Big Loss and Massive Layoffs: Ford China’s Retreat | TiPost Focus

Ford China has reportedly started layoffs of more than 1,300 people, and the compensation for the layoffs will be N+3, which means N years of work is translated into N plus 3 months of pay on their departure.

Ford China responde to the rumors by saying China is an important market to the U.S. automaker. “For Ford, China is a crucial market, and our commitment to promoting sustainable development in China remains unchanged. We are building a more streamlined and flexible organizational structure, investing resources into our core business areas, and striving to achieve our business goals in China,” said the statement.

Although the official did not respond directly, the words “streamlined,” “flexible,” and “focus on core business” indicate the truthfulness of the layoffs.

According to foreign media reports, Ford CEO Jim Farley said during the first-quarter earnings conference call on May 2nd that he and Ford’s leadership team had just returned from China to the United States. They will ultimately finalize these plans-reducing spending in China and only focusing on business areas that generate the highest returns.

Ford CEO Jim Farley

In the conference call, Jim Farley used the joint venture between Ford and Jiangling Motors as an example, revealing that Ford plans to use China’s business as an “export center” to export low-priced electric vehicles and commercial vehicles to markets such as South America, Australia, and Mexico.

It can be seen that not only the layoffs themselves, but the entire strategic focus of Ford China will be lowered. In other words, Ford’s business in the Chinese market has encountered unprecedented setbacks.

Difficult Transition Forces Ford to Start “Belt-Tightening”

Actually, Ford has always been very concerned about its financial indicators. This is also the reason why Ford, as a North American traditional brand, has been able to survive for a hundred years without bankruptcy. The performance of Ford’s financial situation can only be described as “steady”.

In order to maintain revenue, Ford can take drastic measures such as product structure adjustments, business restructuring, and internal layoffs. Even world-class brands such as Volvo, Jaguar, and Land Rover were decisively divested by Ford due to their impact on financial health indicators.

As early as the fourth quarter earnings conference last year, in the face of the business data of a net loss of $2 billion for the whole year, Ford’s official measure was to further control costs.

According to foreign media reports, Ford carried out two rounds of large-scale layoffs last year and earlier this year, with a total number of thousands of people. At the same time, layoffs are not limited to the US domestic market. On February 14th, local time, Ford announced that it will lay off 3,800 people in the European region in the next three years, mainly engineers and some management personnel.

John Lawler, CFO of Ford, also frankly stated in a previous conference call that Ford is actively controlling costs and hopes to cut costs by $3 billion, of which additional layoffs are one part.

And now this “decision-making blade” has finally fallen on Ford China.

Thanks to the above measures, Ford’s performance in the first quarter of 2023 financial report was good, with a revenue of $41.5 billion, a year-on-year increase of 20%, and an adjusted pre-tax profit of $3.4 billion, a year-on-year increase of 45%, with a profit margin of 8.1%.

However, Ford was once one of the most open and transparent multinational car companies in terms of its actual sales volume. But starting from this year, it has stopped reporting its sales in China, and Ford’s headquarters no longer publishes its performance according to geographical regions, but according to three key business units.

Moreover, in the past two years, Ford’s business in China has been in a state of loss. Ford China lost $327 million in 2021 and the loss expanded to $572 million in 2022.

Of course, the most direct reason for the decline in revenue performance is the decline in sales of all products. Last year, Ford’s total sales in the Chinese market were only 496,000 vehicles, less than half of the peak period in 2016.

Among them, Changan Ford’s annual sales in China were 251,000 vehicles, a year-on-year decrease of 17.61%; Jiangling Ford’s annual sales were 48,000 vehicles, a year-on-year decrease of 25.68%; even the Lincoln brand failed to achieve its goal of 100,000 vehicles and ended up with an annual sales volume of 79,300 vehicles, a year-on-year decrease of 13.4%.

According to public data, in 2022, Changan Ford’s net assets decreased by about RMB 4.4 billion, a year-on-year decrease of about 74%; operating income reached RMB 51.067 billion, a year-on-year decrease of about 17%; net profit loss was RMB 2.449 billion, which changed from profit to loss compared with the same period last year. In the first quarter of 2023, Changan Ford’s sales were 44,800 vehicles, a year-on-year decrease of 25.68%.

Not only that, Changan Ford’s current production capacity is only 670,000 vehicles, but the capacity utilization rate was only 47% in 2022, and more than half of it was idle. In the first quarter of 2023, the capacity utilization rate dropped to about 33%.

