Ford In December: Why China Is More Important Than The U.S.

| About: Ford Motor (F)
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Ford scorches for yet another month in China.

We discuss why Ford's results from Asia are arguably more important than its results in the U.S.

We also identify new risks for Ford in China.

By Parke Shall

You simply can't finish a year much stronger than Ford (NYSE:F) has. We just got done writing an article yesterday looking at the pros and cons of the company blowing away sales estimates for December in the U.S., when this morning Chinese data rolled in showing that Ford has rounded out nothing short of a spectacular year in China. We believe these Chinese numbers are even more important than the numbers coming out of United States and we wanted to take a second to not only review the data, but explain why we think this.

First and foremost, Seeking Alpha reported this morning that Ford sales out of China were very impressive,

  • Ford reports sales in China increased 23% in November to 149,856 units.
  • Sales for the Changan Ford Automobile JV rose 19% to 115,654 vehicles.
  • Sales for the Jiangling Motor Corporation JV jumped 28% to 32,913 vehicles.
  • The automaker ended the year with continued strong demand for SUV models Edge and Explorer.
  • 2016 Ford China sales +14% to 1.272M.

We are long term multiple year bulls on Ford and are actually happier to see this great data coming out of China than we are to see the domestic sales data that we were presented with a couple of days ago. Don't get us wrong, we like positive data coming from numerous countries. As a matter fact, it is a large part of our long thesis in the company. Ford and General Motors had such a problem in 2007 and 2008 not just because of the amount of credit that they extended but also because they had far less of a global presence.

We believe that the new game plan for these companies, where they focus on building their brands internationally, will help them during future volatile events in the automotive industry. We think that Ford and General Motors are setting themselves up to be steadfast the next time that we hit economic turmoil, whether it be country specific or global.

China is important not only because Ford has spent billions of dollars in capital expenditures to build an infrastructure there, but also because it is an extremely populous region that can act as a fantastic backbone for the company overseas. Europe is also performing well for Ford, as the company has recently turned it into a profit center over the last two quarters. We expect that Ford will eventually turn several major countries overseas into profit centers and that these will act as good diversification protection against economic turmoil in any specific country.

There are some risks on the table with China, however. President elect Trump seems serious on starting some sort of trade war with China and, unless he gets a deal done in the early stages of his presidency, this may have a suffocating affect on the business of American companies trying to sell product overseas. China has already said that part of its retaliation is going to be to make it difficult for US businesses to do business in China. Bloomberg reported yesterday,

China is prepared to step up its scrutiny of U.S. companies in the event President-elect Donald Trump takes punitive measures against Chinese goods and triggers a trade war between the world's two biggest economies after he takes office, according to people familiar with the matter.

The options include subjecting well-known U.S. companies or ones that have large Chinese operations to tax or antitrust probes, the people said, asking not to be identified because the matter isn't public. Other possible measures include the launch of anti-dumping investigations and scaling back government purchases of American products, according to the people.

The move illustrates how the fallout from escalating tensions between the two nations could spread to companies. Trump has made China a frequent target of his attacks and nominated trade-related officials that the Communist Party's Global Times newspaper said would form an "iron curtain" of protectionism.

Given these risks, it is going to be just as important to scrutinize China in 2017 as it is going to be to scrutinize the United States for Ford's business. However, this was no doubt a fantastic way to round out the year for Ford and the continued positive data in Asia gives us confidence that Ford is building a fantastic business for the long term; one that will be adverse to risk the way the company had failed to manage risk in 2007.

With the company's healthy dividend and continued optimism globally, we are happy to continue holding our shares long.

Disclosure: I am/we are long F.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.