Coronavirus expected to hit automakers' bottom lines
Detroit — As some automakers restart production in China this week and others extend downtime amid the coronavirus crisis, industry experts predict their bottom lines will take a hit.
All three Detroit automakers extended a production shutdown in China because of the outbreak following the week-long Lunar New Year holiday. But General Motors Co. has now extended its downtime for its 15 Chinese assembly plants to at least Saturday.
Meanwhile, Ford Motor Co. on Monday began staggering resumption of production at its nine Chinese plants to get assembly lines moving again, a process that's expected to take several days. Fiat Chrysler Automobiles NV also reopened its two Chinese assembly plants to start production in the coming days, and Tesla Inc.'s Shanghai factory returned to action Monday after the company said last week that Model 3 sedan deliveries would be delayed.
As a result of the outbreak, the world's largest auto market will lose production of 1.2 million vehicles for the first quarter and see a 50%-80% decrease in sales in February, analysts forecast. The coronavirus scare is an added complication as automakers there face declining demand, trade tensions and stricter emissions regulations.
It is too early to tell by how much the virus will affect business, the automakers said. Even before the first person was diagnosed, GM's sales had declined there 15% in 2019, while profits were cut nearly in half to $1.1 billion. Ford's sales fell 26% in China, though it cut its losses there in half amid a turnaround plan and the introduction of new models. Fiat Chrysler, which has less than 1% of the Chinese market, saw sales drop 41% to 73,000 vehicles, according to Hong Kong-based consulting firm ZoZo Go LLC.
“There probably will be starts and stops,” said Jeff Schuster, LMC Automotive’s president of global vehicle forecasting. “You may see some factories back up and then shut down again, whether it’s because of an actual case of the virus or a shortage of something. Even if something gets up and running, we expect some interruption further into this week, next week and into March.”
LMC forecasts that automakers will be unable to make up two-thirds of the 1.2 million in lost production. The outbreak could cause a net decrease of nearly 800,000 new vehicles, a decline to 23.5 million from the originally projected 24.3 million vehicles for the year.
China's Automobile Dealers Association predicts sales will fall as much as 80% in February as consumers avoid going out to shop. China sells about 2 million vehicles a month.
Automakers are relying heavily on digital advertising to encourage consumers to place orders, said Michael Dunne, CEO of ZoZo Go.
"Everyone is on edge because ... this thing is still not defined," Dunne said. "No one wants to go out to a crowded showroom to pick up a new car. It's not a priority right now."
Volkswagen AG has the largest risk for exposure because it produces roughly 40% of its vehicles in China, more than any other foreign automaker there, said Patrick Anderson, CEO of East Lansing's Anderson Economic Group consulting firm.
Honda Motor Co. is also vulnerable because it assembles vehicles in the province around Wuhan, the disease’s epicenter in central China.
So does GM, whose largest market is China. “They’re essentially an American-Chinese company,” Anderson said. “Undoubtedly, the public health crisis has a serious and negative effect on General Motors in China.”
Production startup at GM plants will vary by plant depending on the safety of employees, parts availability and available vehicles on dealer lots, the automaker said.
GM expects the virus will dent sales, but GM China President Matt Tsien told investors during the automaker's Capital Markets Day event in New York last week that he expects to see pent-up demand after the coronavirus crisis subsides. Tsien said it was too early to predict how the virus will affect GM's earnings.
Production at Honda Motor Co.'s Wuhan plant will remain down through Thursday, though two other plants several hours south of Wuhan in Guangzhou are operating again. Toyota Motor Corp. said it was preparing to resume China production this week.
Nissan Motor Co. is expected to restart production Feb. 17 at its Huadu and Dalian plants, with other factories ramping up at other times. A parts shortage also has strained Nissan's production in southwest Japan, where it is making temporary adjustments at its plant in Kyushu.
Likewise, Hyundai Motor Co. and Kia Motors Co. had suspended production in South Korea. Hyundai planned to restart some assembly lines starting Tuesday.
Fiat Chrysler has identified a manufacturing facility in Europe that is at risk of closing because of a parts shortage in the next two to four weeks if the outbreak continues to worsen. The automaker has not specified which plant that is.
Any impact on North American production should be minimal, ZoZo Go's Dunne said, because most parts used here are made here. The availability of parts in the aftermarket are more exposed.
Automakers say they are monitoring their supply chains and have developed contingency plans. It's standard to have alternate supply sources for situations like this, Dunne said.
But for electric vehicles, there is a limited global supply of batteries and their components — many of which come from China, Anderson said. That exposes companies like Tesla to disruption.
“Tesla is critically dependent on battery-electric assembly, notably battery assembly,” Anderson said. “By far the largest share that goes into these lithium-ion batteries are made in China. They made a huge bet on battery-electric and are an innovator to their great credit, but they are also very vulnerable to any disruption in supply.”
Battery assembly is the single biggest risk for a parts shortage in North America, Anderson said, though such vehicles still only account for a small portion of the market. Although the Buick Envision and a Volvo model are built in China, access to such vehicles in the United States likely won’t be affected.
“There are very few vehicles that are assembled in China and brought over here,” Anderson said. “We haven’t identified any models that would be difficult to find in the United States.”
The largest source of anxiety for automakers right now is not knowing how long the spread of the virus will continue and when consumers will return to dealerships. It likely won't be this week, especially in hard-hit areas, LMC's Schuster said.
"I’d be surprised if normal operations resume in any areas before the end of the month," he said. "Wuhan will be impacted at least through part of March."