Jim Farley, who had just visited China, realized the seriousness of the situation. His answer was a new brand strategy of “Ford will carry out lower investment, more streamlined, more focused, and higher return business in China”. The most intuitive manifestation is that at this year’s Shanghai Auto Show, Jim Farley went straight to Jiangling and bypassed Changan, China’s largest partner.

This sudden change not only means a significant reduction in Ford’s investment in China but also likely means that the “Ford China 2.0” plan will be abandoned.

Compared with this, the layoff of over a thousand people by Ford China is not a big deal, as Ford has already laid off more than 10,000 employees globally since last year.

Lackluster Products Are to Blame for Ford’s Retreat From China

But the root of Ford’s dilemma in China can be traced back to a “man-made disaster”, the well-known “three-cylinder engine” incident.

At that time, Jim Hackett, the then CEO of Ford, without any relevant experience in the automotive industry, adopted measures such as the three-cylinder engine and marginal, unprofitable sedan business, leading to the loss of its traditional business, and even on the day of his resignation, Ford’s stock price rose by 3%.

In 2018, Ford hired Chen Anning from Chery to serve as the Global Vice President, President and CEO of Ford China. Additionally, Ford China was separated from the Asia Pacific region to become an independent business unit.

Under Chen Anning’s leadership, Ford gradually emerged from the sales crisis it experienced in 2018 due to the “three-cylinder engine” incident. The company also proposed the “Ford China 2.0 Strategy”, which allowed Ford to launch a large-scale product innovation and localization transformation in the following two years.

However, due to the shaking transformation of Ford’s headquarters, Chen Anning’s authority and resources were insufficient to launch a “dual-line battle” for both fuel and new energy, resulting in a lack of competitiveness in Ford’s product lineup in recent years.

The Mach-E, which was almost copied and pasted from overseas, did not make any waves in the highly competitive domestic new energy vehicle market.

Although the independence of Ford’s electric vehicle division and the launch of its first model, the Mustang Mach-E, seemed to be a sign of acceleration in its electrification strategy in China, the bleak reality in the Chinese market poured cold water on Ford China. By 2022, the cumulative sales of the Mach-E in China were only 4,860 vehicles, which did not even reach the monthly sales volume of mainstream new energy vehicle brands, let alone challenge “fellow countryman” Tesla.

At the Shanghai Auto Show, new energy vehicles and related technologies inevitably took center stage. Whether it was joint venture brands or independent brands, new energy vehicle models occupied the prominent positions on the exhibition stands. Traditional powerhouses such as BMW and Audi even showcased only their full range of new energy products, aiming to concentrate on demonstrating their latest achievements and developments in the field of new energy.

In comparison, Ford only presented one hybrid model, the EcoSport L, as its main new energy product, making it appear lonely and helpless.

However, Ford’s other new products have nothing to do with its slogan of “catering to the Chinese market.” The mid-size pickup truck Ford Ranger and the tough off-road SUV Ford Bronco, which is about to be introduced to China, are both niche products from top to bottom. Even Lincoln’s new generation of Navigator, Aviator, and other models are out of place compared to other luxury brands at the auto show.

Today, in the Chinese market, which accounts for more than 60% of global sales of new energy vehicles, Ford only has one pure electric vehicle model, the Mach-E. As for the Lingling Ford Territory EV, a mediocre oil-to-electric product, it was quickly marginalized after its launch, with monthly sales mostly in single digits, almost negligible.

What’s even more embarrassing is that although Ford’s pure electric products have poor sales, it doesn’t affect its “loss-making.” According to previous financial report information, Ford’s electric vehicle and digital business unit, “Ford Model E,” lost $700 million in the first quarter, and globally sold only 12,000 electric vehicles, with an average loss of $58,000 per vehicle.

Although it is not easy for new energy companies to make a profit, for companies like Ford, every car sold is equivalent to giving away two entry-level hybrid versions of the Ruifeng L, and the gross profit margin is exploding.

In the field of electrification and intelligence, Mach-E was “blasted” by a group of new and old rivals; in the field of hybridization, a wave of hybrid replacements for fuel has already been stirred up in China in recent years. How many domestic consumers will buy a hybrid product from an American brand? Although it has been replaced with the original four-cylinder engine in traditional fuel vehicles, its reputation among Chinese people seems to have disappeared with the three-cylinder engine.

