Why Ford's China Sales Are Down -- and How It'll Recover

Ford Motor Company (NYSE: F) said this week that its sales in China rose 15% in June from a year ago, giving the Blue Oval its best-ever June sales result in the country.

That's good news, but here's the context: Last month's gain followed several months of declines -- and a strong hint that Ford would adjust its pricing in China in an attempt to recover its sales momentum.

Year to date, Ford's sales in China are still down 7%.

Why Ford has had a tough year in China

Ford's sales in China have suffered recently for a couple of reasons. First, the locals have upped their game: New models from domestic Chinese automakers, particularly in the smaller-SUV segments, have proven surprisingly competitive with those from the global brands -- and the Chinese automakers have a cost advantage.

That pressure has forced Ford, Volkswagen, General Motors (NYSE: GM), and the other global automakers into a tough choice: Cut prices (and profit margins) to compete more effectively, or lose sales.

Ford, unlike rival GM, has a second challenge: Its key models are showing their age. Small vehicles are the big sellers in China, and Ford's Focus, EcoSport, and Kuga (the Chinese version of the Escape) are getting long in the tooth by Chinese standards. Consumers who want the latest and greatest are shopping elsewhere right now.

Ford has new models in development that will address the second problem in time. But it can take action on pricing right now -- and it did.

How Ford adjusted to find sales growth in June

Early in June, Ford's Asia Pacific marketing and sales chief, Peter Fleet, said that Ford would offer "new and exciting promotions" on Ford-brand vehicles in China, a clear signal that the Blue Oval would cut prices on some models.

A glance at Ford's June sales numbers shows that the price cuts worked better for some models than others. Car models, including Ford's current China best-seller, posted gains:

• Sales of the Ford Escort rose 30% last month to almost 26,000 vehicles sold. (Escort is a familiar name to Ford fans, but the current Escort is a China-only model. It's an entry-level compact sedan based on the last-generation Focus. Ford positions the current Focus as a premium model in China.)
• Ford Mondeo sales rose 28% to about 8,600 sold. The Mondeo is the China-market version of the midsize Fusion sedan.
• Ford Taurus sales rose 11% to about 2,100 sold. China's Taurus is a different and much newer model than the U.S. Taurus. It's mechanically related to the new Lincoln Continental. If you imagine a Fusion scaled up to Continental size, you'll have the idea.
• Sales of Ford's small EcoSport SUV rose 6% to just under 3,000 sold.

But other Fords continued to lag:

• Sales of the Kuga fell 5% to just under 8,000. Fleet had promised a "realigned customer offer" on the small SUV, but its sales still fell short of last year's.
• Focus sales fell 4% to just over 14,000.
• Sales of the Edge, a newer model that has done well in China, fell slightly (about 1%) to 8,515 sold last month.
• Sales of Ford's Transit commercial van fell 24% to 3,823. The Transit had been a good story for Ford in China.

A bright light: Lincoln sales are booming

In contrast to the mixed results for Ford-brand models, Lincoln's sales have been very strong in China. Lincoln's sales in China rose 84% in June from a year ago, to 4,165 sold. Year to date, Lincoln sales in China are up 97% to 24,571.

Ford decided to roll out the Lincoln brand in China a few years ago, after research showed that Chinese consumers held Lincoln in very high regard. Chinese Lincoln dealers have put a very strong emphasis on personal service, and sales have been good.

Ford sells five Lincoln models in China, all of them imported from North America. Four posted double-digit percentage gains last month; the fifth (the Continental sedan) is new since last June.

What does this mean for Ford's profits in China?

Ford's joint ventures with Chinese automakers generated $274 million in equity income in the first quarter, down from $443 million a year ago. Ford attributed the drop in part to pricing pressure, which was obviously a factor through the second quarter as well.

That will hurt, and it's likely that Ford's China equity income in the second quarter will fall short of the $296 million it generated in the second quarter of 2016. But those pressures will be offset somewhat by the strong results for Lincoln: While Lincoln's total sales numbers are still low, those are high-profit sales.

Long story short: The June sales gain was good to see, but it's likely that Ford still has work to do in China. We'll know more when Ford reports its second-quarter earnings result on July 26.

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John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool has a disclosure policy.