The automobile industry is taking a hit as cities are put on lockdown in the wake of the corona virus epidemic.
“The headwind related to coronavirus is affecting both local and global manufacturers as China has become the largest passenger car production hub and consumer. But delayed production and worsened sentiment are now adding extra challenges on top of the already very weak auto sales since 2018,” according to Alicia Garcia-Herrero, chief economist, Asia Pacific Corporate & Investment Banking, Asia Pacific at Natixis.
One of the reasons why automobile has been hit harder than other manufacturing sectors is Hubei province supplies 9% of car production, which is larger than its relative GDP of 5%. And the impact of stalled activities in Hubei province needs to be understood in the context of the general excess capacity of the sector in China.
"With a utilization rate of 77% in 2019, the disruptions should not be a problem on the aggregate level but only for specific auto makers with production concentrated in Hubei province. The relatively high level of inventory held by dealers and the seasonality pattern that February is the weakest month for car sales also mean a general shortfall of supply is unlikely if factories can resume production soon," says Garcia-Herrero in a report.
Dealers currently hold inventory equivalent to 1.3 month of sales and February have accounted for an average of 6% of annual sales in the last five years.
Although the disruption on production looks manageable in the short run, the impact on firms varies. Honda and Dongfeng are the most exposed firms in Hubei province. But pressure on other firms will surge if the coronavirus spreads to more provinces. "Any production delay in Guangdong and Zhejiang, which form 12% and 4% of total production and have relatively high number of infections, will have a significant impact on production, including Japanese and European firms," Garcia-Herrero says.
The above worries have been reflected in the market with eight out of 10 underperformers in the global automobile sector being directly related to Hubei or with exposure in provinces nearby. The concern, however, is not only related to the supply chain, but mainly due to the expectation of lower sales in China for 2020 due to delayed rollout of new models and dampened purchasing sentiment.
In the medium run, if the disruption in the automaker supply chain is severe, it will accelerate existing forces towards the localization of the production in the targeted market. This is, obviously, one more important blow to global value chains and globalization.