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Is the Future of Ford (F) & Zotye JV Mired in Uncertainty?

Zacks Equity Research

Reportedly, the future of the joint venture between Ford Motor Company F and Chinese automaker Zotye is in limbo. The U.S. automaker and Zotye had teamed up for electric vehicles production in 2017 but the partnership has not turned out to be as fruitful as expected. Per the pact, Ford and Zotye had agreed to make a combined investment of $756 million to form a joint venture (JV) in China. The JV aimed at developing a manufacturing plant in the Zhejiang province, a R&D facility, along with a sales and service network to examine vehicle connectivity and mobility service solutions.

However, vehicle sales in China have been on the decline and the situation is unlikely to improve anytime soon, which has certainly affected the Ford-Zotye JV. According to China Association of Automobile Manufacturers, vehicle sales in China during January to July 2019 totaled 14.13 million, down 11.4% y/y. A fall in customers’ confidence due to concerns related to economic slowdown amid the U.S.-Sino trade tussle and phasing out of government tax breaks sapped the demand for cars.

Notably, Zotye estimates a net loss of 270-320 million Yuan in the first half of 2019 versus a profit of 305 million Yuan in the comparable period last year. Zotye’s vehicle sales in the first seven months of 2019 came in at 82,000, reflecting a decline of 48.4% y/y. Macroeconomic headwinds and a sluggish auto market have impacted its sales.

Per Caixin Global, Zotye — which went public via backdoor listing — is mired in another controversy as it has failed to meet the sales targets that were set in a previous agreement. As part of the agreement with the company’s majority shareholder New-Tech Group, Zotye is required to meet the profit targets for the next three years. New-Tech would have to part with some of Zotye’s shares, on failure to meet the targets. The company had failed to meet the targets in 2017 and 2018 as Zotye was hit by the lack of product development capabilities. The company, which is caught up in the China auto slump, expects to incur loss in the first half of 2019.

Considering these factors, Ford and Zotye are comprehensively re-evaluating their pact and conducting an overall appraisal of their cooperation, per reports. According to sources, slow introduction of new car models has also been a contributing to the tepid progress made by the Ford-Zotye JV.

Zacks Rank and Key Picks

Ford currently carries a Zacks Rank #3 (Hold).

Some better-ranked players in the auto industry include IAA, Inc. IAA, Wabash National Corporation WNC and Fox Factory Holding Corp FOXF. While IAA and Wabash sport a Zacks Rank #1 (Strong Buy), Fox Factory holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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