By Yilei Sun and Norihiko Shirouzu

The worsening coronavirus epidemic is likely to wreak havoc on China auto sales and production in the first quarter, but the effects could ripple through supply chains worldwide if the outbreak continues to expand.

Seeking to rein in the epidemic, which has killed more than 200 people, authorities have extended the weeklong Lunar New Year holiday by three days to Feb. 2. In mainland China, 11 of 31 provinces, representing more than two-thirds of automobile production in the country, have announced that returning to work for all nonessential businesses would be delayed to Feb. 10 on top of the extended holiday. That’s in addition to broad shutdowns of road, rail and air logistics and passenger travel.

Prior to the outbreak, forecasts for the world's largest auto market this year had ranged from mild sales growth to small declines after two painful years of contraction due to a slowing economy, the U.S.-China trade war and the chaotic introduction of new emission rules.

Auto analysts at IHS Markit had already forecast 10% lower first-quarter production volumes in China before the crisis began, and they released new estimates on Friday. Assuming no further disruptions, IHS predicted a first-quarter production decline of 350,000 units, or a 7% drop. But the analysts said a worsening crisis that keeps plants idled into mid-March could trigger a disruption across China’s massive supply chain, with the possibility of 1.7 million units worth of lost production in the first three months, a drop of 32.3% from expectations before the coronavirus outbreak.

Writing in Forbes, Willy Shih, a professor at Harvard Business School who studies industrial manufacturing, said the real test may come when workers who went home to Wuhan or other areas of high contagion for the Lunar New Year holiday return to work. Many live in cramped factory dormitories filled with bunk beds and work in close proximity to one another on factory floors.

When they return, Shih writes, “managers will have to worry about whether any of their workers have potentially been exposed to the virus and will need to be quarantined for two weeks. Imagine an even worse case if virus carriers are not identified and go out on the factory floor and infect others. This will be a nightmare.”

China, the world's largest automotive market, is already coming off slowing sales and industrial output. The China Association of Automobile Manufacturers said overall vehicle production totaled 25.721 million units in 2019, including commercial vehicles, down 7.5% on increased trade friction with the United States, lower subsidies for new energy vehicles and other factors. Sales slid 8.2% to around 25.77 million vehicles.

Showroom traffic in China is expected to be sparse when extended Lunar New Year holidays end as much of the population is steering clear of public spaces, while output is set to plunge in the short-term.

That is particularly true of Hubei province, the centre of the outbreak and a major car manufacturing hub that accounts for nearly 9% of China's vehicle production. Dongfeng Motor Group and its partners Honda Motor, Renault and PSA all have factories there.

"We expect (China) vehicle production to decline 3% for the full year, with production down 15% in the first quarter, including the extended new year shutdown," Joseph Massaro, CFO for auto technology supplier Aptiv, told an earnings conference call.

But he said delayed production could be made up in the second quarter. "We don't view this as a full year issue at the moment."

Cui Dongshu, secretary general at the China Passenger Car Association, said the holiday extension has discouraged dealers from ordering cars at the end of the month as is their usual practice, virtually guaranteeing a decline in sales for January.

Yet he noted in a blog post that the 2002-2003 SARS epidemic had little long-term impact on China's passenger car market, which grew 70% in 2003, albeit from a low base and helped by economic stimulus.

Automakers with plants in Hubei, particularly in its capital Wuhan, where transport links have been cut to curb the virus, will have the most work to do in rejigging production plans. Delays can often be made up later with extra shifts on weekends and at night.

Honda, which has three assembly plants in Wuhan with Dongfeng, said it was assessing how transport disruptions were affecting the supply of parts and that no decision had been made on when its factories will restart. Dongfeng, Renault and PSA also said no decision had been made on when production might resume.

Other automakers with operations in Hubei include Nissan Motor Co which has a plant with Dongfeng and General Motors Co which has a venture with SAIC Motor Co. Nissan and GM did not respond to requests for comment.

Tesla Inc, which started delivering cars built at its $2 billion car plant in Shanghai last month, has said it expects a delay of just one to one-and-a-half weeks in its ramp up of China-built Model 3s due to the shutdown. 

In a sign, however, that the virus impact was not just limited to China, Hyundai Motor said it is suspending some SUV output in South Korea this weekend as parts supplies had been disrupted.

CAR OWNERSHIP SHIFT?

The big unknown is, however, just how far the outbreak, which authorities expect to peak in February, will ravage Chinese consumer spending.

Industry officials and analysts believe sales will be hit in the short-term but also say the impact might not be too bad over the whole year.

The outbreak could even spur more Chinese consumers to embark on car ownership, given that many are suffering in areas where public transport has been suspended, said Yale Zhang, head of Shanghai-based consultancy AutoForesight.

"Customers who do not have their own car might realize they need one, which might help sales this year," he said.

China has an estimated 170 vehicles per 1,000 people compared to 800 per 1,000 in the United States.

(Information from Reuters was used in this report.)


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