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What To Do When You Fail in China (Pt 2): Ford vs. Fiat

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In Part 1 (article here), I wrote about how both Carlsberg and Danone encountered setbacks in China. And then how Carlsberg, in particular, came back and succeeded.

In this article, I have two more examples of “what to do when things go wrong in China”. This time in automotive. I think the story of Ford in China is pretty inspiring. But first Fiat, which is a fairly short story.

Nanjing Fiat: Struggle to launch in the PRC

Italian automaker Fiat entered China in 1996 through a 50/50 joint venture with Nanjing Auto. As foreign auto companies can only operate with a local partner, there was a lot of jockeying for dance partners in the 1980s and 90s. GM partnered with SAIC (really the Shanghai government). Volkswagen partnered with both SAIC and FAW. Fiat partnered with Nanjing Auto.

Nanjing Auto is reported to be the oldest of the Chinese automobile manufacturers (although FAW was the first to actually make cars). Nanjing Auto was originally an auto workshop. But in the late 1940’s, the army began working with it as they passed through Nanjing and began using it for repairs. The company was later transferred to a ministry. And it eventually began making trucks in 1958.

Nanjing Auto’s joint venture with Fiat was a fairly standard deal based on combining foreign capital and technology with local operating and government expertise (important in cars in China).

Over the next six years, the JV produced only four models (the Perla, the Siena, the Palio compact and the Palio Weekend station wagon). This is a very low number in this fast-moving market. Sales averaged 25,000-35,000 annually from 2002 to 2006. In comparison, SAIC-GM sold 413,000 cars in 2006 alone.

The joint venture basically never really got launched. This was mostly the result of having the wrong partner. Nanjing Auto was primarily a truck-maker and the Nanjing city government could only offer limited support. In contrast, Shanghai supplied GM and Volkswagen with extensive support, including building an entire auto supply chain and making large government car and taxi fleet purchases.

The JV ended in 2007 and Fiat exited. Nanjing Auto later became part of SAIC.

Changan Ford: Late to the China market

Ford entered China through a similar joint venture with Changan Auto in 2001. They were pretty late coming to China and then things happened a bit slowly. They began by assembling Ford Fiestas from kits.

Mazda also entered the picture. In 2005, they bought 15% of the Changan Ford joint venture, which was renamed the Changan Ford Mazda Automobile Co. And production became focused in Chongqing and Nanjing. There were also lots of announcements about big investments and capacity building.

But for all this building and deal structuring, the car sales didn’t really happen. By 2006, the JV was selling about 126,000 cars per year. More than Fiat, but only a third of GM and Volkswagen.

Post Break-Up, Changan Ford Comes Roaring Back

However,in recent years, things have really started to change for Ford. They have split from Mazda and their recent performance is starting to turn heads.

In December 2012, the Chinese government approved the split up of the three-way joint venture between Ford, Mazda and Changan Automobile. The now renamed Changan Ford joint venture went on to sell an impressive 678,000 cars in China in 2013. And that was a 49% increase year-over-year. And it was up from only around 300,000 for the JV as recently as 2010.

By 2014, according to the China Association of Automobile Manufacturers, the Changan Ford Focus was number one in China with 391,781 units sold. And this was the third time in a row that the Focus has claimed the top sales position.

The company is still behind leaders GM and Volkswagen overall but they are coming up fast. For several years, Ford grew at 3x the industry average. And in 2014, they were 8th in China for car sales. As we are going to print, Ford just broke 1M in sales for 2016 in China (joint venture plus Ford sales combined).

Fiat Is Coming Back to China

In 2010, Fiat found a new China partner, Guangzhou Automobile Group Co. (GAC). Sales began in September 2012. Also, Fiat became Fiat Chrysler along the way. In 2013, they reportedly sold approximately 130,000 cars in China.

I think there are some important lessons here.

Lesson 1: You don’t necessarily need to get to China early to win.

Ford only really started producing cars in China in significant numbers in 2005 (61,000 sold in 2005). This was way behind General Motors, which established its joint venture with SAIC in 1997. And it was decades after Volkswagen launched its China joint venture in 1984.

Being early is an advantage for sure. But in some businesses, it is never too late go after the China market.

Lesson #2: You don’t need to start off in first tier cities.

Ford did not partner with a major automotive group in a coastal first tier city. It did not go to Beijing, Shanghai or Shenzhen / Guangzhou. It went to Chongqing, far inland.

While I have not seen Ford’s sales breakdown by region, it would not be surprising to see the company doing particularly well in the inland markets. Like Carlsberg, going deeper inland and perhaps avoiding the more entrenched competition in the coastal cities, was a good strategy.

The other factor here is that an inland headquarters has the advantage of lower labor costs. Manufacturers are increasingly moving inland to avoid rising labor costs on the coast.

Lesson 3: Market share can shift fairly quickly in China

General Motors’ auto sales increased to about 3.9 million in China in 2016. That is up from 3.6 million in 2015. Volkswagen is in the same sales range. There is definitely some market stability at the front of the pack.

However, market share in the middle shifts quickly. In the past years, Ford has surpassed Toyota and its two joint-venture partners which sold 917,500 cars (a 9% increase). Ford also passed Honda’s China volume at 756,000 cars (a 26% increase). So market share can move quickly in the middle.

Lesson 4: It’s mostly about getting to local operating scale

Ford has been investing in China in a big way. With $4.9 billion in investment set for China, Ford and its joint venture partners are building four assembly plants and three powertrain plants. It has also announced plans to double its network of 400 dealers and is launching 15 vehicles in the next several years.

The lesson here is that local operational scale is the key capability to watch over time. Long-term that is how you win in China. And all indications are that Ford is continuing to aggressively build scale on the ground in China.

Part 1 in here.

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Thanks for reading. My writing (and speaking) are on how rising Chinese consumers are changing the world. (#ConsumerChina). This also includes work on:

  • China 2025″ – what a region transformed by Chinese consumers, companies and capital is going to look like. (#China2025)

Photo by Thomas Hawk, Creative Commons license with link here.

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