Years of corporate chaos and financial trouble slowed entry
By Dee-Ann Durbin
AP Auto Writer
CHONGQING, China (AP) — Dave Schoch has one of the toughest jobs at Ford Motor Co.: catching the competition in the world’s biggest car market.
When Schoch (pronounced Shock) arrived in China 13 years ago, the government was building eight-lane freeways in major cities, but bicyclists and pedestrians still filled the streets. The Chinese were buying fewer than 2 million cars and trucks each year, a fraction of the 14.4 million sold in 2000 in the U.S.
When he returned to China last year, Schoch was stunned. The freeways were choked with cars, from inexpensive, Chinese-made Wuling minivans to Mercedes-Benz sedans. The red-hot Chinese economy had more than doubled annual wages, giving millions of people the money to buy a first vehicle or move up to a luxury brand.
“Things turned upside-down,” says Schoch, who was named head of Ford’s Asia Pacific operations in the fall. “You have to be here and experience it to believe what has happened in the last decade.”
Last year, Chinese consumers bought 19 million cars and trucks — 5 million more than consumers in the U.S. Ford’s share of those sales was just 3 percent. Years of corporate chaos and financial trouble slowed Ford’s entry into China as its rivals gained a foothold. Together, General Motors and Volkswagen control a third of China’s market.
But the race is far from over. China is still a country where just 58 out of every 1,000 people own cars. In the U.S., that number is closer to 800.
Every year, tens of millions of Chinese are reaching the income threshold they need to buy a car, Schoch says. Many analysts predict annual sales in China of 30 million by 2020, almost double the U.S.
forecast of 17 million. It’s up to Schoch to ensure Ford gets a big chunk of that phenomenal growth.
“I go home each night thinking, ‘Have I really tried to move the needle? Are we moving the organization fast enough to take advantage of this? Because I really think we have a golden opportunity here,” he says.
Ford wants to double its Chinese market share to 6 percent by 2015. To make that happen, the company is launching six new vehicles in China this year, including two small SUVs called the Kuga and the EcoSport, the Mondeo midsize sedan and the Explorer SUV, which is exported from Chicago. The Lincoln luxury brand will arrive next year.
To meet its goals, the company has undertaken its most ambitious growth since Ford went on a post-war building spree in Michigan 60 years ago.
Ford is spending $5 billion to build five plants — including three assembly plants, an engine plant and a transmission plant — that will more than double its Chinese production capacity to 1.7 million vehicles by 2015.
“They used to be laggard, cautious. But now they’re all in,” says Michael Dunne, president of the automotive consulting group Dunne and Co. in Hong Kong. “They are saying, ‘We have confidence in the China market. We have confidence in our products. We can win here.’”
Ford sold a company record 407,721 vehicles in China in the first six months of this year. But that was only a quarter of the vehicles GM sold. Volkswagen has six brands aimed at every type of buyer in the vast Chinese market, from the cheap Skoda to the ultra-luxury Bentley. Until Lincoln arrives, Ford has just one.
There are other obstacles. Ford cars are expensive. In a market where 70 percent of vehicles sold cost less than $14,500, Ford’s cheapest car is the Fiesta, which starts at $13,300. The Explorer starts around $80,000 thanks to a 25 percent import duty and other taxes.
Ford’s development costs are also steep compared with competitors’ because it still does much of the research and design for Chinese vehicles at its headquarters in Dearborn, Michigan, where costs are relatively high. Ford hopes to double its technical workforce in Nanjing to 1,500 people by 2015; GM already employs more than 2,000 people at its technical center in Shanghai.
Another complication is the unpredictable Chinese government, which could scramble expansion plans at any time. The government requires foreign automakers to partner with local companies and decides where they can build their plants.
But Ford can’t keep relying on Europe and North America, where it sells 73 percent of its vehicles. The company lost $1.75 billion in Europe last year as sales plummeted in a recessionary economy, and it expects to lose $2 billion there this year. Profits in Asia would have cushioned those losses, but Ford’s Asian operations lost $77 million because of the big investments in new plants and vehicles.
One hundred years ago, Ford was the company with a head start in China. It started selling the Model T there in 1913, and founder Henry Ford explored opening a plant in China in the 1920s. But Ford quickly cooled on the idea because of China’s poor roads and low wages. The country’s only Ford dealership, in Shanghai, closed at the outbreak of World War II, and its car industry was cut off to foreigners for several decades after that.
Ford re-entered China in 1997, around the same time as GM. But Ford focused on the commercial van market, which was limited. GM and its Chinese partners — SAIC and Wuling — grew quickly by selling Wuling minivans and Buicks to the mass market.
Ford’s attention was elsewhere. SUV sales were booming at home. The company was buying up luxury brands like Jaguar and Volvo with the profits. No one at headquarters anticipated that the Chinese market was about to take off.
“If I had gone to management in Dearborn and tried to convince them that China would be 20 million units in 2013, they would have really started to worry about me,” Schoch says with a laugh.
