Entering text into the input field will update the search result below

Coronavirus China: Impact On Global Automotive

Mike Smitka profile picture
Mike Smitka


  • Based on China alone a substantial decline in automotive is justified. As detailed below, exposure varies across OEMs and Tier Is. There is no single, simple bottom line for investors.
  • Output is recovering in China, but coronavirus countermeasures have already cost the Chinese industry – both car companies and suppliers – at least 4 weeks in 2020Q1 output and sales.
  • With China accounting for 30% of global automotive production and global sales, this 1/3 drop in 2020Q1 is a 10% hit to top-line revenue for global OEMs and Tier Is.
  • Inventories delay the impact on North America until mid-March, when parts shipments will fail to arrive. Korea has already been hit, Japan is next.
  • Uncertainty will remain high until Hubei-based plants restart March 11. These include Honda, Nissan, Renault, GM and PSA, and many global suppliers. And now there's Korea, Italy and Japan.

Whether or not Covid-19 goes global is driving overall market volatility, and auto stocks are down accordingly. However, there has already been an impact on global auto OEMs and Tier I's, so some decline is justified. Here I provide conservative estimates of the financial losses the industry has already incurred, based on what has already happened in China. Of course if quarantines extend to auto production regions elsewhere (Daegu in Korea and northern Italy), we could see comparable impacts emerge elsewhere.


In China, production stopped January 23rd, as the week-long Chinese (lunar) New Year holiday began on January 24th. Historically this holiday has seen 100 million Chinese migrants return from cities to visit their natal villages. Fortunately, that meant firms built up inventories going into the holiday. Unfortunately, because most of those infected had no or mild symptoms, there was no immediate quarantine. By the time the initial Wuhan lockdown began on January 23rd, perhaps 100,000 people had already left the city. Today it and the entire surrounding province of Hubei remains in lock-down, affecting 60 million people, including those elsewhere in China who cannot return home. Other parts of the country have regained a semblance of normalcy. The news in China has shifted from reporting new cases to reporting cured cases, and some automotive parts shipments are now reaching Europe. However for automotive, Hubei is part of the greater Yangtze River Delta, with 17 assembly plants (out of the 100+ in China as a whole) and over 400 supplier plants. To quote Toyota (Source: Automotive News, Feb 26):

some plants in the epicenter of the virus outbreak remain unable to produce and transport goods, while some plants remain closed under orders by regional authorities.

Factories reopening but not producingFactories may be "resuming production," but they await both a full complement of workers and an

This article was written by

Mike Smitka profile picture
I'm a retired economist. Over the decades I focused on the auto industry and on the Japanese economy. I also taught a course on the Chinese economy for 30+ years. But I was also a banker and worked in factories, and for the past 28 years have visited suppliers for business case and engineering presentations on innovations, as a judge for the Automotive News PACE awards. As such, I've visited about 60 suppliers, in Korea, Japan, the US, Canada and France. (I've visited another 50 or so via other activities.) I'm also on the steering committee of the GERPISA consortium of auto industry researchers, and was on the planning committee for the June 2022 global conference in Detroit. I'm also active in the Industry Studies Association. I'm the co-author of Smitka and Warrian (2017), A Profile of the Global Auto Industry: Innovation and Dynamics, available as an eBook.I first lived in Tokyo in 1975, after graduating from Harvard with a degree in East Asian Studies. My econ PhD is from Yale; the Nobel Laureate Oliver Williamson was my dissertation chair. I've spent 7 years in Japan, and have spent 2 months or more in China, Korea, Germany and the Philippines. I read, write and speak Japanese, and read German and (a covid project) Chinese.My current research interests are technology in the automotive supply chain, and the Chinese industry. My investing is passive, via my university's TIAA retirement plan.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (20)

Mike Smitka profile picture
I spent time yesterday speaking to a virologist who started out studying avian influenza (that project came with a special, year-round duck hunting permit). He then worked for many years in the lab that developed all of the world's flu vaccines. (When the professor who headed that project retired, the then-mature processes were licensed and the lab close.) I also had a long dinner with a historian and a political scientist who specialize on China, and have cumulative years of experience there, over a roughly 30 year period.

Three takeaways.

One, basic work on virology and epidemiology has only just begun. It is almost certainly far more widespread than data suggest, because of the large number of cases that present few or no symptoms, and the very small number of people tested to date who were not severely ill. Nevertheless, he noted that the regional medical center affiliated with his university has a standing flu triage committee, because hospitals would not be able to handle everyone in a really bad flu year. Even if coronavirus mortality is low, the sheer number of cases could overwhelm any country's healthcare infrastructure. There aren't enough hospital beds, there aren't enough ventilators, and there would not be enough staff with the relevant skill sets. The key thing to watch is whether the experience of Wuhan is mirrored elsewhere in China. Viruses tend to have multiple strains, and it's possible that some strains are relatively innocuous.

Two, small businesses in China really are at risk. See this video from BBC taken Mar 4 in Beijing: www.bbc.com/...

