a letter to Henry Ford, inviting him to come to China and to help develop the auto industry in the country. Things didn’t materialize during that time frame, but we’re now beginning to embark on a mission to really fulfill Henry Ford’s original vision, which was opening the highways to all of mankind. That was a big deal to Henry Ford – he put it on advertisements in the 1920s.
Q: And it’s still applicable?
A: China is now the world’s biggest market, but it’s still the world’s biggest opportunity. And, you know, what better place to open the highways to all mankind than central and western China? They’re still opening highways as we speak. So Henry Ford’s vision is applicable even though he was talking in 1924-25. That’s why we’re excited about what we have going on. Would we have liked to have gone faster sooner? Yes. But not at the expense of fixing North America on our own. One of the things that we study a lot in business school is that you can only have so much management attention and focus on certain things. And I can assure you that right now the Ford Motor Company leadership team is focused on China and Asia-Pacific and Africa like we never have been before.