- The new coronavirus will likely depress Chinese auto sales below our previous base case for 1%-2% growth in 2020, although it is currently too early to quantify the full impact.
- We estimate the current two-week production shutdown imposed in the Chinese province of Hubei will knock 2%-4% off total annual production in the region, which is home to about 9% of the total Chinese auto production.
- We believe China may further extend shutdowns beyond Hubei to limit contagion risk, possibly affecting up to one-half of China's auto and auto-parts production.
- Volkswagen is the automaker with the highest exposure to China, with just under 40% of its global production and units sold there. Among suppliers, we think Bosch will be hard hit.
The new coronavirus, which has triggered lockdowns in some Chinese cities and several auto plant closures, will inevitably harm global auto industry production and sales in China. The World Health Organization (WHO) has recently declared the outbreak a public health emergency of international concern. This suggests that countermeasures available to the Chinese government could still extend beyond the epicenter and lead to restrictive measures on transportation to China or additional quarantine checks on goods imported from China by WHO member countries.
These countermeasures will likely halt the recovery in China's auto production that started only in November 2019 (see chart 1). Production for the full year dropped by 7.5% to 25.7 million units, after a 4.2% decline in 2018. Based on reports from large suppliers, such as Aptiv PLC, which is exposed to a variety of automakers, we expect auto manufacturers in China to cut production by about 15% in the first quarter of this year following the outbreak. More importantly, the global auto supply chain, which depends heavily on China, will also be negatively affected. China is, for example, the second-largest market for Robert Bosch, the largest auto component manufacturer in the world.
In tow of production cuts, auto sales will also be hit. Chinese auto sales totaled approximately 25 million vehicles in 2019, down from 28 million the year before and marking a second consecutive year of sales decline (see chart 2). Before the coronavirus outbreak, we had expected the market to recover in 2020, resuming a very moderate growth path of 1%-2% in light of the ceasefire in the trade war with the U.S., a normalization of financing conditions in the country, and evidence of expanding vehicle sales on a monthly basis since August 2019. We now envisage demand will dip in the first quarter, and possibly beyond, reversing the recovery trend. S&P Global Ratings' base-case projection is that the coronavirus will stabilize globally in April 2020 (see "Coronavirus Impact: Key Takeaways From Our Articles," Feb 4, 2020). We assume consumers will tend to avoid purchasing cars in dealer shops until then to reduce contagion risk. A soft first quarter is a downside risk to our full-year sales growth assumption.
The outbreak is centered in Wuhan, a city in the Hubei province, and the fourth-largest manufacturing base in China, accounting for 9%-10% of total auto production. The province hosts a large number of auto manufacturers and suppliers and is the headquarters of Dongfeng Motor Group, one of the larger Chinese automakers, which has established partnerships with Japanese and European auto manufacturers. Hubei is a hub for auto R&D and the production of electric vehicles.
Many Global Automakers Are Highly Exposed
Among global automakers, we see Volkswagen as the most exposed to the risk of depressed auto production and consumption in China, even though its operations are not concentrated in the most affected Chinese province. VW's critical plants are located in Anting (in the Shanghai area), Tianjin, Foshan, and Qingdao. Although these are not near the epicenter of the outbreak, we assume that extended downtime at those plants is also likely. VW manufactures vehicles and components at 23 sites in China, representing nearly 40% of the group's consolidated production (see charts 3 and 4). Our base case assumes 4.1 million units sold in China in 2020 (versus a reported 4.2 million units sold in 2019). At stake in our base case are €3 billion of dividends from joint ventures in China that contribute to our estimate of adjusted free cash flow for VW in the range of €6 billion-€7 billion for 2020.
Among the Japanese automakers, Nissan has a relatively large risk from the coronavirus, in our view, considering its high exposure and recently weak performance. Nissan's sales in China contributed to about 30% of its total unit sales in 2019. The company also has large exposure to production in China (31% in 2019). Nissan's management has a strategic focus on China and sees higher growth potential there than in other regions over the next two years. Nissan also intends to expand its electrification models, such as e-power hybrid vehicles in China.
Honda's earnings could also be negatively affected if the outbreak is prolonged. The Japanese automaker has a production base in Wuhan, and China contributes around 30% of its global sales and production. In 2019, the company outperformed the Chinese market. It has strong product competitiveness backed by solid local partnerships and R&D capability in the country.
General Motors has a car factory in Wuhan, producing four models for the Chinese market that contribute about 19% of GM's total China production. This plant has been idle since Jan. 24 on account of the Chinese new year holiday. The coronavirus situation will put incremental pressure on our base-case assumption for lower year-over-year equity income from China, which is due to regulatory and pricing pressure amid the market slowdown in less developed cities and market shift away from mini commercial vehicles.
