Why Ford Chose China Over Mexico

June 29, 2017 Posted by China Briefing Reading Time: 6 minutes

By Gidon Gautel

US-based Ford Motor Company recently announced plans to expand automotive production in China. Ford officials had initially planned to manufacture its Ford Focus model in Mexico; representatives said the decision to move Focus production to Chongqing in 2019 would help the manufacturer avoid unnecessary retooling and investment costs.

A statement on Ford’s website said, “Ford is saving US$1 billion in investment costs versus its original Focus production plan”, before adding that the plan will improve the company’s financial health and improve its manufacturing scale in China.

Ford President Joe Hinrichs stated in a radio interview that the biggest advantage is that the move will allow Ford to “leverage existing capacity, and frankly invest in one less plant to build the Focus worldwide, and that involves things like tooling for the body shop”.

Manufacturing companies large and small have long looked to China for cost savings: Ford can certainly save by scaling up its China operation instead of building or refitting factories in Mexico. But the cost considerations ultimately overlook the competitiveness of China’s automotive industry, as well as its market potential.

Did Ford make the right move?

In a word, yes.

Thomas Ward, President of PIM China, an industrial market research firm, said, “Ford has excess capacity in a well-running China plant with an established supply chain; it would not make sense to build a plant in Mexico”. Ward notes, “The labor cost savings are negligible compared to Mexico, but they are not an issue as Ford, like many others, has fully automated plants”.

China’s parts manufacturers may then prove crucial. The number of individual parts manufacturers in China boomed from 4,300 in 2003 to 10,000 in 2015. This means that, unlike in the US or Mexico, where parts must be shipped in from a variety of locations, cars in China can be put together at lower costs with shorter supply chains.

In addition to production savings, John Niggl, Client Manager for InTouch Manufacturing Services, a third-party QC inspection and factory auditing firm, notes a lesser-known advantage: “producing in China allows multinational automakers to compete much easier in the local market, due to heavy Chinese tariffs that discourage imports. These benefits are likely to make Ford more profitable, while lowering costs for consumers”.

Ford is already experiencing record sales across all models in China. Since 2014, sales have grown 14 percent to 1.27 million units. Ford Focus sales have risen by more than eight percent since 2015. In contrast, Ford’s US sales declined in 2016, and demand for the Ford focus has dropped by 20 percent from 2016, and continues to fall.

Improving its market share in China, however, appears firmly within Ford’s sights. Patrick Colligan, Global Business Development Manager at Dezan Shira & Associates, notes, “Moving production to China will help Ford open a cost effective, direct supply channel to the local Chinese market, where they are competing with GM and Volkswagen – both of whom are ahead of Ford in sales and market share”.

The stakes are high for Ford. Chinese car sales in 2016 totaled 23.6 million, greater than sales in the US and Mexico combined (at 17.5 and 1.6 million, respectively). Despite such impressive figures, market penetration in China is still low in comparison to the US and Mexico. In 2016, China’s motor vehicle ownership per 1,000 people was a mere 140. In comparison, the US’ in 2014 was 797, while Mexico’s was 275.

Manufacturing plants in China are also better placed to access ASEAN. Vehicle sales in the Philippines and Vietnam expanded by more than 30 percent each last year, while Singapore’s were up 43 percent. This growth is complemented by various China-ASEAN trade agreements since 2005, allowing greater market entry. Vietnam, for example, is set to scrap or reduce tax across all tariff lines by 2020.

What is not being said?

In addition to cost savings and market access, Ford can benefit from a number of incentive schemes designed to encourage FDI into the automotive industry.

Aware that high visibility industries help boost local GDP and meet performance targets, regional governments in China have offered attractive incentives to manufacturers. For example, Chongqing’s Langjiang New Area, where Ford’s Chang’an plant is located, has incorporated a 15 percent cut to business income tax until 2020 for both Chinese and foreign-funded industries.

China’s central government also views the automotive industry as a “pillar industry.” This means that it provides national tax cuts, subsidies, and infrastructure development that make the economy welcoming to car manufacturers.

The effectiveness of such cuts was observed in 2016 when the small vehicles tax was slashed in half from 10 to five percent to cushion the slowing economy. Cars sales subsequently rose by 14 percent, and are expected to rise a further five percent this year, as the tax will be kept below the usual 10 percent level.

Ford has in fact recently benefited from another incentive scheme. Colligan notes that Ford announced in April that they are increasing local production and sales of two new electric vehicles (EVs) in China. He says, “Chinese policy makers have made clear their focus on sustainability, and we have seen a strong response from both the state-owned and private sectors”.

The central government’s “Go West” policy and “One Belt, One Road” initiative have also provided the infrastructure development needed to encourage economic growth and consumerism in underdeveloped western provinces of the country. As Ward notes, “infrastructure development plans would be attractive to anyone producing in China.”

How will Ford’s plan be received?

“Though controversial, it’s hard to argue with Ford’s decision to move production to China”, says Niggl. He says that while job losses in manufacturing have been a “pain point for voters in the [US’] latest presidential election, the commonly held belief that manufacturing in America is shrinking, and that re-shoring will bring back lost manufacturing jobs, is unfounded”. He notes, “Automation, rather than outsourcing, has been the overwhelming contributor to job losses in manufacturing”.

Ultimately, seasoned China hands are not surprised by Ford’s decision to expand in China, rather than Mexico or the US. Ward says, “I think [other manufacturers] will see it as a practical move based on production efficiencies and market access”. He adds that “The maturing economy, with an ever-growing middle class purchasing cars, makes China a solid move”.

Colligan is also bullish: “China will continue to be a global force in the years to come in mid-market auto sales. It is not a question of if, but how China will continue to grow, and Ford has made clear its stance”. As most major players are already operating in China to some extent, Colligan believes Ford’s move may tighten competition at the top and drive further growth in higher-value products, such as EVs and associated green technology.

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