Ford is to source the next-generation US-market Focus from China, following cancellation of its plans for a new plant in Mexico. Additionally, the automaker has invested USD900 million in its Kentucky plant to support production of the all-new Ford Expedition and Lincoln Navigator.
IHS Markit perspective
- Significance: Ford has announced that the next-generation Focus will arrive in the US in mid-2019 and will be imported from China. In addition, the plant in Louiseville, Kentucky, US, building the new Ford Expedition and Lincoln Navigator has received USD900 million in investment to support the new SUVs.
- Implications: Ford had planned a new plant in Mexico to support production of the Focus and other vehicles on the new platform, although it cancelled that plan over lack of necessary capacity. The next plan was to add production of the Focus to Ford's Hermosillo, Mexico, plant. Now, the third plan, which it is not expected to change, is for the next-generation Focus to be imported from China.
- Outlook: Ford says the move to import the new Focus into the US is being made to keep the company operationally fit and in an effort to conserve capital expenditure. The next-generation Focus, as an import, will be at risk of being taxed under likely changes to be made by US president Trump's administration. The move also reflects reaction to slowing sales in the car market. The US compact car segment, however, may weather the attack from utility vehicles better than many expect. Ford's investment in the Kentucky plant seems to be an effort to reinforce that the automaker is heavily invested in US production.
Ford has announced another change in its plans for production of the next-generation Focus, as well as a USD900-million investment in the plant in Louiseville, Kentucky, United States, that builds full-size sport utility vehicles (SUVs). Supply of the new-generation Focus in the US will largely come from China, with some variants being produced in other countries. Currently, the Ford Focus sedan and hatchback in the US are produced at Ford's Michigan Assembly Plant. The Focus RS performance edition, however, is built in Germany.
Ford's announcement confirmed that the US market will receive the next-generation Focus in mid-2019. US production of the current vehicle will end in mid-2018, as the Michigan Assembly Plant is converted to production of an all-new Ranger pick-up and Bronco utility vehicle.
Among the reasons Ford cites for the change in its plans is that the new plan reduces the number of plants that need to be tooled to produce the next Focus. Ford says the move saves an additional USD500 million, along with the USD500 million the company saved by scrapping the plan for a new plant in Mexico. Also clear is that the decision is made independently of the uncertainty over the future US tax situation and of pressure from US president Donald Trump for companies to increase production in the US. The same is true of the decision to cancel the other plan for investment in Ford's Hermosillo, Mexico, plant to add production of the Focus. According to an Automotive News report, executive vice-president and vice-president of global operations Joe Hinrichs told reporters that the move to import the Focus "allows us to free up capital" by reducing the number of plants that need to be tooled up to produce the car. Hinrichs is quoted as saying that the company believes this is the best balance of cost-to-capital trade-off, particularly given the weakness in US demand for small cars. He also indicated that the decision was made on capital cost concerns more than variable costs, as it is more expensive to ship a car to the US from China than from Mexico. Hinrichs also indicated that Ford felt the capital savings outweighed the risk of a potential US border-adjusted tax on the vehicle. The US presidential administration is looking at renegotiating the North American Free Trade Agreement (NAFTA) and implementing taxes on imported products as a way of creating more manufacturing jobs in the US. On the election campaign trail last year, President Trump singled out Ford for some criticism.
Relative to concern about consumer attitudes in the US regarding the switch to importing the Focus, Hinrichs is quoted as saying, "We've done a lot of research and consumers care a lot more about the quality and the value than they do about the sourcing location. iPhones are produced in China, for example, and people don't really talk about it."
The second part of Ford's announcement was on the USD900-million investment in the Kentucky plant building the full-size Ford Expedition and Lincoln Navigator SUVs; both of these highly profitable vehicles go on sale late in the third quarter in the US. Few details were included on this in the announcement; as these vehicles are shortly to be in full production, this investment has been largely made. Ford stated this investment would be "securing" 1,000 US jobs.
In the Ford statement, Hinrichs said of the moves, "Large SUVs are attracting a new generation around the world – and we're finding new ways to deliver the capability, versatility and technology that customers around the world really want with our all-new Ford Expedition and Lincoln Navigator. At the same time, we also have looked at how we can be more successful in the small car segment and deliver even more choices for customers in a way that makes business sense… Finding a more cost-effective way to deliver the next Focus program in North America is a better plan, allowing us to redeploy the money we save into areas of growth for the company – especially sport utilities, commercial vehicles, performance vehicles as well as mobility, autonomous vehicles and electrified vehicles."
