After decades of blistering growth, the auto sector of China has been battling a downturn, as evidenced by the second straight annual decline in the country’s 2019 car sales. Adding to the woes of the already struggling China auto industry, the coronavirus outbreak is further dashing any hopes of recovery in the world’s largest car market.
Coronavirus Wreaks Havoc on China Auto Market
Amid coronavirus, the China auto industry has taken a severe beating of late, with shutdown of factories, dealerships with less customer traffic, supply-chain disruption and annual motor show delay.
According to China Passenger Car Association, retail sales of passenger cars in China tanked around 92% year over year in the first half of February, as the shutdown due to coronavirus outbreak has put brakes on the business across the country. Vehicle sales in China totaled 4,909 units in the first 16 days of the month, plummeting from 59,930 units in the comparable year-ago period.
Wuhan — identified as the epicenter of the epidemic — is touted as China’s motor city and is home to numerous auto plants including biggies like General Motors GM, Honda Motor HMC, Nissan NSANY and Renualt. As part of the nationwide shutdown, many automakers shut their factories, which took a toll on China’s vehicle market. The few dealerships that remained open in the first week of February witnessed very little customer traffic.
In addition to auto companies based in Wuhan, various other vehicle manufacturers across the nation also halted their operations. For instance, Tesla’s TSLA Shanghai Gigafactory was shut down, delaying the production of Model 3. Notably, German auto giant Volkswagen VWAGY suspended operations at all its plants in China, operated in partnership with SAIC. Both Tesla and Volkswagen currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Additionally, China’s annual auto show, which was scheduled to be held on Apr 21, has been postponed amid virus fears.
No Turnaround in Sight for China Auto Market Woes
Even before the deadly outbreak, the China auto industry was under stress amid waning consumer demand. After recording growth for decades, the wheels have been coming off China’s auto market since July 2018 owing to tighter emission standards, trade tensions, increasing popularity of ride-sharing platforms and economic downturn. Several structural changes are also crashing China’s auto market. Policy reversals on government subsidies for new energy vehicles upended the market. In July 2019, the government of China scaled back subsidies from 50,000 yuan to 25,000 yuan for cars with a driving range of more than 400 kilometers. Further, stricter emission rules implemented in July paralyzed the country’s auto sales. Per the rules, all vehicles sold in China are required to meet China 6 standards and the higher prices of such vehicles tamed consumer demand.
The massive lockdown in the country, with widespread economic impacts, has further jeopardized China’s economic activities. Although the country’s operations are gradually restarting, carmakers are likely to struggle to boost output. Hit by the disruption caused by the coronavirus epidemic, China Association of Automobile Manufacturers now forecasts the country’s auto sales to dip more than 10% in the first half of the year and around 5% during the full year.
Butterfly Effect on Global Car Industry
The impact of coronavirus is getting felt beyond China’s borders, as various auto companies are halting operations amid shortage of supplies from China. Importantly, around 80% of global car production requires parts from China. The shutdown in China has disrupted the global supply chain, as vehicle makers are struggling to source the numerous parts required for building cars.
Britain’s biggest carmaker Jaguar Land Rover has already warned that it could run out of parts, as coronavirus is halting supplies from China. Fiat Chrysler FCAU also warned that it could suspend production at one of its European factories if supply from China continues to get affected. Toyota and Peugot-Citrion also have similar concerns. Hyundai and Kia halted several assembly lines in Korea. Nissan also announced that it would suspend auto production in Japan. Meanwhile, General Motors indicated that production outage may affect its plants in Texas and Michigan.
While some regions in China have started introducing stimulus measures to help boost sales, most of the cash-strapped local governments are not likely to take similar steps. Due to this, the dealerships might struggle to generate sales for the next couple of months at least. As businesses restart operations, there may be a surge in growth in the country’s auto market. However, it will take time to resume normalcy of operations. Until the situation is better, incentive policies are unlikely to have a major impact on car sales. As the auto industry has been caught off guard this time, companies should start chalking out a proper contingency plan for any such catastrophic event in the future.
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Honda Motor Co., Ltd. (HMC) : Free Stock Analysis Report
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