Mike Smitka
Emeritus Prof of Economics, W&L
Judge, Automotive News PACE Awards (supplier innovaiton)
Steering Committee, June 2020 GERPISA / PVMI Joint Detroit Conference
The finance site SeekingAlpha has just published an article of mine on the impact of the coronavirus. They have exclusive rights, so I won't repost it here. I can though provide a synopsis.
- The Chinese industry accounts for about 30% of the global industry. The major global OEMs all have a presence there, as do the Tier I and many Tier II suppliers. All the big players have one or more R&D centers in China as well. Now the market has fallen the past 2 years, but for many global players it remains their single biggest market. For example, roughly 40% of VW's and of GM's unit sales are in China. For VW, Audi is a major luxury brand, so in some periods China has accounted for more than 40% of VW Group income. In CY2019 it generated $1.12 billion in income for GM, not including unreported licensing fees and profits on parts sales.
- 2020Q1 is already a disaster. January sales were down 19%. So far February sales look to be down over 90%. March sales will likewise be a disaster. Of course output has been zero or nearly so since the start of the Chinese New Years on January 24th. Since no one is buying cars – and China is a net importer of finished vehicles, not an exporter – it's just as well no one has been producing.
- Conservatively, this represents on average a 10% less top-line for global auto in 2020Q1 (no sales in February, which is one-third of the quarter). Realistically, given an unexpected drop in January sales, it's more.
- Going forward – we're now into March – things will remain grim. Why? China is in effect in a deep recession. Small business owners have had no income for 5 weeks or more, and their employees (if they still have any) haven't been paid for 2 months. (Historically you tried not to pay workers just before the New Year, because many either didn't return or used the holiday to switch employers.) But it's the Chinese bourgeoisie who buy cars. They can no longer afford one. March will go well if sales are only down 50% over 2019.
- Going forward, what of government stimulus? Well, what tools does the government have? In 2009-2010 they used indirect fiscal policy, by letting governments borrow to build infrastructure and sell land to housing developers. They also speeded up the construction of the national expressway system (now more extensive than that of the US), a high-speed rail network and lots of airports. There's now a lot of excess capacity, new suburbs with almost no residents, and on and on. President Xi has encouraged the rise to the top of the most syncophantic, not the most imaginative. They will try doing more of the same – building yet more unoccupied suburbs – but that will no longer work.
- Furthermore, stimulus won't help the bourgeoisie. Small businesses are poorly banked; monetary stimulus can't reach them. Instead they depend upon private lending, family networks and (above all) retained earnings. They also turned to real estate and unregulated investment trusts to park their wealth. Well, there's no way now to liquidate the 3 and 4 condominiums that many better-off Chinese own. Investment trusts tend not to have been professionally managed, even when they weren't dodgy. They're at best illiquid. So there's no way for help from Beijing to reach these businesses, and what these businesses have put aside for a rainy day aren't liquid in the current environment. So many will go out of business, and will also have lost their savings. They are not going to be buying cars.
- In sum, the Chinese economy is in a very deep recession, and there won't be a V-shaped recovery. There wasn't post-1992 in Japan, there wasn't post-2009 in the US. Car sales are not going to bounce back. So it's moot that supply chains are not yet up and running. The industry doesn't need to produce more vehicles, while dealers sit on copious inventories.
- Supply chain issues will affect the North American and European industries. How much is unclear. Korean producers in particular are closely integrated to suppliers in northern China – it takes only a day for ships to cross from Tianjin to Incheon (though having flown over those shipping channels in November, congestion means it takes at least a day longer). It typically takes 4 weeks (and up to 6 weeks) for shipments to reach the US. But firms stock up in advance of the New Year, so the ships that should have sailed in early February are only now starting to not show up. (Pardon the syntax!)
- And now there's coronavirus in Korea, Japan and Italy.
Restarting production: A few workers, but no parts. Screenshot from Automotive News TV.
...realistically, 2020Q1 automotive China top-line will be down two-thirds, which translates into a 20% top-line for global auto...
...If you will need new brake pads for your car before summer, get them now!! Advance/O'Reilly/Autozone won't be restocked anytime soon...
On SeekingAlpha I provide more detail on the role of Hubei and Wuhan. Look at a map: they're part of the Yangtze River Valley, closely tied to the greater Shanghai region that accounts for almost half of the Chinese auto industry. In a world of just-in-time suppliers, you can fill in the rest.
What I've written here is framed in terms of industry averages. The "hit" will vary from firm to firm. While VW and GM look to China for 40% of their sales, Suzuki has withdrawn from the Chinese market. Some Tier I's are more dependent on China, some less. And then there are the Chinese companies whose sales are predominantly in China, such as BYW, Chery, Geely, Great Wall, and the domestic brands of the joint venture partners of VW and GM and the rest, including BAIC, Dongfeng, GAC, FAW, SAIC. (The shares of most Chinese Tier I's are not publicly traded, so I won't list names here.)
