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Analysis: China car market may require "Two Fords"

The logo of Ford Motor Co is seen at the company's assembly plant after an emergency meeting with the plant management in Genk October 24, 2
The logo of Ford Motor Co is seen at the company's assembly plant after an emergency meeting with the plant management in Genk October 24, 2

By Deepa Seetharaman

DETROIT (Reuters) - Six years ago, the "One Ford" mantra saved Ford Motor Co from collapse. Now, Chief Executive Alan Mulally's unified global product strategy is facing a formidable test: winning over first-time Chinese buyers such as Zhang Haifeng.

The 42-year-old teacher has seen his pay jump 27-fold over the last two decades, as China expanded its compulsory education system. After studying his options for a year, Zhang in April paid 70,000 yuan ($11,200) for his first car - General Motors Co's Baojun 630 sedan.

"In the end, I thought Baojun was the most cost-effective, and best suited for ordinary people like me," he said.

China, the world's largest auto market, is the one country where GM trounces Ford. Competition there will intensify in the next three to five years, and analysts say Ford still is bogged down by expensive vehicles and an incoherent brand identity.

GM and Volkswagen AG have dominated the Chinese market in part by developing models tailored to local tastes, using older platforms, or creating low-cost brands with local partners, such as GM's Baojun.

Ford has resisted such moves, choosing instead to build global cars designed mainly in Europe. The rationale is that a global platform allows Ford to quickly build cars that can be sold around the world with just a few tweaks. The cost savings can be huge and can be reinvested in improving car technology.

The "One Ford" strategy, however, has had mixed success in China. Neither the Fiesta subcompact nor the Focus compact have broken into the top 10 vehicles in their respective segments this year, LMC Automotive data shows, although the Focus nameplate has made inroads in the market in recent months.

Wooing Chinese consumers with attractive, affordable cars is crucial if Ford is to meet its target of doubling its 3 percent China market share by mid-decade. The company now is developing what it describes as a "Value B" car, which is Ford's first attempt at a sub-$10,000 compact for the Chinese market.

"It's so important to have more products at different price points in order to grow the volume and grow the share," Joe Hinrichs, who has led Ford's Asian and African operations for three years, said in an interview earlier in November.

Over the next three years, Ford will also expand its product range to 15 vehicles from the current five, as well as launch its upscale Lincoln brand in China. Next year, Ford will add several sport-utility vehicles, including the global Kuga and Ecosport crossovers, which analysts say will help Ford gain further traction in the fastest growing segment in China.

"We shouldn't have to use historical legacy platforms," Hinrichs said. "The Figo in India we have done on a legacy platform out of Germany, and it's been a great vehicle for us, but you won't see us do that again because we have now our global strategy.".

Since 2006, Ford has poured around $5 billion into China, aiming to boost production capacity to 1.2 million vehicles and double the number of dealers by 2015.

Still, some analysts express concern that Ford may not succeed in the region unless Mulally is willing to deviate from his "One Ford" strategy. The new low-cost compact for China also will be based on a global platform, executives said.

"By Ford's own standards, these investments are aggressive," said Ashvin Chotai, managing director of Intelligence Automotive Asia.

"But it's not going to make a big dent in China," he added. "There needs to be flexibility around their global strategy to make it effective in China."

FORD'S ORIGINAL VISION

Mulally's "One Ford" plan helped avert bankruptcy in 2009, and the company is drawing from the same playbook to restructure its European operations, which are expected to lose at least $3 billion over the next two years.

Under "One Ford," overall product development became two-thirds more efficient from 2006 to 2012, Ford has said.

Mulally's insistence on developing global cars harkens back to Henry Ford's Model T, which was exported around the world in 1913. The 1915 model sold for just over $700 in China, at a time when rivals were charging around $2,000.

But Ford's fortunes in the country waned after the automaker bypassed an offer from modern China's founder, Sun Yat-sen, to help the country build an indigenous auto industry in 1924.

Nearly a century later, Ford's brand identity is one obstacle in China, said Shaun Rein, author of "The End of Cheap China" and a corporate consultant in the country. The high cost of Ford's lineup is another hurdle.

The Fiesta, Ford's cheapest model, starts at $12,300. About one-fifth of China vehicle sales this year were priced less than $12,000, according to J.D. Power and Associates.

Earlier this year it launched the global Focus compact car in China and positioned its older, or "classic", Focus toward incoming buyers. The combined sales of both models reached 33,614 in October, making it the top-selling nameplate in passenger cars in China, according to IHS Automotive.

Next year, Ford will launch the Fiesta-based Ecosport compact, which will be the lowest-priced SUV in its portfolio.

Ford also plans to introduce "several low-cost models," including the "Value B" compact, by 2015, according to Dave Schoch, who will become president of Ford's Asia Pacific operations on December 1.

"We recognize that we've played at this higher end and we have a huge opportunity to expand our segment coverage in the market," he said in an August interview.

Next year, more than 65 million people in China will have annual incomes of at least 60,000 yuan ($9,600), the point at which they can afford a simple, no-frills car, according to U.S. consultant Alix Partners.

Ford executives said the new "Value B" car will rival the 57,000 yuan ($9,100) Chevrolet Sail, a subcompact designed, developed and manufactured in China by GM and its partners. The Sail is the second-best selling vehicle in China.

To make this possible, Ford is broadening its local supply base to cut costs and boost margins for low-cost models, executives said. Schoch said he worries if Ford is moving quickly enough in China.

"Are we moving the organization fast enough to take advantage of this? Let's face it. We're pretty slow sometimes," he said.

($1 = 6.2326 Chinese yuan)

(Reporting by Deepa Seetharaman; Additional reporting by Norihiko Shirouzu and Hui Li in Beijing, and Ben Klayman in Detroit; Editing by Tiffany Wu, Steve Orlofsky and Sofina Mirza-Reid)

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