Outlook and implications
Ford says the move to import the Focus from China has been made to keep the company operationally fit and in an effort to conserve capital expenditure. There is some risk regarding the current US presidential administration's efforts to tax imported vehicles, although the specific details about a border tax are not known at this point. However, whether from Mexico or China, the new Focus would have been imported and Ford was already committed to taking that risk. The move also reflects reaction to slowing sales in the car market, as consumers are choosing utility vehicles over cars at an accelerating pace. Meanwhile, the announcement regarding production of the SUVs in Kentucky seems to be an effort to reinforce that Ford is heavily invested in US production and not reducing its presence with the Focus move.
In 2016, Ford produced the Focus in Argentina, China, Germany, Russia, Taiwan, Thailand, and the US, although US demand was met with US production. To date, Germany is the largest production source for the Focus, although this announced change might put China ahead of Germany in terms of Focus output. IHS Markit will update the production forecast to reflect the change and incorporate our expectations for the impact on Focus and Ford production overall at the next available opportunity. IHS Markit North American production analyst Joe Langley says that, although not included in the announcement, it is expected that the Hermosillo facility, once earmarked to add production of the Focus with the Fusion, will become the source of the Fusion in the US and of the Mondeo in Europe. He said, "Total global Fusion supply, excluding China, can now easily be produced at Hermosillo and maintain good capacity utilisation."
Relative to the performance of small cars, US sales of the Ford Focus have been under particular pressure as the vehicle is ageing and is facing fresh competition from the Honda Civic and the Chevrolet Cruze, as well as from Hyundai's latest Elantra. Sales of the Focus are down by nearly 20% over the first five months of 2017, which followed a 17% decline in 2016. According to IHS Markit data, sales of C-segment cars (which includes both standard and luxury vehicles) have declined by 6.4% between January and May 2017. Sales of the Ford Focus are down 19.7% in the year to date. Each of the top five vehicles in the segment ‒ the Honda Civic, Toyota Corolla, Nissan Sentra, and Ford Focus ‒ is showing sales declines so far in 2017 compared with 2016. The Chevrolet Cruze is an anomaly, with sales up 35.7% over the first five months of 2017. The Cruze is also compared against a poor showing in the first half of 2016 as GM ramped up the all-new vehicle. South Korean manufacturers are faring better, as the Hyundai Elantra's sales are up 26% in the year to date and the Kia Forte's are up 8.7%. IHS Markit forecasts this segment's erosion will see sales fall from 2.13 million units in 2016 to 1.99 million units in 2020. This is a segment that, until now, has largely seen production in the NAFTA region. In 2000, 81% of vehicles in the segment were assembled in North America; in 2016, 79% of compact cars were built in North America. Some of that change can be explained by the increase in premium makes playing in the segment, such as the Mercedes-Benz CLA and the Audi A3.
Taking a wider look, the compact car segment has seen this type of fluctuation in the past. US sales in the segment were 2.17 million units in 2000, and at a low point of 1.46 million units in 2009, during the recession. The segment rebounded to see sales reach 2.25 million units in 2014 and 2015. Among the differences facing the segment over the next 15 years is that the consumer shift towards crossover utility vehicles (CUVs) is growing. So far, the trend has not stabilised and is not expected to be reversed. The Ford Focus, however, saw sales of 286,166 units in 2000, a figure the company has not achieved since. As with others, the Focus saw its low point during the recession, with sales falling to 129,303 units in 2010. Unlike others, Ford's rebound has not been sustained. Post-recession, sales of the Focus peaked at 245,922 units in 2012 in the US; they have been in decline since.
For the outbound forecast, IHS Markit expects this segment's sales to be around 2.0 million units until 2029. Despite consumer preference for CUVs, those vehicles are more expensive than compact cars. Compact cars will continue to meet a need for affordable transportation in a way that utility vehicles, so far, are less able to do. In this context, Ford's decision to pull the Focus out of a NAFTA production base also reflects that the company may expect its performance in the segment to continue to be eroded. Ford is not exiting the segment, but is indicating a lack of faith in its resilience.
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