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Ford Motor Co. (
- Analyst Report
, Mazda Motor Corp. and China’s Chongqing Changan Automobile Co. have received approval from the China’s central government to split their three-way manufacturing and sales joint venture (JV), Changan Ford Mazda Automobile (CFMA) into two.
Ford owns a 35% stake in Changan Ford Mazda, with Changan holding 50% and Mazda the remaining 15%. Last month, the venture’s sales went up a staggering 44% to 26,306 cars in China, driven by strong sales of new Focus, Classic Focus and Mondeo. This compared with Ford’s overall sales gain of 32% to 42,560 vehicles in the country.
Ford manufactures Focus, Fiesta, Mondeo and other models in China through CFMA. It also holds a 30% stake in Jiangling Motors Corp. that makes light commercial vehicles.
CFMA has two major manufacturing bases in China, located in Chongqing and the eastern city of Nanjing. After the split, the two joint ventures, Changan Ford Automobile and Changan Mazda Automobile will own and operate Chongqing and Nanjing operations, respectively. Changan Ford Automobile will be controlled by Ford and Changan and Changan Mazda Automobile by Mazda and Changan.
Ford and Mazda
Ford severed its ties with Mazda in 2008 by reducing its 33% stake to 13% and later to 11% in 2009 in order to raise cash during the global economic crunch. Late 2010, the Detroit automaker further reduced its stake in Mazda from 11% to 3.5%.
The partnership between Ford and Mazda began in 1979. Through the partnership, Ford intended to develop small and fuel-efficient cars using Mazda’s technology while Mazda depended on Ford to fund its research and development activities.
Consequently, Mazda sought Toyota Motor Corp.’s ( TM - Analyst Report ) help in 2010 to obtain key components of hybrid systems – batteries, motors, control units and other electronic parts – from the latter, through a hybrid technology tie-up.
Expansions in China
In April this year, Ford announced plans to raise its annual production capacity by nearly 60% in China by investing $600 million with its joint venture partner, Changan Automobile Group Co. The automaker expects to boost capacity at Chongqing operations by 350,000 units per year to 950,000 vehicles per year by 2014.
Last year, Ford broke ground for a $300 million vehicle plant with Jiangling Motors, which is capable of producing up to 300,000 units annually. The facility is scheduled to start operations at the end of 2012.
Ford has embarked upon an aggressive expansion plan in China that includes plans to triple its lineup in China by introducing 15 models, including the Kuga small sport utility vehicle by 2015.
In order to develop the new models, Ford will build new plants raising its capital spending to about $6 billion annually by mid-decade from $4.3 billion in 2011. In order to keep pace with the expansion, Ford also plans to double its workforce by hiring 1,200 employees by 2015.
Ford anticipates global sales to expand by 50% to 8 million vehicles by 2015 given the potential growth in Asia, mainly China and India; and rising demand for small cars. The automaker anticipates small cars to account for 55% of the total sales by 2020 compared with 48% presently. One third of the small car sales are expected to come from Asia.
Auto Industry in China
Auto sales in China had grown at a double-digit pace since 1999, except in 2008 when the global economic crisis crept in. In 2009, China overtook the U.S. as the biggest auto market in the world by sales volumes when the Beijing government introduced a stimulus package, including tax incentives for small cars with engine sizes of 1.6 litres or smaller.
However, the incentives were scrapped last year and the Beijing government imposed quotas on new car registrations in order to control the traffic congestions. As a result, new car deliveries plummeted 56% to 403,500 units in 2011.
Nevertheless, China’s automotive industry outlook is promising in 2012. According to China Association of Automobile Manufacturers (CAAM), car sales in 2012 is expected to grow by 9% in the country, which is much higher than 2011 (2.5%).
Ford’s Aim in China
Ford has been gearing to catch-up with its rivals in the world's largest auto market. Currently, the automaker holds 2.4% of the passenger-vehicle market in the country. It has been lagging behind the big players in the China, including General Motors Company ( GM - Analyst Report ) , Toyota Motor Corp, Volkswagen AG ( VLKAY ) , Hyundai Motor Co. ( HYMLF ) and their respective joint ventures.
The company plans to expand its production capacity in China to 1.1 million vehicles by 2012. It will spend $1.6 billion to build 4 plants in the country by 2012. In contrast to this, GM, which already produces more than 2.8 million vehicles per year, has targeted to grow its production capacity to 3.7 million vehicles by 2015.
Ford, a Zacks #4 Rank (Sell) stock, posted a 39% fall in profits of $1.20 billion or 30 cents per share in the second quarter of the year from $1.98 billion or 49 cents in the corresponding quarter of 2011 due to lower operating results in all the regions except North America. However, the company’s profits were higher than the Zacks Consensus Estimate of 28 cents per share.
Revenues in the quarter dipped 6% to $33.3 billion, due to the same factors mentioned above. However, it exceeded the Zacks Consensus Estimate of $32.0 billion. In the first half of the year, Ford’s U.S. total market share was 15.4% in the U.S. and 8.1% in Europe.
For 2012, Ford anticipates market share in the U.S. and Europe to be lower than 16.5% and 8.3%, respectively, in 2011. It also expects the overall pre-tax operating profit to be lower than 2011 compared with the prior guidance of tallying. Operating margin in the Automotive segment is anticipated to be equal or lower rather than the prior guidance of improve over 5.4% in 2011.
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