March 4, 2014 1:30 pm

Ford warns on overcapacity in emerging markets

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A Ford Motor Co. logo stands above Ford trucks on display©Bloomberg

Global carmakers have built worrying amounts of production capacity in underperforming emerging markets, Ford's chief operating officer has warned, as sales in Brazil, Russia and India lag behind ambitious expectations.

Hopes that breakneck sales growth in emerging markets would offset plunging demand in western countries after the global financial crisis sparked a building boom in markets such as India, as carmakers poured billions of dollars into new factories to profit from predicted double-digit growth.

“There is clearly a case where the eyes have been bigger than the stomach for some [carmakers],” said Mark Fields, the company’s number two and widely seen as the successor-in-waiting to Ford chief executive Alan Mulally.

“We are looking at the announcements and the capacity that is coming in on the next five years and saying, hey, if we look at that and the market assumptions on industry growth, well hmmm, there’s going to be some interesting market dynamics,” Mr Fields told the Financial Times in an interview at the Geneva Motor Show. “You have to base yourself in the facts, the data.”

The total global automotive market will have an estimated 20-30 per cent too much capacity in 2016, according to research by KPMG.

Overcapacity, or having the ability to build more cars than you can sell, is a headache for carmakers. Factories are expensive to build, run and maintain, and typically only produce profit when at least 75 per cent of the intended capacity is being utilised. 

Under-utilised factories are the single most important reason why companies such as Peugeot Citroen, Fiat, GM and Ford are losing money in Europe.

In depth

Geneva Motor Show 2014

Geneva Motor Show

The 84th edition of the international motor show takes place against a backdrop of improving health in the European car industry

While China’s rise as a global motor powerhouse to become the world’s largest has been relatively constant, growth in other Bric markets has turned negative.

Brazil, India and Russia all bought more than 2.5m cars last year, making them the world’s fifth, sixth and seventh-largest markets by sales.

They are important for global carmakers experiencing the worst European car market for two decades. Fiat, General Motors and Volkswagen each have about 20 per cent of the Brazilian market, while Renault-Nissan holds 30 per cent of the Russian market.

Sales fell in all three markets last year for the first time in more than a decade.

“Look at Brazil. There is a lot of capacity that has been ramped up in Brazil,” said Mr Fields, who stresses that Ford has not been “over-exuberant” in emerging markets.

“As we’ve looked at some of the markets over the past year – India, Russia – we saw looking at the metrics that the economy was starting to tighten up,” he said.

Ford expects North America and China to again drive the global industry’s sales and profit growth this year, Mr Fields said.

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