Inside the Exit of Ford and Other Automakers From India

"Ford makes ugly little cars in ugly factories."

That’s how Ferrari describes the company in the movie Ford v Ferrari. Moments later, Henry Ford resolves to “bury Ferrari” at Le Mans!

In any case, the only thing Ford buried yesterday was its 26-year-old manufacturing presence in India, likely with effect from Q2 2022. Until recently, the vehicles manufactured in the company’s Sanand and Chennai plants were exported to over 50 countries.

The company says it has accumulated losses to the tune of $2bn in both these plants over the last decade. The decision to stop production will impact more than 4,000 employees and 150 dealers who currently operate at 300 outlets across the country. Not to forget the dealers who have invested over ₹2,000cr ($272m) in creating sales infrastructure for the company and employ close to 40,000 people.

The announcement hasn’t particularly come as a surprise in the auto industry which has been fraught with foreign automakers’ exits, closure of plants, failed mergers, and most recently, downsizes in production owing to the global chip shortage. With the exception of Tesla’s much-awaited entry, the Indian automotive industry has experienced significant gloom.

Doesn’t bode very well for the fifth-largest auto market in the world, surely. How did we get here and what may we look forward to?

The End of Ford’s Fiesta

The two plants of the company in India have an annual manufacturing capacity of 400,000 units. But lately, they had been operating at 20% utilisation out of which only half was being exported. In 2019 alone, Ford India wrote down non-operating assets worth $800m.

In addition to poor sales and reduced exports, the company’s troubles were compounded by the pandemic. Sales dwindled from 2,872 units in June 2020 to a dismal 2,790 units in June 2021.

And then there was the disastrous merger of its Indian operations with Mahindra and Mahindra which was called off almost a year after being signed. While Ford was exploring new partnerships to stay afloat, especially in the hybrid and electric vehicle segment (reportedly with Ola, the Skoda-Volkswagen group, Hyundai, MG Motor, Tata Motors, Changan Vehicles and others), evidently none came to fruition. A massive business restructuring, therefore, was imminent under these circumstances which started in June when Ford announced an exit from the auto finance business in India.

And India isn’t the exception. Earlier this year, Ford ceased all production in Brazil after operating in the country for more than a century. In fact, over the last few years, Ford has been exiting or reducing investments globally in a number of non-core markets which are no longer profitable. In the last two years, the company has eliminated 20% of its workforce across Europe and closed at least six factories as part of its global downsizing efforts.

The Elusive Indian Auto Industry

Now, India has been a particularly tough nut to crack for global automakers like Ford, Honda, Toyota, Nissan and others. Ford especially, even though it boasts competent technology, its slower product cycles, higher maintenance costs and limited distribution and after-sales networks have inhibited growth over the years.

This is discounting the largely value-conscious Indian market which is heavily dominated by Maruti Suzuki’s cheap cars. This outsized market presence of domestic players (and others like Kia India which have single-handedly outsold Ford in the last two years) has disincentivised foreign players from maintaining or expanding operations for long. This is true even for large players like Toyota and Honda which have substantially scaled down operations.

Add to that the Government’s high-tax regime with levies as high as 28% GST on gasoline vehicles that has contained the growth of foreign automakers, be it in the premium SUV, heavy truck-making or commuter bike segment.

Also, in light of recent events like the Centre’s reported inclination to ease import restrictions for new entrants like Tesla, it isn’t a stretch to expect existing carmakers like Ford feeling marginalised. This leaves them with little-to-less incentive to continue with loss-making operations.

Old guards like General Motors and Ford which had set up shop in India soon after the liberalisation in 1990s have experienced existential challenges in the last decade on account of these reasons. Truth be told, Ford’s product strategy and marketing outreach in India hasn’t exactly been promising either.

Plus, growth in domestic automobile production has been sluggish over the last few years (2.36% CAGR between 2016 and 2020) owing to a host of factors — increase in vehicle prices, liquidity squeeze in the financial services sector and poor purchasing sentiment of the public overall.

In any case, Ford admits to have pursued many courses of restructure (partnerships, platform sharing, contract manufacturing, sale of manufacturing plants etc.) before zeroing in on the exit strategy. The market difficulty seems to have hamstrung its growth enough to merit any financial revitalisation in India.

It is worthwhile pointing out, however, that the shutdown announcement had a limited impact on Ford shares which declined by 2% yesterday while maintaining a 48% growth this year as of Wednesday’s close in the NYSE.

Following the Auto Exodus

The exit of Ford comes as a setback to the Make-in-India campaign, which is particularly relevant when one considers its impact on scores of SMEs which supply raw materials and spare parts to Ford’s plants. At least 50,000 jobs have been estimated to be affected directly when the plants close.

This isn’t good news for India which was projected to become the world’s third-largest carmaker by 2020 with annual sales of 5 million vehicles. Amidst the continuing exodus of companies, the pandemic-induced supply inefficiencies and slowdown, sales have barely managed to touch 3 million a year.

It would require a bunch of formidable actions through policies or production-linked incentives to offset these losses and prevent them from spiralling further in the automobile industry.

(Originally published September 10th 2021 in transfin.in)