US-based Ford Motor Company recently announced plans to expand automotive production in China. Ford officials had initially planned to manufacture its Ford Focus model in Mexico; representatives said the decision to move Focus production to Chongqing in 2019 would help the manufacturer avoid unnecessary retooling and investment costs.

A statement on Ford’s website said, “Ford is saving 1 billion USD in investment costs versus its original Focus production plan”, before adding that the plan will improve the company’s financial health and improve its manufacturing scale in China.

Ford President Joe Hinrichs stated in a radio interview that the biggest advantage is that the move will allow Ford to “leverage existing capacity, and frankly invest in one less plant to build the Focus worldwide, and that involves things like tooling for the body shop”.

Manufacturing companies large and small have long looked to China for cost savings: Ford can certainly save by scaling up its China operation instead of building or refitting factories in Mexico. But the cost considerations ultimately overlook the competitiveness of China’s automotive industry, as well as its market potential.

Thomas Ward, President of PIM China, an industrial market research firm, said, “Ford has excess capacity in a well-running China plant with an established supply chain; it would not make sense to build a plant in Mexico”. Ward notes, “The labor cost savings are negligible compared to Mexico, but they are not an issue as Ford, like many others, has fully automated plants”.

China’s parts manufacturers may then prove crucial. The number of individual parts manufacturers in China boomed from 4,300 in 2003 to 10,000 in 2015. This means that, unlike in the US or Mexico, where parts must be shipped in from a variety of locations, cars in China can be put together at lower costs with shorter supply chains.

In addition to production savings, John Niggl, Client Manager for InTouch Manufacturing Services, a third-party QC inspection and factory auditing firm, notes a lesser-known advantage: “producing in China allows multinational automakers to compete much easier in the local market, due to heavy Chinese tariffs that discourage imports. These benefits are likely to make Ford more profitable, while lowering costs for consumers”.

Ford is already experiencing record sales across all models in China. Since 2014, sales have grown 14% to 1.27 million units. Ford Focus sales have risen by more than eight percent since 2015. In contrast, Ford’s US sales declined in 2016, and demand for the Ford focus has dropped by 20% from 2016, and continues to fall.

Improving its market share in China, however, appears firmly within Ford’s sights. Patrick Colligan, Global Business Development Manager at Dezan Shira & Associates, notes, “Moving production to China will help Ford open a cost effective, direct supply channel to the local Chinese market, where they are competing with GM and Volkswagen – both of whom are ahead of Ford in sales and market share”.

The stakes are high for Ford. Chinese car sales in 2016 totaled 23.6 million, greater than sales in the US and Mexico combined (at 17.5 and 1.6 million, respectively). Despite such impressive figures, market penetration in China is still low in comparison to the US and Mexico. In 2016, China’s motor vehicle ownership per 1,000 people was a mere 140. In comparison, the US’ in 2014 was 797, while Mexico’s was 275.

Manufacturing plants in China are also better placed to access ASEAN. Vehicle sales in the Philippines and Vietnam expanded by more than 30% each last year, while Singapore’s were up 43%. This growth is complemented by various China-ASEAN trade agreements since 2005, allowing greater market entry. Vietnam, for example, is set to scrap or reduce tax across all tariff lines by 2020.