Ford Motor Company's Production Dilemma in China
As the saying goes, one man's trash is another man's treasure. And while investors and folks at Ford Motor Company (NYSE:F) alike will hate that phrase in regard to the Lincoln brand, there is some truth to it. Consider that until recently Lincoln sales were in a steep and unrelenting downward spiral since the brand's peak in the late 1990s. Ironically, despite its slowing sales and its vehicle innovation stagnating in the U.S. until recent years, Lincoln's brand image is highly regarded in China.
"It's different in the U.S. than in China," Kumar Galhotra, head of Lincoln, said of the brand's standing in a January interview with Bloomberg. "In China, our heritage plays very strong. Our favorable opinion in China is actually ahead of Lexus and on the factor of prestige, we're actually ahead of Audi."
Because of that, and the fact that China's luxury auto market is expected to overtake the U.S. to become the largest in the world sooner rather than later, there are some serious changes being considered with Ford's luxury lineup.
To import, or not to import
Naturally, producing vehicles in a multitude of different markets across the globe comes with challenges distinct to each market. In China, for instance, the automakers have a decision to make when it comes to production versus import. On one hand, if you produce vehicles in China, you can avoid a 25% tariff that comes with importing vehicles. But that comes with a catch: To produce vehicles in China, you must partner up with a Chinese company to form a joint venture.
Ford has a joint venture, CAF, to produce non-premium passenger vehicles, in which it has a 50% equity investment. It also has two similar joint ventures, JMC and CFME, which produce trucks and commercial vehicles, and engines, respectively. Ford has a 32% equity investment in JMC and a 25% equity investment in CFME.
Meanwhile, as Ford is gearing up to accelerate sales of its luxury Lincoln lineup in China, it's currently paying the import tariff but reaping 100% of the rewards for those vehicles. That's working so far, but Lincoln's story in China is still in the early stages. If it's going to turn into a major player, the automaker will need to produce vehicles in the region.
Here is a good sign for investors hoping for Lincoln's success to take off in China: It appears Ford is already discussing with its Changan Automobile Group partner about producing Lincolns in Chongqing as soon as 2018.