With the recovery of the European economy, Ford (NYSE:F)'s fortunes in the continent have been gradually changing. The launch of Ford's new 2014 Transit Connect and the 2014 Tourneo Connect is expected to drive the company's margins in the near future.
These numbers and new releases paint a good picture of Ford's business in Europe. However, the company has been struggling to gain market share in India. The Indian automobile market is estimated to triple by 2020, therefore; shareholders should keep a close eye on what Ford is doing in the second most populous country in the world.
The increasing inflation rate and hiked car loan rates may have stagnated the development of the Indian auto market, but Ford has been struggling for different reasons. Let's take a look at those reasons.
Why Is Ford Struggling in India?
From 2011 to 2012, Ford witnessed a decline of 15% in its sales, translating to a combined loss of nearly $40 million. Ford holds a market share of 3% in India, which is terrible since the company has been operating in the Indian market for 17 years. The main reasons why Ford doesn't have a prominent presence in the Indian market are:
- Narrow product portfolio.
- Less emphasis on compact cars.
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Presently, Ford only offers five cars in India. By comparison, peers like Maruti Suzuki and Hyundai offer 16 and eight cars, respectively. Moreover, unlike Ford, Hyundai and Maruti offer numerous models across all car segments. Therefore, it is evident that a narrow product portfolio has hampered Ford's sales in India.
Moving on to the second reason, due to poor road conditions, a congested driving environment, parking woes and high car density, Indian drivers prefer to drive compact cars. In fact, small cars account for 70% of the total car sales in India. Now, given that four out of the five cars that Ford offers are either sedans or SUVs, Ford's dismal market share isn't surprising.
EcoSport and Mustang May Fuel Growth, and Figo Is Establishing Ford's Credentials
To make its presence in the Indian car market more prominent, Ford will be launching the classic Ford Mustang in India in 2014, followed by two more hatchback models before the end of 2014. The estimated growth of India's middle class population should fuel the demand of mid-ranged hatchbacks and premium sedans, and if the upcoming models satisfy consumers, Ford may be able to gain market share over its peers.
Another segment that has become highly popular in India is the small SUV segment. Ford's newly launched Ford EcoSport has turned out to be the highest selling SUV in the country, dethroning rival Renault Duster. Better looks and a better interior design have allowed EcoSport to surpass the Duster's sales within three months of its launch.
Furthermore, a difference of 30% in the starting prices of these cars also fueled the sales of the EcoSport. So, how did Ford manage to outsmart its rivals in terms of both quality and pricing? Well, it's quite simple. In India, there is a 30% excise duty on SUVs that are four meters or above in length, which obviously adds to the car's price. However, since the EcoSport is only 3.999 millimeters in length, it is free from this additional tax. Therefore, the smaller size of the EcoSport made it both inexpensive and fuel-efficient.
This is a great start for Ford in the Indian compact SUV market, which is expected to grow from 6,140 units sold last year to over 126,000 units in 2015.
On the other hand, Ford is also looking to bolster its presence in the small car segment with the Ford Figo. The Figo has sold more than 300,000 units in the country so far, which may not sound fantastic given that it has been present in India for almost four years. But this is undoubtedly impressive when you consider that Maruti Suzuki has dominated this segment and commands nearly 39% of the small car market.
The car has helped establish Ford's credentials in the compact car market and the company can use it as a platform for further growth. Ford will be opening an engine and vehicle assembly plant in India next year, an investment of roughly $1 billion.
This will be Ford's second plant in India, and this is a much needed investment since the company is now finding it difficult to satisfy demand for its recently launched EcoSport compact SUV.
Ford has turned its business around quite successfully in North America while Europe is also picking up. Now the company is also focusing on the Indian market, which is good news as India is the second-most populous nation in the world. It is looking to introduce new products in the Indian market and this could improve its earnings further. Ford has appreciated 30% this year but it still trades at a reasonable 12 times trailing earnings. The dividend is a sweet 2.40% while the earnings growth expectation for the next five years is almost 15% per year. Considering the moves that Ford is making in markets such as India, investors can expect stronger top- and bottom-line growth in the future.