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Analysis: Why is Ford Bidding Farewell to India?

Ford's and other US auto companies leaving India shows how tough the Indian market can be even for big giants. Read on to kno

Last week, Ford Motor Company announced it would halt its car production in India (1). Based in Dearborn, Michigan, the company has been operating in India for over 25 years, which is not a long duration for an auto company. It is set to exit the Indian market after failing to gain a significant market share and compete against its Asian counterparts.

Notably, Ford India is not the only company to leave the Indian market. Over the past few years, other US automakers like General Motors (2017) and Harley Davidson (2020) have also shut down their factories in the subcontinent. So, what went wrong exactly?

Why is Ford Leaving India?

Ford drivers vouch for its cars’ sturdiness and power. However, the company never saw a smooth ride for its iconic cars like the Thunderbird, Model T, the Mustang, etc., in the Indian market. While it witnessed some positive results with its models like the Ikon, Endeavour, and EcoSport, Ford never found its anticipated success.

Ford has cited operating losses of more than 2 billion USD over the last decade and weak demand for its latest vehicles for its exit from the market. According to the company, it had analyzed several other options for India, including platform sharing, collaborations, contract manufacturing. It has also expressed the possibility of selling its manufacturing units, a plan still under review (2). However, none of them seemed feasible.

“We considered several options. However, we could not find a sustainable path for long-term sustainability and profitability, including in-nation auto manufacturing,” stated Ford India’s head Anurag Mehrotra in a statement on Thursday (3).

According to a Reuters report (4), since Jim Farley’s Ford Chief Executive took charge last year, India has been a lower priority, especially considering limited financial resources.

Media reports also suggest that Ford India decided to wrap its business in the country after its deal with India’s Mahindra & Mahindra failed to see the day’s light. Ford aimed to make cars at a lower cost, cease its independent operations with the joint venture partnership. The agreement was called off this year, citing a change in business conditions amid the coronavirus pandemic.

As per the new exit plan, Ford India will close its operations at its factory in Sanand in Gujarat by Q4 2021 and its Chennai plant by 2022. According to Global Data (5), a data intelligence firm, Ford can make over 440k cars in India annually across both plants. However, it has been used only about 25% of it.

A Move Towards EV and Automation

Ford’s decision to cut losses in India came after it left Brazil earlier this year (6). It emphasizes the pressures on worldwide automakers to invest in more automated and electric vehicles.

Notably, automaker companies once fought hard to keep a presence in every major market even if they were losing money. However, the picture appears to be changing. Today, companies like General Motors, Renault, and Stellantis are stepping away from money-losing markets and redirecting their capital towards investment in technology and electrification to survive in their existing markets.

Ford is escalating its investment in EVs and advanced software. In May, the company stated that it would increase its spending on EVs by a third to 30 billion USD by the next decade (7).

The automaker’s exit from India indicates that Ford will probably invest more into EVs and automation software.

The Impact

Ford’s exit comes when the overall auto industry faces a worldwide shortage of semiconductor chips and several other parts. There have been higher demands for chips as the coronavirus pandemic forced people to work from home. The supply chains are also disrupted because of the local lockdowns and other restrictions.

According to the company, the restructuring will cost the auto manufacturer about 2 billion USD. It will also affect more than 4k employees as Ford stops making cars at its factories in Gujarat and Tamil Nadu (8).

Notably, more than 500 employees at the Sanand unit will keep on producing engines for export. The company will need about 100 more people for parts distribution and customer service. As per Ford’s press release, the company will continue selling its current vehicles like Aspire, Figo, EcoSport, Freestyle, and Endeavour until existing dealers’ inventories run out.

Another factor leading to Ford giving up on Indian also includes the declining passenger vehicle market over the past five years. As per the SIAM Society of Indian Automobile Manufacturers, passenger vehicle sales, after peaking at 3.37 million in 2018, have only been declining to 2.77 million units in 2019 and about 2.71 million units during 2020.

According to Ford’s statement, as part of its restructuring plan, the company is looking to expand its Ford Business Solutions operations, with over 11k employees. The team will continue to support its worldwide operations and focus on technology and engineering. The expansion will offer more opportunities for data scientists, software developers, R&D engineers, and finance and accounting professionals, added the company in the press release.

