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Auto industry still awaits full force of coronavirus outbreak

SNL Image

People sit a recommended distance apart during the presentation of the new electric Fiat 500 in Milan on March 4.
Source: AP Photo

Automakers are yet to feel the full brunt of the coronavirus outbreak, analysts say, as the forthcoming production disruption could be compounded by a fall in demand if restrictions on movement and wider concerns for the economy prompt consumers to defer trips to dealerships.

Thus far, fears have largely focused on the supply chain effects on the automotive industry, which counts China's Hubei province, where the outbreak began, as one of its major hubs.

Carmakers and their suppliers have taken measures to ease the strain. Continental AG has diverted supplies from Chinese plants to customers abroad as slower domestic production reduced the need for parts. Klaus Rosenfeld, CEO of German peer Schaeffler AG, said March 10 that his company has found a way to transport goods from China to Texas by rail, rather than sea, which has cut delivery times from six weeks to three.

"European OEMs are still awaiting a supply shock from China," said Justin Cox, director of global production at U.K.-based consultancy LMC Automotive. "In the meantime, they have done well so far to mitigate the impact from any shortages helped in no small part from their originally high stock levels from the Chinese New Year and length of supply-line. But it could get tougher in the coming months should the Chinese factories' return to work and their ability to provide catch-up supply be hindered or delayed," Cox said.

Christoph Sturmer, global lead analyst at PwC's Autofacts consultancy, expects the impact of the coronavirus on the automotive supply chain to be cumulative, with potential shortages of raw materials affecting parts producers and then, in turn, automakers. This is on top of some recent shutdowns among Chinese parts suppliers.

"We think that the deep impact of what is happening may be about eight weeks. Eight weeks with basically minus 80% economic activity once stocks are really hit," Sturmer said.

Fiat Chrysler Automobiles NV said March 11 that it would slow production at its Italian plants to enable workers on factory floors to maintain a greater physical distance from each other to reduce infection risk. Sanitization of work and rest areas would also be intensified, the company said. Office-based workers have already been offered the possibility of working from home.

Both FCA and French carmaker Renault SA said they were at risk of a shortage of some components after the shutdown of a parts supplier in northern Italy, one of the areas worst affected by the outbreak, but it has since been permitted to resume operations, spokespersons at both companies said.

FCA's Italian plants have been suffering from chronic overcapacity, in part due to a decision not to replace the Punto compact car that was retired in 2018. The country's health crisis comes just as the company launched revamped versions of Fiat's top sellers, the 500 and Panda, which are now offered with electrified powertrains.

Automakers will likely be reluctant to cut staff to adjust to a downturn in production, mindful that some manufacturers paid a price when they shed skilled and experienced workers during the global economic crisis a decade ago and then later faced labor shortages, Sturmer said.

"I think everybody has learned from the effect of the 2009 crisis that sending people home is the wrong thing to do. ... The markets are going to come back at one point in time and if you're not ready to catch the market as it comes up, you'll never catch up," Sturmer said. "You'll fight an uphill battle as Ford and GM have for the last 10 years because the others were just faster to rev back up."

Shoppers stay home

There is also growing concern that the impact of the coronavirus outbreak on the auto industry could spread from supply to demand. New car sales in China fell 80% in February as restrictions on movement came into effect, and the current recommendations for self-isolation and minimal travel in major Western markets could greatly diminish activity at dealerships.

"This is moving from a supply-side shock to one on the demand side," said Cox. "We're hoping that it will be a short term blip but it could be much deeper. It's just very much unknown."

SNL Image

Auto sales globally have fallen in the last two years, led by significant declines in the world's largest market, China. No February data is available yet for major Western markets. January got off to a weak start in Europe with a 7.4% year-on-year drop in passenger car sales, and registrations fell 0.2% in the U.S. Italy's automotive association UNRAE forecast that car sales could drop more than 15% in 2020.

"Autos are a good proxy for the global economy where it is mainly driven by consumer sentiment, and if you don't feel good about the outlook, you don't buy a new car," one automotive analyst at a London-based bank said. "Do you price a global recession with everything collapsing, if you think coronavirus will impact only two quarters, then you have a catch-up effect?"

Carmakers' reaction to the effects of the coronavirus outbreak on demand has thus far been muted. Daimler AG warned Feb. 21 in its annual report that global sales will likely be affected by the virus but has not adjusted its guidance, while Bayerische Motoren Werke AG CEO Oliver Zipse on March 3 reaffirmed the company's full-year sales outlook.

The turmoil caused by the coronavirus adds to numerous challenges already facing the auto industry, from tougher CO2 emissions standards to higher investments in new technologies.

"You are just adding headwinds to headwinds," the analyst said. "[The coronavirus] moved from a nonissue at all at the end of January to a big issue that is leading to a perfect storm."