With the recent passage of “phase one” of a trade agreement between the United States and China and the ratification of the United States-Mexico-Canada Agreement (USMCA), 2020 was supposed to be a transitional year for the global auto industry. Analysts had expectations that sales in the sector had bottomed out and that growth in China would support the world market, reversing recent negative sales trends and getting back to a trajectory of growth. But the worldwide spread of the coronavirus disease has become one of the greatest tests to the complex global supply chains created by auto manufacturers over the past 30 years and could lead to another downturn in global sales.
Coronavirus ground zero
When a dangerous new virus was spreading in the Chinese city of Wuhan and the Hubei province, the auto industry found itself at the center of the outbreak. The Hubei province is home to many major car manufacturers and in 2018 produced 1.7 million cars, accounting for almost 9% of China’s automobile output that year, according to Bloomberg Intelligence.
An assortment of automakers operating in or near the city had no choice but to halt production at the start of 2020 due to the spread of the virus. Soon after, manufacturers in other parts of the country, including China’s automotive center of Shanghai, felt the impact. While some plants in Wuhan remained shuttered through early March (more than two months after operations were expected to resume following the Lunar New Year holiday), many have reopened. That includes the new Tesla factory in Shanghai, and Ford restarted production at its facilities in Chongqing and Hangzhou on Feb. 10.
Many workers trying to get back to jobs in China face a slew of fresh quarantine policies designed to prevent the spread of the new coronavirus, and factories are running slowly and could face new restrictions if the pandemic worsens. China postponed its annual auto show in Beijing, originally scheduled for April 21, and many other events have also been canceled or delayed.
While the ultimate impact of the coronavirus pandemic on China’s auto production and sales is not clear, passenger car sales there fell 92% in the first half of February, according to data from the China Passenger Car Association. China’s association of automobile manufacturers recently forecast a 10% decrease in sales for the first half of the year and 5% decline for the full year. As of mid-March, IHS Markit estimated that there would be a reduction of 1.7 million vehicles produced in China. Several manufacturers – including General Motors and Volkswagen – have become dependent upon sales and revenue from what has become the world’s largest new vehicle market, and this slowdown may hit their suppliers hardest. Ultimately, automakers around the world that depend on parts and accessories from China will feel the pain as well.
The coronavirus could drive down global auto sales by as much as 2.5% this year, a significantly sharper decline than the 0.9% dip previously forecast by Moody’s Investors Service.
The auto industry is feeling the effects of the coronavirus outbreak well beyond China’s borders as shortages of supplies from China stall production around the world. While China is not a significant exporter of fully assembled vehicles, it has become a major player in the worldwide auto parts and component network. In 2018, China exported almost $35 billion worth of parts and accessories, with the United States importing almost $12 billion.
Nissan recently announced it would suspend auto production in Japan due to the outbreak. Hyundai, which is highly dependent on Chinese suppliers, idled three of its plants in South Korea in February due to parts shortages. In mid-March, every major carmaker in the U.K. and Europe suspended or cut production as the disruption from the pandemic continued to spread – with only lower-volume manufacturers such as Aston Martin keeping factories open. In addition, while the United Auto Workers and big three automakers had initially agreed not to close their factories outright, as of March 18 they decided to suspend production to keep their workers safe from the coronavirus.
As automakers work to reopen factories and parts plants resume operations, many suppliers have no choice but to turn to costly airfreight, rather than ships, to get parts to their customers quickly. Supply chain issues may force businesses to send workers home or reduce production in the near term.
How coronavirus may transform auto sector
There may be a surge in growth in the automotive market as manufacturers resume operations, but it will take time to get back to normal production levels. There is still the threat of U.S. tariffs on automobiles and auto part imports, expiring credits for electric vehicles in China, as well as new European Union emissions rules kicking in this year and in 2021. Tariffs – which have increased costs – as well as the increased research and development costs (such as electric vehicle and autonomous vehicle technology) to comply with new regulations and increasing consumer demands could do serious damage to the bottom lines of the weakest global players.
The coronavirus outbreak will surely accelerate industry consolidation and transformation, with organizations focusing on greater resiliency, innovation and investment in emerging growth markets. Significant disruption inevitably causes companies to respond with a campaign to diversify their suppliers, leading to higher costs in the short term. Those higher costs typically ease as the memory of the disruption fades, but this time may be different; manufacturers were already shifting global supply chains away from China in response to tariffs, and this pandemic could be just the event that leads to more regionally focused supply chains. Such a reversal would mark a departure from the three-decade-plus trend of moving manufacturing to China.