Can China’s carmakers avoid a virus-driven crash?

Many car companies are facing up to their over-reliance on China as a source of key components, analysts say.

China car showroom
Demand for cars in China, one of the country's most important economic sectors, plunged after the coronavirus outbreak [February 28, 2020: Aly Song/Reuters]

Shenzhen, China – At the Shenzen showroom of GAC Motor – one of China’s biggest carmakers – the salespeople sat at their desks looking thoroughly bored. It was a late February afternoon, and there were no customers.

The coronavirus outbreak has slammed the brakes on an industry that had already been decelerating due to China’s economic slowdown and a shift away from car ownership among younger Chinese.

The months since the discovery of the novel coronavirus have been tough on the auto sector. Factories were forced to shut as millions of workers were told to stay home during an extended Lunar New Year holiday in January to slow the spread of the virus.

But as the rate of new cases drops, many Chinese businesses and factories are returning to work.

“At the beginning when we reopened there were only two or three groups of people per day, but we’re seeing more now, maybe five groups,” Huang Zhilun, a GAC Motor sales manager, told Al Jazeera. “Every day, there is a little bit more activity, as more dealers start to return to work, and more customers are willing to come back.” 

China’s car-making industry is the world’s largest and has grown in importance to the country’s economy.

Last year, carmakers in China sold 21.05 million passenger vehicles, compared with slightly less than 17 million in the United States and 15.8 million across the European Union, according to the German Association of the Automotive Industry (VDA).

In 2010, the auto industry accounted for 7.4 percent of China’s gross domestic product, according to research published last year by Cornell University. That figure rose to 9.3 percent of gross domestic product (GDP) by 2018, based on data by Beijing-based Zhiyan Consulting Group.

And it employs nearly 5.6 million people, according to the National Bureau of Statistics.

But China’s car industry has faced headwinds in recent years. After almost two decades of continuous growth, sales peaked in 2017 at 24 million units and have fallen since, as China’s economy slowed. Government efforts to reduce emissions and bad debts have combined with external factors such as the US-China trade war to curb both the broader economy and car sales in particular.

The COVID-19 outbreak has squeezed carmakers further.

‘Ground zero’

February marked the biggest monthly drop in car sales in China’s history, with a 79 percent plunge, according to latest figures from the China Association of Automobile Manufacturers.

And other data point to a sharp contraction in the broader economy. Retail sales, investments and industrial production all plunged in the first two months of 2020, according to official statistics.

China car showroom 2
All dressed up and nowhere to go. Car showrooms in China were all but empty at the height of the outbreak [Aly Song/Reuters]

But the virus has hurt not only demand for vehicles in China, but the ability of Chinese manufacturers to supply cars and car parts to customers, both at home and abroad.

“Almost from the moment it became clear that coronavirus was spreading in Wuhan, the auto industry found itself at Ground Zero,” Marco Hecker, auto sector leader for accounting firm Deloitte based out of Hong Kong, told Al Jazeera. 

Several large foreign carmakers have significant manufacturing operations in China. But their inability to fully staff factories due to measures to contain the virus has damaged the supply chains that, when they work smoothly, deliver components and finished goods around Asia and beyond according to carefully timed schedules.

“The shutdowns of auto parts manufacturers has not only affected downstream production in China, but also disrupted the global supply chain as some of downstream suppliers or carmakers are forced to halt production, shift production capacity to other countries or struggle to source tens of thousands parts out of China,” Hecker said.

Hecker estimates that China’s auto parts market makes up 50 percent of the global total.

Japanese car giant Nissan, for instance, has its China headquarters in Wuhan, the city in Hubei province where the virus is widely believed to have originated. The company said last month it would reduce output from some of its Japanese plants due to issues with procuring components from its Chinese factories.

Rival Japanese carmaker Honda and South Korea’s Hyundai also have manufacturing facilities in Hubei province.

Intertwined supply chains

“What strikes me about this coronavirus is that, for the first time, we’re actually discovering the actual extent to which the world is genuinely entrenched and intertwined with their supply chains centred in China,” said Michael Dunne, CEO of ZoZo Go, an automotive industry consultancy firm.

“It’s really an awakening of sorts for companies,” Dunne told Al Jazeera.

China car showroom Michael Standaert
Global carmakers like Nissan source significant amounts of components from Chinese parts manufacturers [Michael Standaert/Al Jazeera] 

The region’s carmakers are slowly cranking up operations as the virus abates and more staff return to work.

Vice Minister of Industry Xin Guobin told media on Friday that vehicle-parts makers in Hubei province are resuming production in an orderly manner. He also said his ministry will ensure that global supply chains are stabilised.

As of February 26, the China Association of Automobile Manufacturers (CAAM), said more than 75 percent of automakers had resumed production.

Spokespeople for German car giant Volkswagen and Japanese rival Toyota told Al Jazeera that all their operations with local joint venture partners have returned to normal.

But analysts say the outbreak is forcing many global carmakers to reassess their reliance on China as a source of components, and that they are starting to appreciate the need to diversify their supply chains.

“The thinking got sort of turned off, you know, the thinking about the strategic parts of sourcing got turned off, at the expense of people saying hey, this is low-cost, big scale, and profitable,” Dunne said of the shifting of so much of the supply chain to China.

“So that came at the expense of countries like Thailand, Indonesia, India, and more recently, say Vietnam,” Dunne said. “China just hogged it, the investments, across the board, and no one was questioning it because it was working so beautifully, why would we look anywhere else?”

Tech to the rescue?

But even if carmakers are returning to normal, it still is not clear when Chinese customers will feel ready to open their wallets and consider buying a new car. Daily life remains curtailed in many Chinese cities, with people continuing to avoid shops and restaurants as the virus spreads rapidly in other parts of the world, raising some concerns about it returning to China.

At a Volkswagen dealership ner the Shenzhen GAC showroom, a couple wearing surgical masks were the only customers – no others were allowed in – and they had to register and undergo temperature and ID checks before they entered.

“We have about five or six people per day, or five groups,” a Volkswagen salesman said, declining to divulge his name. “Normally we would have 10 to 15 groups of people per day [during the week] and about 30 [per day] on weekends. But now it’s about five groups. It’s difficult to say when things will get back to normal,” the man told Al Jazeera.

But some companies are using technology to overcome the issues concerning physically going to a dealership to buy a car.

One such carmaker is NIO, a Chinese electric vehicle company.

“On the sales front, we adapted to start livestream on social media, [and] set up discussion groups to keep communicating with our client,” NIO’s international spokesperson Carrie Shen told Al Jazeera.

Huang at the GAC dealership has a novel sales pitch: extolling the virtues of the car as a virus-free zone.

“When things return to normal, car demand will come back, too, because after all, riding in your own car is much safer than taking the crowded metro,” he said. “This is also why many of the customers over the past few days have visited us, so the outbreak has, in fact, driven these people to get their own cars.”

With additional research assistance by Zhong Yunfan.

Source: Al Jazeera