Michał Śliwiński 郑昊天 , Chinese Market Development Manager
Many of the Chinese automakers and their suppliers have already adjusted to the new reality of declining market and lower sales but few people could envision what a huge blow would the coronavirus outbreak have on the whole Chinese economy and particularly on the automotive industry. Not that the predictions made at the beginning of 2020 were rosy. After 8,2% decline in 2019, experts were predicting that the passenger car market would fall another 2% in 2020[1]. The slowing Chinese economy, trade tensions with the USA, new emission standards all had their part in slowing the market and keeping the citizens from buying vehicles. Even the NEVs, the future of the industry, suffered big decline in sales after the government cut the subsidies, putting many new automakers in a very precarious situation. Year 2020 was supposed to be a transition year after which the industry, propelled by new China-oriented models and more advanced electric mobility and autonomous driving solutions would start to grow again. Then the coronavirus outbreak made the situation much, much worse.
The most important day in the Chinese calendar
The outbreak happened during the Chinese New Year which is the most important holiday in the Chinese calendar. During that period hundreds of millions of people travel back to their home towns and villages to visit their families and friends or choose to spend the time travelling in China or abroad. For years the Chinese New Year was a difficult time for businesses big and small. They were forced to adjust their workforce while ensuring production, keep an eye on their supplies and make sure that their workers would come back to work after the holiday instead of choosing another employer. Hardly a holiday for business owners. The outbreak during that time meant that millions of workers were locked in places sometimes hundreds of kilometres away from their homes and workplaces. Moreover, the epicentre of the epidemic happened to be Hubei province and its capital Wuhan which is one of the industrial power engines of China with huge automotive, machinery and shipbuilding industries. Wuhan alone is home to Honda, Nissan, General Motors, Renault, Dongfeng Peugeot and other car plants. Add to that tens of well-known tier one and tier two suppliers including Adient, Faurecia, Valeo, ZF, BorgWarner and other and it becomes obvious that Hubei province is one of the biggest car manufacturing sites in the world.
With the spread of the virus and increasing number of deaths, the central government decided to lock Wuhan and neighbouring cities down and restrict travel across China. In order to limit the spread of the disease, local authorities forced businesses to remain shut or limit their production and imposed strict quarantine rules on the population returning from other areas, sometimes prohibiting them from returning to their homes. Restrictions imposed on the movement of people had a huge impact on retail and travel industry which saw their revenues tumble. Car sales alone fall 92% in the first half of February as many dealers were closed and customers were unwilling or unable to go outside[2]. By the middle of February, many places across China saw lower levels of cases and local governments decided to allow businesses to resume their production. Starting production proved to be a very difficult process for many companies for variety of reasons. Many workers were still locked in their hometowns unable to leave. Even if they were able to leave and came back to their homes they were forced to undergo compulsory quarantine lasting form 7 to 14 days during which they couldn’t leave their houses. Moreover, each company was obliged to follow very strict safety rules which included obtaining various permits, daily temperature checks for each employee, providing face masks and other safety equipment, checking the travel history of workers and other obligations. Lack of workers and obligation to adhere to rigorous safety procedures constituted additional costs for businesses with already very limited or no revenues for that period of time.
Car manufacturing is one of the most labor intensive industries and lack of workforce had a huge impact on operations of OEMs and their suppliers. Many OEMs were forced to postpone their starting date, other had to limit the number of shifts. The same applied to car parts manufacturers who faced a shortage of labor, lack of materials and declining orders from their clients. The supply chain problems affected companies based not only in China but also in Japan, Europe and the USA, forcing them to look for alternative suppliers or pause production.[3] As for car companies based in Wuhan and Hubei province there is still no official information when their operation will be resumed. To see the real impact of the coronavirus on the car production and sales in China we still have to wait for the official numbers not only for February but also for March. Nevertheless, we can be sure that the volumes will be much lower than previously expected.
The coronavirus epidemic impact on Exact Systems China Ltd.
As for a company that provides comprehensive quality control solutions to automotive OEMs and suppliers, Exact Systems China Ltd. was directly affected by the coronavirus outbreak and its consequences. Like our clients, we felt the impact of lack of workers and had to follow strict safety rules imposed by local authorities. We were also unable to dispatch our teams to perform projects in different parts of China. Our prompt response to the health crisis let us purchase face masks and other safety equipment which by that time were already in very short supply. Our HR and operations departments were able to trace our workers’ travel history and prepare all of the necessary documents required by the local authorities and our clients. Despite many difficulties, we managed to assist our customers starting from the day one and fulfill all of their requirements. The satisfaction of our clients makes us proud of our performance and hard work during the health crisis. With the number of infections in Shanghai and around declining every day we predict that the situation will get back to normal sooner than later.
The coronavirus outbreak will undoubtedly have a direct impact on the Chinese economy and consequently on car production and sales in 2020. In a few days The China Association of Automobile Manufacturers (CAAM) shall release its data for February and we will see whether the situation improved with time. We can expect that both the central and local governments will take steps to support the industry by introducing new subsidies and tax policies for manufacturers aimed at increasing the vehicle sales, lowering costs and reducing the necessity of layoffs. Nevertheless, many smaller companies will definitely feel big cash flow pressure as their revenues decrease which may result in mergers or bankruptcies. Year 2020 was not supposed to be an easy year for the automotive industry in China and around the world but the sudden outbreak of the coronavirus changed everything. What we are looking at may be one of the most difficult years for the car industry in recent history.
[1] https://www.marklines.com/en/statistics/flash_sales/salesfig_china_2019
[2] https://www.bbc.com/news/business-51583348
[3] https://www.autonews.com/manufacturing/toyota-fca-issue-warnings-about-coronavirus-impacts