In the long run, perhaps one day, Changan Ford will follow in the footsteps of other brands such as Changan Suzuki, Dongfeng Renault, and GAC Fiat, and withdraw from the Chinese market.

Business Contraction: the Dilemma of Second-tier JV Brands

Unlike Stellantis Group’s attitude towards GAC Fiat’s “self-reliance” in the field of electrification, Ford has actually made many attempts in the field of electrification.

In 2021, Ford announced that it will increase its funding for electrification research and development from $11 billion to $22 billion, and subsequently launched three electric vehicle products: commercial vehicle E-Transit, electric pickup truck F-150 Lightning, and Mustang Mach-E.

Meanwhile, in order to facilitate the transition to electrification, Ford will split its overall business into three independent operating segments in March 2022: Ford Blue, Ford Model e, and Ford Pro. Among them, the Ford Model e business will accelerate innovation, launch more industry-leading electric vehicle products, and form economies of scale, responsible for developing software, intelligent connectivity technology, and services for various business units of Ford.

In July 2022, Ford announced a new electric vehicle plan: it plans to invest $50 billion before 2026, gradually establish electric vehicle production bases and battery module research and development centers around the world, and plans to increase electric vehicle production capacity to 600,000 vehicles in 2023 and 2 million vehicles annually by 2026.

To make up for the technological shortcomings, Ford is also actively collaborating with various parties, but unfortunately there are still no significant results at this stage. For example, Ford is working with Volkswagen to produce Ford electric cars for the European market using their MEB electric platform. Ford also jointly invested billions of dollars with Volkswagen to the star company in the autonomous driving field, Argo AI, but the company went bankrupt last year.

In the crucial battery field, Ford announced in September 2021 that it will partner with South Korean battery manufacturer SK Innovation to jointly invest $11.4 billion to build two “giant factories” in Tennessee and Kentucky to produce electric trucks and batteries. Ford’s share in this investment is $7 billion, the largest manufacturing investment in Ford’s history.

Recently, Ford officially announced a $3.5 billion investment and partnership with CATL (Contemporary Amperex Technology Co. Limited) to build an electric vehicle battery factory in Michigan, USA. According to the agreement, Ford will provide funding and effort, while CATL will provide technology and services, and the two parties will cooperate to produce lithium iron phosphate batteries. For the car giant, Ford has introduced CATL’s battery technology in an almost “humble” way, which is also based on cost control on the product side.

Whether it’s investing in funds, restructuring brand business, or introducing external technology, it’s clear to see Ford’s determination to transform. It can only be said that Ford’s current predicament is partly due to its reliance on the advantages of fuel vehicles, missing the best time for electrification transformation, and also missing the new trend of intelligentization; on the other hand, the “three-cylinder engine” and “broken axle gate” incidents have caused the traditional business line’s product strength and reputation to collapse, exacerbating Ford’s plight in China.

In recent years, the Chinese automobile industry has undergone tremendous changes, with rapid development of electrification and intelligentization, making car companies that stick to the old era face the risk of falling behind at any time, and many joint venture brands are facing unprecedented crises.

Represented by Volkswagen and BBA, European car companies, although they did not catch up with the trend of electrification, can still strive hard based on their strong foundation in China, and have more room for trial and error. However, for second-tier joint venture brands such as Korean and American brands, the change of times has already turned into a trend.

Therefore, Ford’s plight is a microcosm of many joint venture brands in China who are struggling to advance or retreat.

Groups such as Stellantis and Hyundai have shrunk their businesses in China, but relying on their stable sales in the global market, they have captured more revenue and profits from other carmakers.

Currently, second-tier joint venture brands either follow Stellantis to enter a light asset operation mode in China, or, like Ford and Hyundai, carry out a certain degree of business contraction and focus on high-return business models, waiting for the right opportunity.

In the domestic US market, all car companies need to do their best to compete with Tesla in terms of intelligentization and electrification technology. In other words, if Ford wants to compete with global car companies in the “more fierce” Chinese market, the challenges it faces can be imagined.

Ford CEO Jim Farley has repeatedly revealed Ford’s ambition, “Ford wants to surpass Tesla and become the world’s largest electric vehicle manufacturer.”

At least in the short term, this bold statement is unlikely to truly resonate with Chinese consumers.

(This article was first published on TiPost App, author|Chang Xiao, editor|Zhang Min)

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