The global automotive industry has been among the hardest hit by coronavirus as the shutdown in China — and now in several other countries — disrupts global supply chains.1https://www.statista.com/statistics/269872/largest-automobile-markets-worldwide-based-on-new-car-registrations/ China is the largest car market in the world, both in terms of supply and demand, and about 80% of global car production involves parts from this powerhouse.2https://www.ft.com/content/b5392370-53b6-11ea-8841-482eed0038b1 Hubei province, of which Wuhan — where the virus originated — is the capital, was ranked as the fourth-largest car producer in China in 2019.3 https://www.weforum.org/agenda/2020/02/coronavirus-china-automotive-industry/ “Hubei is not only a supply base for auto parts in China but also for the global auto industry as a whole,” a specialist told Third Bridge Forum. “Therefore, I think the epidemic actually has the most significant effect on the whole industry chain.”
In response to the upheaval, Moody’s Investors Service altered its global outlook for automaker sales, now anticipating a 2.5% decline in 2020, compared with the 0.9% drop previously projected. The ratings agency predicts Chinese auto sales will fall 2.9% this year, compared with its previous forecast of 1% growth, it said in a statement.
Meanwhile, with parts running low, supply chain and procurement teams are likely assessing worst-case scenarios and searching for alternative suppliers. One global automotive industry expert highlighted that at any given time — but particularly during a crisis — the “dream scenario” is to have parts dually sourced, with the flexibility to seamlessly shift from source A to source B. However, this is not often the case. Though always considered when sourcing new business, once calculations are made, the approach is often deemed unfeasible. Sourcing alternative suppliers overall requires a “very significant amount of work, oftentimes with significant risk”. One industry takeaway could therefore involve rethinking supply chains to ensure they are better able to withstand sudden disruptions like we have seen as a result of coronavirus.
Against the backdrop of a gloomier outlook for the global automotive industry, coronavirus is hogging the limelight in what is seemingly a bigger story in China, according to one of the aforementioned experts. Sales dropped 92% in the first half of February4 https://www.bbc.co.uk/news/business-51706225 and while coronavirus undoubtedly played a part in this decline, it is not entirely to blame, he said. As sales started to dwindle in 2019 — or even in the second half of 2018 — the pandemic has aggravated an existing auto sales problem in the country. Indeed, car registrations dropped about 9% last year to 21 million units, according to Statistica.5https://www.statista.com/statistics/269872/largest-automobile-markets-worldwide-based-on-new-car-registrations/ Even without the outbreak, the decline “still takes time to bottom out”, which could take until the middle or end of the year. “I have an extreme estimate, that is, even if no auto manufacturers resume production, the stocks may not be sold until April or May,” the specialist said.
However, another expert believes the pandemic will have “certain positive impacts” on sales, namely regarding ultra-luxury vehicles. He noted that passenger vehicle sales dropped 8% in 2019 while luxury vehicle sales rose 10%. “I think the coronavirus outbreak will probably lead to changes in consumption philosophy and behaviour of certain groups of people,” he said. With many auto sector salaries likely to take a hit, spending power will be reduced. “Some people might even be laid off in Q1, Q2 or H1 2020,” the specialist added. However, those with a strong desire to buy their first vehicle might do so earlier than planned — so as to avoid public transport, for example. “I think the coronavirus outbreak might also drive the sales for large SUVs that can accommodate an entire family and run in multi-scenarios.”
Reasons for the broader sales decline in China include the introduction of policies aimed at combating air pollution, which is discouraging people from owning their own vehicles. At the same time, house prices have been increasing, meaning people have less spare cash. “Hence, the auto industry [in China] is in a downturn on the whole,” the expert said, noting that vehicle consumption is declining in both first- and second-tier, and third- and fourth-tier cities. “I think this perfectly explains the overall market downturn and the differentiation between high-end and low-end auto brands in China’s automotive industry.”
Other areas, it seems, have not been as affected by the disruption, such as developmental work on vehicle electrification and autonomous driving. While travel has been significantly reduced, particularly between countries, communication technologies have enabled most to continue working. At this point, the expert sees “absolutely no slowdown” in development work. Similarly, he has observed little impact on sourcing decisions and strategies, given it usually takes two to four years for a product to hit the road. Any operational impact will be “broad brush” rather than affecting a certain vehicle or technology. “If the vehicle is made in a region that potentially is so impacted that work is stopping, then obviously that would be the impact, but that’s more geographical than anything else.”
The outlook for China’s automotive industry remains uncertain and could take a number of roads. “There may be a rebound, as well as slow growth or even zero growth,” according to one specialist. The unexpected outbreak may also accelerate the elimination of weaker industry players, while the stronger brands will be able to weather the storm and potentially grow stronger. How quickly auto dealers are able to recover from the impact will depend on economic prospects once the pandemic is over. However, the consensus is that this is essentially a “lost quarter for everyone in China”.
Meanwhile, more countries have entered shutdown mode, including Brussels, Italy and Spain in Europe. The UK, it seems, is not far behind. Toyota and BMW this week suspended production, while Nissan has shuttered its Sunderland factory, Britain’s biggest car plant.6https://www.bbc.co.uk/news/uk-51939634 As the ripple effects of coronavirus intensify, RBC Capital Markets warned this week that global auto production could drop 16% in 2020, with an expected 20% decline in the US.7https://www.cnbc.com/2020/03/16/rbc-warns-coronavirus-could-cause-20percent-decline-in-us-vehicle-sales.html Navigating the road ahead will not be easy, with no clear exit in a fast-moving situation.
Click here to read Third Bridge Forum’s introductory piece on coronavirus, as well as its observations on how the virus is impacting the travel industry.
The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
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