Even as automotive sales in China cool, Ford sees big opportunity. And it’s not in the megacities, but in the country’s smaller locales.
“It’s clear we’ve seen a market slowdown,” CEO Mark Fields said during an earnings call Tuesday. Ford (F) saw commercial vehicle sales fall further than passenger vehicles, an indication of a slowing market. While it’s putting pressure on prices, Fields says it’s important to put China and its current market conditions into perspective.
“It’s the biggest market in the world right now,” Fields says. “By our forecasts it’s going to grow to about 30 million vehicles in the next 5 to 10 years. We’re still very bullish on China.”
The U.S. automaker is seeing larger percentage growths in so-called tier 3 to 6 cities, burgeoning, smaller metro areas that are located closer to rural populations. Beijing, Shanghai, Guangzhou, and Shenzhen, known as the big four, are considered tier 1 cities.
Tier 3 to tier 6 cities don’t have the same restrictions as the largest metropolitan areas such as Beijing. In certain Chinese cities, including Beijing, Guangzhou, Hangzhou, Shanghai, Shenzhen, and Tianjin, regulations have been put in place to limit the number of cars an individual can own in an effort to reduce pollution. Prospective owners in the country can only acquire a license plate through a monthly lottery system.
This year, 85% of Ford’s dealer appointments are going to be in tier 3 through 6 cities, Fields said in an earnings call Tuesday. In the second quarter, wholesales in those tier 3 through 6 cities were more than double percentage increases than in tier 1 and 2 cities, Fields says.
Overall, Ford had its best quarter since 2000. Net income skyrocketed 44% in the second quarter from the same period a year earlier. Much of the company’s $1.9 billion in net profit was driven by high sales volume in North America.
Sales in the rest of the world were mixed. Taking all of Ford’s operations outside of North America collectively, they broke even in the second quarter and improved from the previous period.
Ford lost $14 million in Europe and $46 million in the Middle East and Africa. Ford also saw a $185 million loss in South America—an improvement thanks to higher net pricing. In a call with analysts Tuesday, CFO Bob Shanks described South America, particularly a Brazil, a tough environment, although it gained market share there.
The Asia-Pacific region had a record profit of $192 million and an operating margin of 8%, despite lower industry sales in China. Ford did lower its 2015 sales expectations for China to 23 to 24 million vehicles, down from a previous projection of 24.5 million to 26.5 million cars and trucks. The company’s focus on smaller cities with fewer restrictions may boost numbers even further in coming quarters.