Ford Motor Company's China Sales Accelerate

By Markets Fool.com

Ford Motor Company posted rapid growth in China throughout 2013, with vehicle sales up 49% for the full year. However, as 2014 progressed, Ford China's sales growth slowed down.

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A slew of new models boosted Ford's growth in China in 2013. Photo source: Ford Motor Company

At the time, Ford's management team blamed the loss of momentum on capacity constraints. Sure enough, following the opening of a new assembly plant in China a few months ago, Ford has returned to strong sales growth in the world's largest auto market.

Sales growth stalls
After posting double-digit sales growth in China in each of the first seven months of 2014, Ford's sales growth slowed to 9% in August and sales declined marginally in September and October. The abrupt slowdown came as Ford faced more difficult year-over-year sales comparisons. Moreover, Ford was already using all of its production capacity in China.

In a way, the sales slowdown can be attributed to Ford's extraordinary success in China. In 2012, Ford rolled out an ambitious plan to double its production capacity (and sales) in China by 2015. However, during 2013 and 2014, demand for Ford vehicles rose even faster than production capacity.

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New production capacity arrives
Fortunately, Ford's production bottlenecks in China are easing. In November, Ford opened a third assembly plant in its main Chinese production hub of Chongqing. This expanded production capacity by 360,000 vehicles per year.

The new Chongqing plant will build the recently launched Ford Escort. The Escort is a major piece of Ford's plans to gain market share in China this year.

The Ford Escort is a big piece of Ford's plan to grow sales in China in 2015. Photo source: Ford Motor Company.

The Ford Escort is a practical entry-level offering positioned between the Fiesta and the Focus in terms of price. It deliberately has conservative styling and avoids fancy bells and whistles. On the other hand, it has a larger backseat than the Focus, which is a key selling point in China.

Return to growth
The added production capacity from the new Chongqing assembly plant has helped Ford return to sales growth in China. Sales rose 13% in December, bringing total sales growth for the full year to 19%. In January, sales growth accelerated again to 19%.

As Ford continues to introduce new models in China, demand for Ford vehicles should continue to grow. Furthermore, Ford should be able to significantly boost sales in the next couple of years without running into capacity constraints.

In addition to the recently opened Chongqing plant, Ford is also building a new assembly plant in Hangzhou with an annual production capacity of 250,000 vehicles. This plant is expected to open later this year and will bring Ford's total manufacturing capacity in China to about 1.5 million vehicles per year.

This is about 35% ahead of Ford's 2014 sales in China. Moreover, Ford still sells some imported vehicles in China, and its manufacturing plants have been producing beyond their nominal capacity recently. With the production footprint that will be in place by the end of 2015, Ford could probably grow annual sales more than 50% to 1.7 million or 1.8 million vehicles.

In the long run, Ford will need more capacity in China to meet its full sales potential there. With sales growth reaccelerating, capacity constraints could start to become significant again by 2017. As a result, if Ford continues to post strong sales growth in China in the next few months, the company will likely announce another round of capacity expansion later this year.

The article Ford Motor Company's China Sales Accelerate originally appeared on Fool.com.

Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.