What To Do When You Fail in China: Ford vs. Fiat – Part 2 by Jeffrey Towson, LinkedIn

I recently wrote about how both Carlsberg and Danone initially failed in China (article here). And then how Carlsberg, in particular, came back and succeeded.

This week I have two more examples of “what to do when you fail in China”. This time in auto. I think the story of Ford is pretty inspiring. But first Fiat, which is mostly a cautionary tale.

Nanjing Fiat: Dead-on-Arrival in the Middle Kingdom

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 partners in 1995-2000. GM and Volkswagen partnered with SAIC (really the Shanghai government). Fiat partnered with Nanjing.

Nanjing Auto is actually 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 1947, the army took control of it as they passed through and began using it for repairs. It was later transferred to a ministry. And it eventually began making trucks in 1958.

The JV with Fiat was a standard deal based on foreign capital and technology plus local operating and political expertise (important in cars in China). But it turned out to be basically dead-on-arrival.

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 shockingly low number in this fast-moving market. And sales averaged only 25,000-35,000 annually from 2002 to 2006. In comparison, SAIC-GM sold 413,000 cars in 2006 alone.

For Fiat, this was mostly a result of the wrong partner and bad management. Nanjing Auto was primarily a truck-maker and the Nanjing city government could offer little actual support. In contrast, Shanghai supplied GM and Volkswagen with extensive support, including building an entire auto supply chain and large government car purchases. The Nanjing JV also had management problems and multiple CEOs came and went.

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

Changan Ford: Missing-In-Action in China

Ford entered China through a similar joint venture with Changan Auto in 2001. Overall, they late were coming to China and then were slow on the ground. They began by assembling Ford Fiestas from kits (not exactly production).

Mazda also entered the picture. In 2005, they bought 15% of the JV (renamed the Changan Ford Mazda Automobile Co.). And production became centered in Chongqing and Nanjing. There were also lots of announcements about big investments and capacity building.

But for all this building and merging, the car sales didn’t really happen. By 2006, the JV was selling only about 126,000 cars per year. More than Fiat, but only a third of GM and Volkswagen. By 2010, almost a decade on and 15 years after Fiat launched, Ford was still basically missing-in-action in China.

Fiat was a classic “what to do when you fail in China” case. Ford was more of “where are they now?” situation.

Post Break-Up, Changan Ford Comes Roaring Back in China

In the last couple of 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 went on to sell an impressive 935,000 cars in China in 2013. And that was a 49% increase year-over-year. And it was up from only around 400,000 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 but they are coming up fast. For several years now, Ford has been growing at 3x the industry average. And in 2014, they were 8th in China for car sales. They are aiming to be in the top 3 in the next couple of years.

After fifteen years in China and post-break, Chang’an Ford has finally found its mojo.

In Contrast, Fiat Is Still Struggling to Find Its Way Back to China

Not too much news from Fiat post-failure. In 2010, they found a new China partner, Guangzhou Automobile Group Co. (GAC). Sales began in September 2012. Also, Fiat became Fiat Chrysler along the way.

Their China problems have continued. In 2013, they sold about 130,000 cars in China. But in late 2014, Guangzhou Auto, which has JVs with both Fiat and Honda, announced a 46% fall in net profit.

So we have two cases of initial failure in China auto. And 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 Shanghai 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 coastal first tier cities. 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 3.5 million in China in 2013. That is up from 3.16 million. Volkswagen is in the same sales range and both companies are growing around 10% annually. There is definitely some market stability at the front of the pack.

However, market share in the middle shifts quickly. In the past year, 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). Market share can move quickly in the middle.

Lesson #4: It’s mostly about getting to local 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 critical capability to watch. Long-term that is how you win. And all indications are that Ford is continuing to aggressively build scale on the ground in China.

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