The company soon realized its error. It formed a partnership with Chinese automaker Changan Automotive in 2001 and began building the Fiesta in China two years later. But with its new luxury brands, high
labor costs and bloated bureaucracy, it had a limited amount to invest.
In 2006, Ford named a new CEO, Alan Mulally, to help stem its billion-dollar losses and end executive infighting. A few months after Mulally’s arrival, Ford borrowed $23.6 billion and used it to close plants, cut its workforce, improve key products and meld global operations. Mulally sold or discontinued every brand but Ford and Lincoln. By 2009, Ford was profitable again, and turned its sights on China.
Schoch says Mulally asked him in 2011 if he would return to China. Schoch’s only question was whether Ford was committed to the country. Mulally didn’t hesitate.
“Yes, from the board of directors on down,” he said, according to Schoch. It was a defining moment for Schoch.
Last month, Mulally visited China for the third time in less than a year. He was there to open a $500 million engine plant in Chongqing (chong-CHING’), an industrial city of 30 million in southwestern China, where suburban industrial parks are rapidly filling with carmakers and auto suppliers. Chongqing is now Ford’s largest manufacturing base outside Michigan.
Mulally was also in Chongqing last August, to break ground on Ford’s third assembly plant there, a $600 million facility that will be completed in 2014.
During that trip, hundreds of uniformed workers — many of whom are former soldiers — stood in precise rows as Mulally warmly praised local leaders for their “pro-business” policies. Chongqing’s government was the first in China to offer subsidies to residents who buy locally made vehicles, which has boosted Ford’s sales in the region. At the end of the ceremony, confetti rained down and rainbow-colored smoke shot into the air, adding another layer of haze to the city’s thick, yellowish sky.
A few days later, the executives touched down amid the rice fields and large, neo-Victorian houses of the wealthy southern city of Hangzhou. Ford is building one of its assembly plants there, in an immaculate new office park on the outskirts of the city. The $760 million plant is expected to produce 250,000 vehicles per year when it’s completed in 2015.
In Hangzhou, Mulally and the others were greeted by Chinese women in traditional silk gowns — blue and white, like Ford’s logo — and quickly ducked into an air-conditioned tent to meet with local politicians. Later, the executives scooped up dirt with red-ribboned shovels. When the ceremony ended, rainbow smoke once again shot into the sky, accompanied by booming golden cannons.
On the wall of his office in Dearborn, Mulally has a copy of an ad that Henry Ford published in the Saturday Evening Post in 1925. The ad was titled “Opening the Highways to All Mankind,” and reflected Ford’s wish to make vehicles available to everyone. Schoch says he’s living Henry’s dream.
Schoch, 61, joined Ford in 1977 as a financial analyst. His career includes stints as chief financial officer for Europe and operations manager for Canada, Mexico and South America. Despite his long international career, the thoughtful, down-to-earth Schoch doesn’t seem jaded. He spends many weekends dropping in on dealerships near the home he shares with his wife in Shanghai. He’s giddy when he
sees first-time Chinese buyers, surrounded by family members, getting their first set of keys.
“Take yourself back to when you were a teenager and you got your first vehicle, and what it felt like, and you can see what it means for the Chinese customer,” Schoch says.
Ford hopes its manufacturing base in Chongqing, far from China’s crowded eastern coast, will help it attract rural buyers in the still largely untapped markets in western China. For those buyers, Ford is developing a low-cost car to compete with the $9,500 Chevrolet Sail.
Ford will use Lincoln to make a play for China’s booming luxury market, which is dominated by German brands like Audi and BMW. Lincoln used to be the best-selling luxury brand in the U.S. but fell behind when Ford started focusing on other luxury brands. Ford’s effort to revive the brand began this year with the launch of the Lincoln MKZ sedan in the U.S.
“Chinese consumers buy on image and prestige and the message that they project to their family and co-workers and friends,” Dunne said. “With a luxury brand like Lincoln, it gives them a chance to say, ‘Hey, see my American luxury car that I drive? Do you have one of these?’”
Chinese buyers also appreciate a brand’s history. That’s why Ford introduced Chinese reporters to the MKZ at a historic temple in Beijing last summer, surrounded by vintage Lincoln posters. GM’s Buick brand — which used to ferry Chinese royalty — is a huge seller with cachet in China even though it struggles in the U.S. GM sold 401,327 Buicks in China in the first quarter of this year, four times more than it sold in the U.S.
Ford, GM and others also have been helped by a backlash against Japanese automakers in China because of disputes between Japan and China over ownership of islands in the East China Sea. Toyota’s sales fell 6 percent in the first six months of this year.
Su Xiaoling, a sales manager in a Beijing real estate company, said he expects Ford’s share of the Chinese market to climb because it offers newer styles and updates them often.
“I think Ford cars are safe. The material they use is good and thick, not like the Japanese cars,” he said. “But the price is pretty expensive.”
Schoch’s goal, he says, is to build Ford’s reputation and convince buyers like Su that Ford’s offerings are worth the price.
“Share and profits are important, but they’re a fallout to how our customers perceive Ford,” he says. “This is not a sprint in my mind. This is part of a very, very long journey.”
