It’s hard to browse any news website without seeing the word “coronavirus”. Whether it’s a local, regional or global media titles, everyone is covering it. Most of the focus of these stories are economic or social in scope.
Asia’s automotive industry is not immune from the impact of the coronavirus contagion. The epicentre of the contagion, Wuhan, is home to GM, PSA Group, Honda, Nissan, and China’s very own Dongfeng Motor. So, the impact is even direr.
According to IHS Markit, the number of automotive plants in China that have been put on extended holiday has increased markedly, as more provinces have decided to delay businesses returning to work. Almost all nonessential business, and not just vehicle plants, are included in the government directives.
IHS Markit paints two scenarios – a current state of play and a potential escalation scenario where the downtime flows into mid-March.
These are framed around the very uncertain near-term spread of the virus, which clearly has the potential for other provinces to announce similar return-to-work delays and/or for possible extensions to the downtime period (to more than the first week of February) so far announced.
11 of the 31 provinces in mainland China had announced that return to work for all nonessential business would be delayed an extra week after the already extended Chinese New Year holiday period. These provinces (Hubei, Shanghai, Guangdong, Chongqing, Zhejiang, Jiangsu, Anhui, Yunnan, Fujian, Jiangxi and Shandong) alone are normally responsible for over two thirds of vehicle production in China, with projected crisis-induced first quarter production loss of around 350,000 units (-7%) if they’re only idled until February 10, 2020.
However, if the situation lingers into mid-March, and plants in adjacent provinces are idled, we could see some more substantial impact. In this scenario, we might expect the potential of a China-wide supply chain disruption caused by parts shortages from Hubei, a major component hub -- and adjacent province closures for the majority of the month of February as a result. If this scenario comes to fruition, IHS Markit predicts potential lost production of more than 1.7 million units for the first quarter, or about 32.3 percent decline from our initial expectations before the crisis began.
It’s important to note that the IHS Markit pre-crisis assessment had already included a 10% reduction in first-quarter build volume versus Q1 2019, so the crisis-induced scenario impacts would be on top of that baseline expectation of a production decline.
Please note that this is only intended as a direct short-term impact assessment under different scenarios in a fast-moving situation.
“At this early stage, we have not attempted to outline the possible view of any production recovery as the crisis abates and work and commercial schedules normalize. How this plays out will be determined by the even more opaque second-round indirect effects on the economy, income growth and consumer confidence, and thus on the severity of impact on auto sales in coming months. This will itself depend on which scenario plays out and will take longer to assess,” it cautioned.