COVID-19 Impact Scenarios on China’s Automotive Industry

The COVID-19 outbreak continues to develop fast. There are signs of successful containment in some areas in China, while fears grow accelerating infection rates in other countries – Japan notably. How the situation develops over the coming days, weeks and even months remains uncertain, creating a risky business environment.

Automotive OEMs and Component Supply Chain

Though information is limited, several Chinese vehicle assembly plants had extended their seasonal shutdowns and the automotive component supply chain has been disrupted with some industrial areas in lockdown. A few automotive plants have reported resumption of production since the week of February 10th, while others remain shuttered. Major affected carmakers in the region include Dongfeng, GM and PSA.

Several component suppliers in Wuhan and Hubei provinces have already alerted their OEM customers they are unable to maintain supplies. Problems have already emerged in Korea and will likely spread to other countries and regions as well. Examples of recent disruptions include Hyundai, Kia and SsangYong in Korea having temporarily closed plants, and Nissan has announced a day of production loss at its Kyushu plant in Japan. Jaguar Landrover in the UK expects parts shortages to force capacity reductions from the end of February.

The situation is likely to intensify, causing ad hoc interruptions in the supply chain, with each OEM, plant, and model expected to have different levels of exposure, requiring different countermeasures. Evidently, some automakers in China such as FAW, Toyota and Honda, had also earlier undertaken stock reduction actions towards the end of 2019 with the lower projected growth for 2020 and will, therefore, face relatively earlier stock outs than might have otherwise been the case.

Outbreak Scenarios

While the rate of infection seems to have stabilized before reaching an exponential growth phase, there are differing views among virologists whether COVID-19 can be contained or will become a full-blown global pandemic. Counterpoint Research has considered the following optimistic, most likely and pessimistic scenarios:

Optimistic: Epidemic bought under control in Q1

With effective Government interventions initiated, the epidemic situation is expected to be bought under control by end Q1. The government would ease clampdowns progressively between mid- April. We could expect component makers and OEMs working overtime from April to recover the Q1 output loss within Q2. We can also expect industry stakeholders seeking,  and receiving,  favourable government incentives and subsidies in the short term to stimulate production and demand. In this scenario, expect the industry to drop between at 3%.

Most Likely (Base Case):  Epidemic bought within control in Q1

With people back at work following the lunar new year annual holidays, widespread dispersal could continue to surface over March, with the epidemic continuing into Q2. The automotive impact would spread widely outside the Hubei Province, disrupting component supply chains. Ongoing official control efforts and damaged consumer confidence will impact consumer demand, dropping GDP growth to around 5% from an earlier estimated 6%, impacting the vehicle production dropping by 5% from the prior year.

Pessimistic: Epidemic continues into Q2,  possibly even into Q3

In this situation, the automotive impact would spread widely elsewhere in the world, with China being the key supplier to many countries in the region. In addition, the eventually lowered consumer confidence will impact the economy harder, resulting in overall weakened automotive demand.  Should the outbreak, with further mutations possibly, continue beyond H1, the situation could cause an economic meltdown, affecting several industries and service activities. If this were to happen, the decline in vehicle production would be sharper and last longer. In our estimates, the lowered GDP could result in vehicle production dropping by 11% compared to 2019.

Exhibit 1: China Vehicle Production in Various Scenarios

Counterpoint COVID-19 Impact on China Vehicle Production

2020 China PV Production Outlook

At  5% YoY drop as the base case, Counterpoint analysts project the vehicle production outlook will be around 24.4 million units in 2020. The situation, however, remains fluid, and further revisions will be made as more clarity emerges.