Premium carmaker Daimler has since 2018 been increasing its production footprint in China through a partnership with Chinese automaker BAIC in the Beijing area in an effort to step up local production. China is Daimler's largest single market with more than 700,000 units, 80% of which are locally produced. The coronavirus therefore represents an additional headache for the company this year.
Fellow German automaker BMW has established operations in the Northeastern part of China (Shenyang). It recently announced it will build a new plant in the Shanghai area in partnership with Great Wall Motor to increase its local production, which is currently about 20% of its global footprint. BMW confirmed that it would extend it factory holidays for production workers by another week at its plant in Shenyang due to travel restrictions imposed on to contain the coronavirus.
Tesla expects a one-week to a 1.5-week delay in the ramp-up of its Shanghai-built Model 3 due to a government-imposed factory shutdown. This may have some impact on Tesla's profitability for the first quarter, but it will not be meaningful because the profit contribution from the Model 3 in Shanghai is still at an early stage. Tesla is also closely monitoring potential interruptions in the supply chain for cars built in Fremont, U.S. However, Tesla has a sufficient liquidity cushion to continue its expansion plans, and this has no impact on our positive outlook on the company for now.
Given Toyota's relatively moderate exposure to China, we believe its risk should be lower than that of peers Nissan and Honda. Nevertheless, Toyota's sales in China represent 16.7% of total unit sales, and its China-based factories contributed to 15.5% of total production in 2019 (Toyota and Lexus brand). The company has intensified its sales network in China in recent years, and plans to further expand its product portfolio in 2020, launching new electric vehicle models.
Hyundai-Kia's sales in China were around 15% of total unit sales in 2019. Hyundai (HMC) has plants in Beijing, Chongqing, and Hubei province, while Kia has plants in Yancheng. Given the location of these plants, we expect Hyundai-Kia will have relatively less direct exposure than peer global automakers. However, given the complex and highly localized supply chain, we believe there could be some indirect impact on the group's production in China and even on its adjacent Korean plants. Moreover, the challenging macro environment could further deter HMC-Kia's recovery in the Chinese market. The group's sales in China declined more than 40% between 2016 and 2019 due to a weakened market position and geopolitical tensions, and the operation is currently running at below breakeven.
We see limited impact for European automakers Fiat Chrysler Automobiles and Peugeot because the business they generate in China does not materially contribute to these companies' earnings and plant utilization rates were weak even before the coronavirus. The outbreak will jeopardize Ford’s path to breakeven in China, although our base case does not include any significant joint-venture cash dividend until 2022. Ford has plants in the province of Chongqing and is still reviewing whether to postpone normal business operations to Feb. 10.
Suppliers Face Risk To Supply Chains And Profits
Among auto suppliers, Germany's Robert Bosch is heavily exposed to the Chinese market. With about €14 billion annual sales from China, Bosch relies on China as its second-largest market, after Germany. China is a global manufacturing base for exporting electric motors, transmission, and power electronics for electric cars. Bosch has two plants in Wuhan, the epicenter of the coronavirus, where it makes steering systems and thermo-technologies. We are concerned that further extended plant closures due to the coronavirus could hit Bosch's Chinese footprint and put further pressure on its already weak profitability. At present, the Bosch locations in China have been closed by government order, which vary by region. In some cases closures have been prolonged through Feb. 13).
Other global auto suppliers are at least as dependent on China as Bosch. Schaeffler, ZF Friedrichshafen, Faurecia, and Valeo all have equally strong production footprints in China.
Virus A Risk To Recovery
The coronavirus outbreak therefore represents a material downside risk to our scenario for a mild recovery of the Chinese auto market in 2020, with no relevant mitigant on the radar. Indeed, the possibility that the Chinese government may re-establish subsidies for electric vehicles is likely to further delay consumer purchasing decisions until they are put in place.
While the Chinese market maintains its long-term attraction for most global auto manufacturers and suppliers, recent developments may contribute to turning 2020 into an ever more challenging year for global automakers and suppliers than we originally expected.
- Coronavirus Impact: Key Takeaways From Our Articles, Feb 4, 2020
This report does not constitute a rating action.
|Primary Credit Analyst:||Vittoria Ferraris, Milan (39) 02-72111-207;|
|Secondary Contacts:||Anna Stegert, Frankfurt (49) 69-33-999-128;|
|Minjib Kim, Hong Kong (852) 2533-3503;|
|Nishit K Madlani, New York (1) 212-438-4070;|
|Katsuyuki Nakai, Tokyo (81) 3-4550-8748;|
|Eve Seiltgens, Frankfurt (49) 69-33-999-124;|
|Claire Yuan, Hong Kong (852) 2533-3542;|
|Research Contributor:||Benjamin Kania, Frankfurt;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: firstname.lastname@example.org.