The Indian Federation of Automobile Dealers Associations stated that Ford’s move was shocking. The statement further added that the US-based company’s decision only to compensate dealers who offer vehicle services to customers was “not enough.”

“Mehrotra had personally called me and assured me that they will adequately compensate dealers. Even though it is a good start, it is not enough,” stated Vinkesh Gulati, the association’s president (9), in a statement.

The series of big multinational companies existing in the Indian market won’t do good for India, especially with high unemployment rates amid the pandemic. General Motors decided to exit after it planned to leave non-profit operations in a few regions like Russia, India, and Western Europe.

The pandemic only worsened these auto companies since they were forced to shut their operations during the lockdown period.

Difficult Market

Ford ventured into the Indian market in 1995 in collaboration with the Mumbai-based Mahindra & Mahindra, which was then primarily a manufacturer of tractors and utility vehicles. It built a greenfield plant near Chennai from where it launched an entry-level, mid-size sedan named Ikon as its first product from the Indian market.

The collaborations between the two companies ended within a few years. However, they again became partners in 2017. Only to call it off again by the end of 2020.

After twenty years of operating in the nation, General Motors, another US giant, stopped selling its vehicles in the subcontinent by the end of 2017. Notably, it sold one of its plants to a long-time partner, SAIC Motor Corp, a China-based firm. GM also discussed selling its second plant to China’s Great Wall Motors (10). However, the company later put the deal on hold because of the coronavirus pandemic and increased tensions between India and China.

Harley-Davidson, the iconic motorcycle brand, a more recent entrant to the Indian market, stopped its assembly operations in the country as part of its global restructuring plan in 2020.

Harley-Davidson decided to leave India to focus on its core market like North America, Europe, and some Asian parts as part of its reconstruction strategy. The company had reported a loss of about 96 million USD during the April-June period last year. While it may not be a huge boss, the number did not indicate a good demand in the future (11).

So, What Went Wrong?

According to Hormazd Sorabjee, the editor of Autocar India, in an interview with Economics Time (12), “it is often a mindset or cultural issue with several western manufacturers. Their cost structures and how they think about cost don’t align well with the Indian market.”

That’s one of the major factors making the Indian market tough for multinational companies. However, where companies from western countries fail to gain, Asian carmakers win big and gain dominance in the same market. Notably, Maruti Suzuki has about a 48% share in the Indian market. At the same time, the Hyundai market has about 17%. For comparison, over 25 years of its operations in India, Ford had managed to gain only about 2% market share (13).

Simultaneously, as we previously mentioned, there has been a muted demand in the auto market. Auto sales have registered a cumulative annual growth rate of only 1.5% in India over the last five years. It further upset the plans of multinationals who heavily invested in the Indian market.

Ford Failed to Recognize the Not-So-Secret “Secret Sauce” to Gain Success in India

A mixture of factors such as wrong-reading of the market, product design, product positioning, and a big investment in a second manufacturing unit, when even its first unit was not utilizing its full capacity, led to Ford biting the dust in the Indian market, stated industry experts (14).

Asian countries like Japan and Korea have already managed to dominate the Indian market. In such a case, it only makes sense for the American automobile companies, first General Motors, now Ford, to leave India since they have already got the basics wrong.

“In short, Ford did not read the Indian market correctly. During the late 90s and even now, small cars dominated the market. Maruti rules the roost. Hyundai came later with its Santro and captured a sizable market,” stated an automobile industry expert to IANS on a condition of anonymity.

In addition, Ford did not entirely customize its car platforms. Notably, India is a right-hand drive market, whereas; the US is a left-hand drive market. An expert highlighted how some of Ford India’s car models require drivers to get down and go around the vehicle and open the left side door to unlock the boot. Certainly a tedious task.

“Different factors at different time frames played against Ford India. And they cumulatively affected the company’s growth. Even though the company improved its three factors, product, pricing, and positioning, over the past years, Ford had to cut down its losses in India as it is facing troubles worldwide,” stated another industry official wanting to be anonymous to IANS.

The small car segment has been a sweet spot for automakers in the Indian market for a long time. Maruti Suzuki and Hyundai Motor made a profit by launching new hatchback models at different prices.

