By Trefor Moss and Mike Colias
SHANGHAI -- Ford Motor Co.'s multibillion-dollar push to expand in China this decade has veered off course, leaving it mired in a sales slump that is weighing on its future in the world's largest auto market.
The No. 2 Detroit auto maker's sales in China fell 27% in the first six months of 2019 from the prior-year period, as a downturn in the Chinese car market extended to a 12th month in June. The sharp drop-off in China auto sales -- the industry's first since Beijing opened the market to foreign car companies in the 1980s -- is challenging even stronger and more-established global car manufacturers in the country, like General Motors Co. and Volkswagen AG.
The prolonged sales decline has become particularly troublesome for smaller, mass-market players like Ford that arrived late and are now being threatened by much-improved Chinese brands.
The speed and depth of Ford's decline in China stands out, exposing deep-rooted flaws in its approach.
Last year, Ford's sales in China plunged 37%, much sharper than the broader market's 3% decline. It reported a $1.5 billion loss in the country in 2018, its first after several profitable years. Ford's China market share was 2.1% in the first quarter this year, down from 5% the same period in 2016.
Ford executives failed to innovate locally, assuming that a global product strategy successful in the U.S. and Europe would also work in China, said current and former managers. However, rivals moved faster to add new technologies, even as Ford resisted tailoring its lineup to suit the needs and desires of Chinese buyers, these people said.
"We probably didn't recognize that the market was moving very fast," said Anning Chen, who took over as Ford's China chief executive in November. An engineer who most recently ran China's Chery Automobile Co., Mr. Chen said Ford must work at "China speed" and prioritize features appealing to China's style-conscious buyers.
Ford's future as a global auto maker hinges on whether Mr. Chen, and Chief Executive Jim Hackett, can turn around the China business. Ford is already shrinking its presence in Europe and South America amid persistent losses in those regions. Failure to transform the China operation into a reliable profit generator leaves Ford almost entirely dependent on the U.S., which is also slowing. The company reports quarterly earnings Wednesday afternoon..
The challenges are plenty. Ford's China missteps played out over several years and involved a revolving cast of executives as well as a fraught relationship with its joint-venture partner Chang'an Automobile Co. That left the company with outdated models, frustrated dealers and excess factory space.
Ford is now counting on a new-model blitz to revive sales. The company has established new research and design centers in China to engineer vehicles for the local market and is developing a multimedia system with Chinese tech giant Baidu Inc. It is also slashing costs and will soon start building more profitable models in China, such as those sold under its premium Lincoln brand, allowing them to avoid tariffs.
Losses in China narrowed in the first quarter, indicating some progress. Still, some analysts are skeptical Ford can bounce back, especially in a contracting car market. Industrywide sales in China dropped 12% in the first half, the weakest in four years, as a slowing Chinese economy and uncertainty around U.S. trade relations continued to weigh on consumer confidence.
"Ford in China has become pretty irrelevant," said Janet Lewis, head of Asian auto research at Macquarie Group. "These types of problems can't be solved with a couple of new models."
Recent tensions with Chang'an have further hampered Ford's turnaround efforts. Last year, Ford's marketing managers in China sought to erect a five-story vending machine to dispense cars for test drives. The promotion was intended to highlight a new partnership with e-commerce giant Alibaba Group Holding Ltd. and boost Ford's sales through online retail.
Senior managers at Chang'an learned of the vending-machine project only days before the launch, leaving them fuming, according to former Ford employees involved with the effort. The conflict led Ford to eventually scale back its Alibaba partnership, they said.
The two joint-venture partners also were at odds in their response to collapsing sales, according to a former executive at Ford in China. Ford wanted to restructure and move faster to put out new models, while Chang'an's priority as a state-owned enterprise was to protect jobs and keep manufacturing cars to lift the local economy, this person said.
Chang'an didn't respond to requests for comment. A Ford spokeswoman described the Alibaba project as a successful pilot but declined to comment on its partner's reaction. Mr. Chen said it isn't uncommon for joint-venture partners to look out for their own interests, adding that the two companies are working more collaboratively now.
Ford had found success in China under former Chief Executive Alan Mulally, who pressed for a major industrial expansion earlier this decade. The company opened dealerships at a rate of about 100 a year, mostly in less-developed cities farther inland, and established new factories, looking to catch up with GM's more-established manufacturing footprint.
Ford's sales peaked in 2016 at 1.27 million -- or about 19% of overall sales. Last year, it sold a total of 752,243 vehicles in the country.
Part of the problem is that for years Ford relied on an ever-changing group of American and European executives to run operations in China -- many of whom had a limited understanding of the local marketplace, said former and current executives.
In a country obsessed with technology, Ford's lineup grew stale and its models lacked features important to Chinese buyers, such as internet connectivity and large, multimedia displays.
"Ford suddenly started looking middle-aged," said Fu Yu, an entrepreneur based in Beijing, who recently traded out his Ford Focus for a new Honda Civic.
In an interview, Joe Hinrichs, Ford's president of automotive, acknowledged the executive turnover and aged vehicle lineup hurt its business at a time when Chinese rivals were quickly improving. Ford has since installed new leadership in China with more on-the-ground expertise and is working to mend frayed relations with its dealers there, another contributor to its sales decline, Mr. Hinrichs said.
"We've hired many local nationals with automotive experience in the Chinese market to help," he said. "They're more in tune with what's going on in the marketplace."
--Bingyan Wang and Kersten Zhang in Beijing, and
in Shanghai contributed to this article.
Write to Trefor Moss at Trefor.Moss@wsj.com and Mike Colias at Mike.Colias@wsj.com