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Why Ford is eyeing cost cuts in China


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"With greater transparency for investors at Ford (F) comes the need for a tighter grip on costs.

Local reports out of China on Monday suggested the auto manufacturer was preparing to cut 1,300 jobs in the country.

Ford CEO Jim Farley quickly dialed back concerns that the company was leaving the ultra-competitive China market entirely, speaking in a Financial Times interview. It operates eight manufacturing plants in partnership with local Chinese players.

A person familiar with the matter told Yahoo! Finance that Ford has no plans to exit China. The automaker will remain focused on its luxury brand Lincoln, which has long been "popular" in the country, the source said.

It will also put more attention on delivery vans in China, the person said.

"We will continue to accelerate our electrification transformation in China. Our new localized EV products are under development now. We are also working with our partners to strengthen our EV business, including expanding the distribution. Our China team will contribute more to Ford’s global success through our learnings from the market and capabilities in electrification and digital software," the spokesperson said.

"In addition, we will build on the strength of our export business and have just reached an agreement with JMC to export more products to global markets, particularly in Asia, Middle East and South America."

But in the FT interview, Farley did acknowledge that Ford would be putting "less capital at risk" in China.

"We are aware that our costs are not competitive, and we are working internally and with our partners to reduce costs in all areas," the spokesperson said. "China remains a very important market for Ford and, as part of this, we must drive a lean and agile organization to build a healthier and more sustainable business in China."

The comments echo Farley's more cautious tone on China, heard on the company's early May earnings call a few weeks after a recent leadership trip to the country.

Ford's increasingly focused approach to China makes sense.

For starters, it has seen its business dwindle in the country over the years.

The auto manufacturer sold 500,000 retail units in China in 2022, down from 600,000 in 2020, according to the company's latest annual report. Ford's market share during that timeframe fell to 2.1% from 2.4%.

By comparison, Ford had a 28.3% combined market share position in the US and Canada in 2022.

In the meantime, Ford is smack in the middle of what it has dubbed a "refounding" of the company as it gears up for a future of EVs. It has broken its business into three new segments for investors: Model E, Ford Blue (gas-powered vehicles), and Ford Pro (commercial vehicles and other services).

The reclassifications aim to drive increased transparency into Ford's business for investors. But it could also lead to increased investor scrutiny of various investments and the direction of profits.

Pulling back on a China market that isn't delivering home-run results could aid in improving profits and shifting assets to EV production in the US.

"Our cost structure is not competitive," Ford CFO John Lawler said on Yahoo! Finance Live in late March. "We know that we [have] about $7 billion to $8 billion that we could take out and improve our competitiveness, and you will see that start to take hold as we get through the rest of the year, into 2024, and beyond."

Better cost management — especially in international operations like China — is key to the thesis among Ford bulls on Wall Street.

"We find Ford shares attractive given valuation only roughly in line with history despite a number of significant positives, including (1) a substantially refreshed vehicle lineup including hot new introductions such as the Mustang Mach-E battery electric crossover, new Ford Bronco (>190K reservations), Bronco Sport, and upcoming F-150); (2) a refreshed F-150 has historically led to a substantial improvement in North American profitability; (3) the 'Bold Moves' Ford is taking to right-size its international operations, including most recently in South America, we think will free up capital for use in initiatives investors are likely to reward more, such as its electrification and autonomous efforts; and (4) Ford has been having recent success turning around its International Operations, including in China, which was previously a problem area," JP Morgan analyst Ryan Brinkman wrote in a client note.



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