However, General Motors and Ford didn’t do it since they didn’t have a small car in their overall portfolio.

“Their attitude towards the Indian market was like they ate the pizza and burger that were launched at the beginning. Hence, they will also start driving the car we will offer. They seem to have overlooked that the burger and pizza companies Indianised their products. The American automakers didn’t do it.”

A journalist recalled, “when the Indian media asked them about their car’s mileage per liter, Ford’s American officials were confused because they were too focused on engine power. Basically, Ford looked at the Indian market through the US lens.”

Ford India has largely been a “single model” company in India, whereas the Asian players keep launching new models (15).

Later, the company started adding Figo, Aspire, Fusion, EcoSport, Endeavour, and Freestyle models. However, by the time Ford realized its mistakes in the Indian market, it was too late.

“Even though Ford increased its number of vehicles sold in India, the company has never been lucrative in gaining much market share in the PVs, passenger vehicles vertical. In FY 2000, Ford sold about 8k PVs in India, which increased to 93k units in FY 2019. However, the market growth share was negligible, from 1.1% to 2.8% during the same period. Even the volumes sold in FY 2020 and 2021 further dropped to about 66k and 48 units respectively amid the coronavirus crisis,” stated Vashishta Unwalla, Lead-Analysts from Industry Research Team, Care Ratings to IANS (16).

Even though its Chennai plant had a huge capacity, Ford spent over 1 billion USD to set up another plant in Gujarat.

According to V. G. Ramakrishnan, Managing Partner at Avanteum Advisors LLP, “without increasing the Chennai plant’s capacity by 30%, investing in a greenfield facility was a wrong strategy. An organization runs into losses not only because of lack of sales but also because of its investment decisions.”

Ford India had operating losses of over 2 billion USD during the last ten years and a 0.8 billion USD non-operating of assets in 2019. It has resulted in its decision to close its two plants.

“The investment was logical as per the company’s plan at that time. However, it didn’t work out later,” stated a Ford India official to IANS.

As per Ramakrishnan (17), Ford never had a product for the Indian market.

“Companies worldwide first make a product plan for a nation, say India plans. Then, it becomes a part of the Asia Pacific product plan, and later the global product plan.”

The numbers may not have encouraged Ford to develop a new product since the company looks at the Indian market from the global level.

However, it was never the case of its other Asian counterparts currently dominating the Indian automakers. For instance, India was a major market for Suzuki Motor, whereas Hyundai made India its global production hub for small cars.

As per Unwalla, about half of the units Ford sold in the country were utility vehicles with popular models like Endeavour and Ecosport. Within the multi-utility vehicle segment, Ford managed to peak its sales to 9.5% in FY 2015. However, it started falling in all successive years. In FY 2021, it dropped to 3.3%.

“Meanwhile, the market share in the utility vehicle segment of its counterparts such as Maruti Suzuki increased from 12.4% in FY 2015 to 21.6% in FY 2021.” Hyundai Motors also increased its market share from 0.3% in FY 2015 to 20.2% in FY 2021. Therefore, it is safe to say that Ford has not been successful in increasing or even maintaining its market share,” added Unwalla.

At the same time, since Ford was never a major player in any car segment, its absence is unlikely to result in any significant windfall to other rivals.

However, as per Unwalla, companies in the utility vehicle segment, such as Hyundai Motors, Maruti Suzuki, Kia Motors, and Tata Motors, may gain by Ford’s exit.

Uncertain Future

In August 2021, wholesale auto sales also dropped 12% YoY, which the industry attributed to an ongoing semiconductors shortage. The industry stated that the shortage impacted the output and attributed the same to the high commodity prices, which have increased the overall vehicle acquisition cost.

We can further add factors like rising fuel cost, which could put vehicle demand under pressure, ultimately forcing companies to rework their strategies to survive in a cost-conscious market such as India.

In addition, the Indian government has also announced a new scrappage policy, mandating the inspection of care upon the expiration of a registration certification. According to the new law, a registration certificate for a passenger vehicle is valid for 15-years from the issue date. Still, there is no clarity if there would be any significant impact of the new rule on the sales of auto vehicles as of now.