Coronavirus deepens challenges for Detroit Three in China
Detroit's automakers have delayed production in China amid the widening coronavirus crisis, exacerbating their operational problems in the world's largest market.
As the companies prepare to announce 2019 financial results this week, the outbreak also adds to their woes stemming from trade tensions with the United States, slowing consumer demand, more stringent emissions regulations and growing evidence their lineups are not quite right for the times.
“All of the Detroit Three have been battling the declining demand,” said Michael Dunne, CEO of Hong Kong-based advisory firm ZoZo Go LLC. “It’s no secret Ford and FCA are losing money there. That was in 2019 before the virus hit. 2020 is going to be a tough year. That difficulty has just been compounded.”
Fiat Chrysler Automobiles NV, Ford Motor Co. and General Motors Co. all have extended the Lunar New Year holiday shutdowns by a week to Feb. 9 under the government's recommendation. They also have delayed business travel to China until further notice and are continuing to monitor the situation.
“Obviously, we are concerned for the health of our employees at GM and at our joint venture,”said GM spokesman Jim Cain, adding its plant are being disinfected. “People working there in international service have been told they are free to work from their home country or home.”
Ford has implemented similar conditions, spokesman T.R. Reid said: “Our current plan is for operations to return to normal post-holiday.”
The new coronavirus has infected more than 14,300 people and killed over 300 in China, where it originated. The government has instituted quarantines in some areas. The U.S. Centers for Disease Control and Prevention has issued a travel warning, and such airlines as Delta Air Lines Inc. and American Airlines Group Inc. have canceled flights to China well into the spring.
Uncertainty over the widening health crisis caused the Dow Jones Industrial Average to lose 603 points Friday as the Trump administration declared the coronavirus a public health emergency and ordered U.S. citizens returning from parts of China to be quarantined for two weeks.
Experts predict the crisis’ economic impact will outweigh that of the 2003 SARS epidemic when China's auto market was one-sixth of what it is today. It’s unclear when consumers will return to dealer showrooms as 14 provinces and cities that account for almost 70% of the country's economic activity have idled factories and closed businesses.
Ford’s Reid said it's too early to determine the effects the outbreak will have on business. In a statement, FCA spokesman Mike Palese said the Italian-American automaker cannot speculate on business impact. GM's Cain also declined to comment on the virus’ financial effects.
The respiratory illness comes as the Chinese automobile market recorded its second consecutive year of contraction, a product of slowing economic growth amid increasing tariffs on U.S. goods. Despite the sales decline, Toyota Motor Corp., Honda Motor Co. and German automakers were able to grow in the Middle Kingdom last year. The Detroit Three, however, all suffered double-digit percentage sales losses compared to China’s overall 8.2% decline in 2019.
“China continues to be a Rubik’s Cube that U.S. automakers are trying to figure out,” said Daniel Ives, an analyst with Wedbush Securities. “What I mean is making automobiles that are very mindful of domestic competition and what the appetite looks like in China, which is different specs and vehicles than what we see in Europe and the United States.”
GM — the second-largest foreign automaker in China — said its sales there fell by 15% to 3.1 million vehicles in 2019. Ford reported its sales were down 26% to 568,000 vehicles. And Fiat Chrysler, which has less than 1% of the Chinese market, saw sales drop 41% to 73,000 vehicles, according to ZoZo Go.
“One of the advantages that we in Detroit take for granted or forget about is we have this massive large truck and SUV market,” Dunne said. “That doesn't exist in China and in other Asian markets.
“How are they going to compete? That requires a completely new mindset. When Americans arrive in Asia, they need to forget everything they know and ask, ‘What does the market require?' and 'How do they deliver that?’”
Chinese consumers prefer fuel-efficient vehicles with smaller engines such as sedans and mid-size SUVs, Dunne said. New and luxury models also dominate the market, said Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions. While GM's Buick and Chevrolet brands were down, Cadillac was up from the help of its recently introduced CT4 and CT5 sedans and newer and redesigned crossovers.
“Ford’s (products) are aging very quickly; GM’s, too,” Fiorani said. “Ford’s are relatively ancient, about four to five years old. In the '20s, it should be refreshing quite a bit of their lineup. It should help quite a bit.”
Ford re-entered the Chinese retail market late and is in the midst of implementing a turnaround plan, pruning old sedans in favor of SUVs and luxury vehicles. Lincoln Navigator SUV, MKC crossover and Nautilus crossover saw sales increase.
“We’ve announced plans to initially bring out five products starting with Lincoln that are designed with intentions for the Chinese market,” Ford's Reid said. The changes in the marketplace and increasing government emission regulations also “provide an opportunity for a company like Ford. We remain determined and optimistic.”
Ford introduced its first electric vehicle for China, the Ford Territory SUV last year, with another 10 planned in the next three years. It also has partnered with Baidu Inc., China’s Google equivalent, and e-commerce giant Alibaba Group on autonomous and connected vehicles.
That is the direction Dunne thinks the Detroit automakers should drive: “They have opportunity to excel in China. There's industry 1.0 and 2.0, which is electrification, autonomy and the connected vehicles. That is the future in China, and it’s wide open. There's no clear-cut player in connected, electric, autonomous vehicles. It requires us to completely rethink our business, but trying to compete against the Chinese in manufacturing cars? I don’t think so, not for long.”
Fiat Chrysler confirmed earlier this month that it's in talks to form a joint venture with Taiwan-based iPhone manufacturer Foxconn Technology Group to build electric vehicles in China.
The step would help the company to meet carbon emissions regulations and “be a game-changer,” Ives said, “because of EVs, the manufacturing footprint and also, especially to associate with Foxconn, which is a golden brand in China. That would be a significant step forward.”
Fiat Chrysler’s Jeep brand, which also re-entered China late, has potential in the country’s massive 9 million units per year SUV market, Dunne said, adding its proposed merger with Groupe PSA could give it more scale.
The company’s decade-old joint venture with China's Guangzhou Automobiles Group underwent restructuring earlier last year, which helped with pricing and costs, FCA CEO Mike Manley said on a third-quarter earnings call in October, adding the company was relaunching marketing efforts there in the fourth quarter to boost volumes.
The coronavirus likely will put a halt to those plans, at least for now. But experts say the Detroit Three must double down their efforts to succeed in China.
“The Chinese market has been so hot for so long,” Fiorani said. “This correction is just bringing it down into line with a very large market as opposed to an extremely large market. Especially the Detroit Three are going to want to keep China as a primary focus. There’s no growth in North America. There has been in China.”