Ford Motor Co. (F, Financial) posted disappointing sales in China. The company’s sales decreased 21% in March as it sold 90,457 vehicles in the mainland. Ford’s overall sales fell 19% to 255,261 units in the January through March period. The sales decline was primarily due to a cut in Chinese tax incentives on the company’s smaller vehicles.
Things are not bad as they seem to be, however. Despite facing declining sales in March as well as in the first quarter, sales of the Everest, Edge and Taurus surged during the first quarter, while sales of the company’s Lincoln luxury brand were twice as large as last year, up 114% to 12,000 units to be exact.
Slump in China
As per Ford CEO Mark Field, the sales decline was anticipated as customers took advantage of the purchase tax incentives in the fourth quarter of last year. The purchase tax on new vehicles stood at 10% initially. About a year and a half ago, the purchase tax was lowered to 5% to stimulate the sales of new vehicles (applicable on vehicles with a smaller than 1.6 liter engine). The automaker’s sales, however, were adversely impacted when the Chinese government announced the purchase tax rate would be increased to 7.5% from January 2017 onward. Around 70% of Ford’s vehicles in China fall in the category of 1.6 liter engines or below. Evidently, the company’s volume was adversely impacted due to the weak retail industry.
"We have always planned for the fact that (in) the first quarter there would be payback from the pull forward of sales into the fourth quarter (before the incentive was reduced)," Field said. Nevertheless, he remains optimistic that sales will increase in the coming period.
The company’s light vehicles sales notched up 1.7% in March. As far as the first quarter is concerned, sales improved 4.6%. Comparing Ford’s performance with that of its crosstown rival General Motors (GM, Financial), both were poles apart. General Motors, in collaboration with its joint ventures, sold 345,448 units in March, representing a stunning 16% year-over-year sales growth. In fact, the Detroit automaker’s sales saw the highest spike in months. Sales volumes for the company were lead by the strong demand for its SUV’s, MPVs and luxury vehicles. Buick, Cadillac and Baojun sales hit record numbers in March.
A look at a few positives
While sales of small cars saw a dip, Ford said vehicles with 1.6 liter engines or larger, which were not affected by purchase tax incentives, witnessed impressive growth. Sales of these vehicles surged 21% in the first quarter compared with the first quarter of 2016. The sales volume was powered by Mustang, Edge, Explorer, Everest and Lincoln luxury vehicles. Everest continues to impress as sales spiked 53% in March and 15% in the January through March period.
Last word
Ford’s vulnerability to purchase tax changes remains high due to the automaker’s sales portfolio in China. There is a positive takeaway from this, however. While the Chinese government plans to increase the purchase tax rate up to 10% in 2018, it could boost demand for small cars in the latter half of the year while the tax rate is still 7.5%.
In addition, the company is expanding its portfolio. Ford is working on electric vehicles as a part of its FordPass smart mobility program. The automaker is also intending to introduce the Ranger in China. These steps suggest Ford’s future is promising in the Chinese market, though the automaker may see rough roads in the first half of 2017.
Disclosure: I do not hold any position in the stocks mentioned in this article.
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