Lincoln Joins the Luxury Car Race in China
Last week, the Ford Motor Company (NYSE: “F”) announced that it will launch Lincoln in China in the second half of 2014. Ford is currently in negotiations with potential dealers with a goal to establish an independent dealer network for the model that will offer a new level of personalized service not currently offered by rivals. Lincoln is hoping to tap a niche in China where customers buy luxury products for their own personal experience, rather than for reasons of status, and plans to offer tailored services to customers as well as focus on technology and offering unique products.
Ford is right to try and gain a share of the China luxury car segment. While total sales of passenger cars in China increased by 8.6 percent during the first seven months of this year, luxury car sales increased even faster at a 36.1 percent rate, and sales of large SUVs increased by 23.2 percent. The premium car segment in China is forecasted to surpass the one in the United States by 2020, growing to about 2.7 million sales, or 9 percent of the Chinese new car market, by the end of the decade.
Lincoln is a century old brand and a very popular model in the United States. However, Ford and Lincoln will face an uphill battle as they battle to gain a share of the China luxury car market.
First, most of the world’s luxury brands are already being sold in China. Audi, Buick, Mercedes and BMW, as well as many of the leading Japanese luxury car models, are being manufactured in the country. One only has to spend a day or so in Beijing, Shanghai or any one of China’s tier-one cities to see all of the latest Porsche, Ferrari, Lamborghini and other luxury models being driven by China’s citizens. While these niche models may not be manufactured in the country, they are recognizable global brands that have already gained acceptance with China’s wealthiest consumers.
Second, Ford has not announced plans to manufacture the Lincoln in China, at least not initially. That means that the Lincoln will be burdened by a 25 percent import tax. While price may not be as important in the high-end segment, trying to sell against established brands like Audi, Buick, Mercedes and BMW with a significant price disadvantage will be challenging. In addition to the 25 percent import tax, the cost of manufacture is still higher in the United States than in China, and added freight fees will also add to the sticker price.
Third, Chinese consumers are very brand conscious, and Ford, by its own admission, is in the early stages of reviving Lincoln’s stale image in the United States, where sales peaked two decades ago. While Ford’s strategy of focusing on service, technology and offering unique products is the right one for the luxury market in China, it’s not different from the strategies of its competitors. Every one of them would say that they are doing the same things. The lack of brand recognition will not only make it difficult for Lincoln to attract consumers, but it will also make it difficult to attract qualified dealers.
China is now, or soon will be, the largest market for any product. As a result, every global company, no matter how large or powerful, ignores the China market at its peril. In addition to being large, however, the China market is also undoubtedly the most competitive market in the world. Every major international company is already manufacturing and developing sales and distribution channels in the country, and a steady flow of up and coming Chinese companies are entering the market, even the premium and high technology segments, every year.
An old Chinese proverb says that the best time to plant a tree was 25 years ago, but the second best time is now. For a variety of reasons, Ford got off to a slow start in China. There is nothing that the current management can do about that, but they are right to substantially up their commitment to the country’s auto market now. However, no one should expect the road ahead to be easy.