China could suffer the loss of a million vehicles worth of production as factories in its crucial automotive industry remain shuttered until at least next week — and likely longer in Wuhan, the "motor city" at the center of the coronavirus outbreak.
With more than 24,000 people infected, the impact of the highly contagious disease is also beginning to be felt by automakers in other parts of the world. Hyundai is suspending production in its South Korean plants because of a shortage of Chinese-made parts, and even European car manufacturers could be hit: Volkswagen and BMW could see a dip of 5 percent in their earnings for the first half of 2020, according to research firm Bernstein.
“Automakers with factories outside of Wuhan said this week that they are scheduled to start (back up) next Monday, Michael Dunne, head of Asian automotive consulting firm ZoZo Go, told NBC News. “The reality is that no one knows how this will play out.”
Chinese authorities have been struggling to deal with the rapidly expanding health crisis. Authorities initially hoped to confine it to the Hubei region where some experts believe it emerged from a meat market. Coronavirus cases now have spread across the country, with government reports indicating the death toll has now exceeded the numbers from the 2003 SARS epidemic.
Hubei’s capital city of Wuhan serves as a major production base for the Chinese auto industry, especially foreign manufacturers such as Nissan, Kia, Peugeot, and Honda. Nissan produces about 1.5 million cars a year in the city, Honda about 700,000. A number of indigenous Chinese automakers, such as Nissan partner Dongfeng, also operate in and around Wuhan.
The initial plan of attack saw plants in the city closed until this past Monday. That was extended to February 9 and could stretch on even further. Meanwhile, automotive operations in other parts of China are also being hit with extended shutdowns. That includes factories in Shanghai, the largest automotive manufacturing center in the country, as well as the capital city of Beijing.
“Nobody in cities like Beijing and Shanghai and Guangzhou are venturing outside,” said Dunne. And with no clear timetable for the auto industry to get back to normal, “It is looking like there will be about 1 million units of lost production,” Dunne said, equal to about two weeks of normal Chinese output.
Over the past two decades, China has grown into the world’s largest automotive market and the vast majority of the vehicles sold there are produced locally.
Joseph Massaro, chief financial officer for auto supplier Aptiv, said during an earnings call last week that he expects first-quarter vehicle production in China to be off by 15 percent, though he added he hopes that much of that could be made up with overtime during the rest of the year.
IHS Markit has issued a more bleak forecast warning that, if the effort to control the coronavirus epidemic echoes what happened with SARS, much of the Chinese auto industry could be idled into March, costing about 1.7 million units of lost production.
Complicating matters, a number of global manufacturers have begun ordering foreign nationals to leave China. Toyota last week banned employees from flying to China “until further notice,” according to company spokesman Eric Booth, who said the automaker “will continue to monitor the situation.” Tesla, GM and Ford are among the companies that have enacted similar restrictions, with some carmakers also racing to extract employees from China.
The crisis couldn’t have come along at a worse time, at least for the Chinese auto industry. The country’s new vehicle market had been the envy of the world for most of the past two decades, with annual sales routinely rising at a double-digit rate. But last year saw a rare sales decline and, even before the coronavirus struck, industry watchers were worrying about what would happen this year.
Typically, there has been a “sales sprint” ahead of the Lunar New Year, Cui Dongshu, the secretary general of the China Passenger Car Association, noted in a blog post last week. There was no sign of it, even ahead of the epidemic. And now, he warns, even the modest 1 percent growth in Chinese car sales this year is uncertain.
Analyst Dunne is also concerned, noting the coronavirus is just one of the problems. “The greatest threat is that the virus whacks consumer confidence — which is already shaky as a result of the slowing Chinese economy and U.S.-China trade tensions. Weak demand for new cars means idle factories, which could lead to job losses.”
That’s worrying foreign manufacturers such as GM, said Dunne, who are not only facing declining sales but also growing pressure from Chinese domestic producers.
But the growing concern is what the epidemic might mean for the industry outside China. While China ships relatively few vehicles abroad, it exports about $70 billion worth of car parts and accessories globally, with roughly 20 percent going to the U.S. The list covers everything from steering wheels to shock absorbers, down to literal nuts and bolts, washers, springs and copper rivets. Most of that comes in the form of aftermarket parts and accessories, but some goods also wind up on U.S. assembly lines.
In an industry that has moved to tighten the supply chain in order to hold down costs and better manage quality, there often are few, if any alternatives should parts supplies get cut off. Two years ago, Ford had to temporarily idle production of the highly popular — and profitable — F-150 pickup when a fire knocked out a key Michigan supplier’s plant.
There has been “no impact yet,” from the shutdowns ordered in China to control the coronavirus epidemic, said Kelli Felker, who oversees manufacturing public relations for Ford. “But we’re closely monitoring the situation.”
That’s been echoed by other manufacturers with U.S. plants. So far, the epidemic hasn’t caused any disruptions. But the longer it drags on, disrupting Chinese auto and auto parts production, the worse the potential effects.