Henry Ford’s Century-Old Line Finds $15 Billion in China

Henry Ford’s Century-Old Line Finds $15 Billion in China

On Oct. 7, 1913, Henry Ford’s assembly line moved for the first time. A century later, among the changes in Ford Motor Co. (F)’s production, none is more dramatic than simply where it takes place. Ford vehicles assembled in China and the rest of Asia now outnumber those built in Europe for the first time. By 2015, Ford will have the capacity to produce more cars and trucks in Asia than it made last year in North America.Wealth in Asia is surging even faster than it did in America following Henry Ford’s manufacturing innovation and the five-dollar workday he introduced the following year. Just as when his Model T became the first car for millions of people, a burgeoning middle class in countries such as China means that at least two of three buyers in these markets are getting their first set of wheels.

“It’s so aspirational and such a big deal,” Joe Hinrichs, who led Ford’s manufacturing and Asia operations before taking over the Americas late last year, said in an interview. “It’s the freedom that comes from the ability to own your own transportation that’s never been had in your family. That’s what it was like 100 years ago here.”

Opening up the highways to these consumers is going to be lucrative business. Morgan Stanley said in a report this month that it values Ford’s Chinese operations at $15 billion. That’s more than a fifth of Ford’s stock-market value and exceeds that of Mazda Motor Corp. (7261) and Fiat SpA. (F)

‘Breathtaking’ Roll-Out

The roll-out of Ford’s factories, products and dealer network in China has been “breathtaking,” wrote Adam Jonas, an analyst for New York-based Morgan Stanley.

Such praise is rolling in even though Ford was a straggler in China. The Dearborn, Michigan-based carmaker formed its first passenger-vehicle joint venture in China six years behind General Motors Co. (GM) and more than a decade after Volkswagen AG (VOW), which remain the established leaders among foreign automakers.

Attention is turning to Ford’s Asia ambitions as auto sales in its home market are poised for a fifth-straight year of growth for just the second time since World War II.

“Of all the regions of the world, that’s the one that we’re most” under-represented, Chief Financial Officer Bob Shanks said of Asia-Pacific. “That’s where we’ve got the most absolute opportunity for growth.”

Market Share

Chief Executive Officer Alan Mulally set a plan with Executive Chairman Bill Ford, Henry’s great-grandson, to build up the company’s Asia presence early in their relationship. They discussed the topic in their first meeting at Bill Ford’s home before Mulally, 68, agreed to leave Boeing Co. (BA) in 2006 and become Ford’s chief.

At the end of Mulally’s first full year at the helm of the company, Ford’s market share in the Asia-Pacific region was 2.3 percent. Through this year’s first half, it’s up to 3.3 percent.

A mid-decade target of 6 percent market share for Ford in China, from about 4 percent now, looks “potentially conservative,” Itay Michaeli, an analyst at Citigroup Inc., wrote in a report this month. He cited demand for sport-utility vehicles and the still-high presence of first-time buyers.

Capturing a bigger slice of Asian markets is crucial to Ford because of the heavy costs of playing catch-up there. Ford has said it’s spending $4.9 billion to expand its lineup and double production capacity in China alone.

Founder’s Vision

It was no different when Henry Ford created the first assembly line, which hastened the process of making Model T’s to less than three hours from more than 12 hours. The costs of building vehicles during the infancy of the industry led the first carmaker he organized, Detroit Automobile Co., to go bankrupt in less than two years.

Henry Ford’s vision was that a mass-manufacturing solution would save so much money that his investments would soon pay off. They did, and there was a side benefit: Ford could then afford to pay his workers a much higher wage than average — $5 a day — which made them into consumers who could afford his cars. It’s the kind of long-range view that Ford and other automakers are taking now toward China.

Ford expects a profit from Asia-Pacific operations this year after losing $77 million last year. By contrast, the company earned a record $8.34 billion in North America.

“Investors are looking at us and saying, OK, Ford looks really good in North America, but show me the money elsewhere,” Shanks said in an interview at Bloomberg’s Detroit bureau.

No Trade-Off

Ford’s growth in Asia isn’t coming at the expense of its home market. The automaker is adding 200,000 vehicles worth of annual capacity in North America in 2013 after increasing it by 400,000 last year.

“It’s an ‘and’ discussion — it’s not a trade-off discussion of one for the other,” John Fleming, Ford’s executive vice president of global manufacturing, said in a telephone interview.

Substantive capacity gains will be more difficult going forward. Half of Ford’s factories in North America are running three crews of workers per day already, according to researcher IHS Automotive.

“There’s probably another good 10 to 15 percent opportunity” for additional capacity from breaking bottlenecks in the manufacturing process, Fleming said. “And we’ve still got some plants that are only working two shifts. It’s going to be enough for us over the next couple of years.”

The breadth of technology Ford is loading into vehicles poses another manufacturing challenge, Hinrichs said. Add to that the company’s push to build several vehicle iterations side-by-side in the same plant as well as updating its cars and trucks more quickly, and it’s clear that complexity will be the next evolution to test Henry Ford’s assembly line.

“It’s weathered the test of time very well,” John Hoffecker, who’s specialized in manufacturing for 29 years and is global head of automotive for advisory firm AlixPartners LLP. “If you look at how sophisticated and how integrated it is today, it’s come leap years from where it was.”

To contact the reporter on this story: Craig Trudell in Southfield, Michigan, at ctrudell1@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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