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Wednesday, December 03, 2003

Ford Bows Into China

Everyone is sceptical about growth numbers and growth potential from China, and on occasion rightly so. However we do have some firm evidence to go by. I will try given sufficient time to document what I think is for real. This Ford investment seems to me to fit that category nicely. In all this, I think it is important to have one thing clearly in mind: the difference between manufacturing for the home market, and manufacturing - as a form of outsourcing - for the global one. The former is far more problematic than the latter.

Also worthy of note in the article is the explanation of location choice: wages are significantly lower in Western China. This seems to confirm Stephen Frost's argument that wages in some parts of China are definitely on the rise, and to contradict some of the sillier naysayers with their virtual 'slave labour' type arguments.

Ford plans to source about $1bn in automotive components from China next year - later than originally planned - as part of ongoing efforts to buy such items from "low cost" countries in Asia and elsewhere.

Ford said last year that it aimed to have sourced $1bn in parts from such countries, including China, by the end of this year.

However Bill Ford, chairman and chief executive, told a media briefing that the company would "hit that amount" in China next year.

Unlike General Motors and Volkswagen, the European carmaker, Ford has been slow to establish a substantial manufacturing presence in China, where vehicle sales have grown by about 40 per cent this year.

Mr Ford conceded the company had been "late to China". But he said the company's current, gradual expansion plans were appropriate for the market.

"We've taken what I think is a smart approach. Instead of going in and putting in huge fixed investments and hoping the market catches up with us, what we've done is made an expandable facility there so that we can expand in increments as the market demand ramps up," he said.

The carmaker has said it and its joint venture partner, Changan, would invest $1bn in boosting capacity at the sedan plant, build a second plant at a new location, as well as build a new engine plant.

Mr Ford said the company had initially doubted whether a Chinese government request made some time ago that Ford invest in western China made sense but "as we sit here now we think it's been a very good thing for us".

He said: "Even though the infrastructure penalty in terms of shipping costs is a little bit versus on the coast, wage rates are significantly lower in western China and the government has been extremely helpful in terms of infrastructure."

He said he could see the company exporting from China "at some point".

Going back briefy to a post I did yesterday for Living in China on banking reform, it is also of interest that the FT article cited there had this to say about car finance:

Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC)............said the CBRC was studying applications from Toyota Motor Corp, Volkswagen AG and General Motors Corp to set up auto financing operations."

Clearly this is of interest for the manufacturers since most of the money in car sales comes from the finance end, but, as Fons Tuinstra has previously pointed out, this is a much more risky business in China, and serves perfectly to underline the internal market/global distinction.

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