Three, China still has a party apparatus that extends down into every neighborhood, school and workplace. There's a consciously created culture of designating leaders. The most famous example was from the Sichuan earthquake, with designated class leaders in elementary schools leading their classmates to safety, doing a headcount, and then going back into buildings to root out stragglers. These were 8-year-olds. In addition, for all of the success Xi has had in rooting out political rivals, there's still a policy apparatus that is staffed by real experts who have access to Xi, even though some of those experts are suspect politically. (I cannot say anything further in a public forum.) So if anywhere can take the concept of the Great Depression WPA (the New Deal Work Projects Association) and put something similar into operation, at scale, quickly, it is China.
Tdot profile picture
Nice, but one needs to consider that like many "black swan" applecart upsets, the subsequent rebound is usually more than compensatory.
Maxed Out Mama profile picture

Where is that rebound coming from? A big chunk of production was cut out, but so was a big chunk of consumer demand.

As for ROW, well, this is a developing event. The streets of Milan are also pretty empty.

Granted, surgical masks are a growth industry, but not much else is.
Tdot profile picture
You need to understand that the temporary lack of production and sales produces "pent up demand", once the disease runs its natural course. Those that would have bought a car in February but could not due to spreading SARS will buy it as soon as things stabilize in April or whatever, joining with others who were going to buy a car then.

It is not as if those who were prevented from replacing their old car in February have now lost their one chance to buy a car for the year. They "play catch up" as soon as they are able.

That is how it works in "black swan" events, where normal sales are temporarily deferred a few weeks due to some disaster or other, increasing sales dramatically on the back end of the crisis.
Mike Smitka profile picture
Yes, there will certainly be pent up demand. But in the interim incomes have fallen to zero for a period. Will migrants who went back to their natal village return? particularly if they moved to a city in the early days of the Great Migration in the early 1990s, and are now in the age bracket where – thanks to pollution and chain-smoking – they are at higher risk of serious illness? Meanwhile quarantines continue.
==> Businesses large and small lack workers.

In the background is financial repression. In 1984, there were no banks in China – not one, the People's Bank of China played more of a book-keeping function for transactions between governmental entities. Banking has since expanded, but if you have comparatively few lending officers, and until recently the economy lacked credit ratings and reliable financial accounting and small businesses had few assets to serve as collateral, you were going to lend to large and capital-rich enterprises. Political connections between local governments, banks and larger businesses reinforced that.
==> Small businesses aren't "banked."

Common to developing economies (and for that matter for small savers in the US), the only outlet for individuals with an eye to the future was to put money into a postal savings account or similar, and to promote growth the government kept interest rates low, "financial repression." Low here meant below inflation, you lost money. So people lent to others in their village and extended family members, and more recently bought a condominium (held vacant as an investment, whole high-rises sit empty in China's cities) or put funds into an investment trust sold by an office inside a local bank. No accounting, not part of the bank, not capitalized, all too often itself either a fraud from day one, or lending poorly and so an unwitting ponzi scheme, without capital new investments were the only way to let people withdraw funds.
==> Staggering amounts of wealth / accumulated savings have vanished in the past 4 weeks.

How are small businesses whose savings are in illiquid assets, and have had no income, pay their creditors? Until they do so, they can't restock their store shelves and restaurant pantries or buy cement for their construction business. Their wholesalers are in the same situation.
==> Most businesses in China are run through an informal credit system which has collapsed, and because that system is informal and unregulated, it is beyond the reach of existing policy tools.

So who has money to buy a car? Yes, auto financing is available, but of course everyone is now a month behind on their loan, and new purchasers will need cash up front.
==> Selling autos is still a business where customers need cash, which they don't now have.

You are absolutely correct, there will be a rebound effect. But will enough businesses and families emerge from the national quarantine for that to offset the headwinds to recovery I detailed above. I believe no, China is in a depression, not a recession.
==> The rebound will be inadequate.

BTW the collapse of the credit system in the US Great Depression was the topic of Bernanke's PhD dissertation. His background is one reason he moved very aggressively as Fed Chairman, once the extent of the problems became apparent in spring/summer 2008. However, the Fed had very few policy instruments at its disposal, even though he had set up a review prior to the collapse of Lehman to explore novel policies that pushed those limits. Now potentially the Chinese government can act more quickly and decisively, it doesn't need to go through a legislature, it is the law, not bound by law. But it has limited administrative tools, and Xi has surrounded himself with yes-men and people whose main job has been to root out enemies. His problem now, however, is not political, and he's not surrounded by policy wonks and people chosen for administrative skills. I don't expect Beijing to either come up with good policy or to be able to implement policy.
==> The top of the political and administrative system is ill-suited to fighting a crises that is not primarily political in nature. [Actually, that's a pretty tall task to ask of any government anywhere across human history!!]
Maxed Out Mama profile picture
Excellent article!!!

It should be noted that this is only addressing what has already happened, but we are not at the end of the story line yet.

There are whole chunks of demand that will be knocked out, and that foreseeably for a minimum of an additional six months. The entire global tourism industry is in trouble. Car hire firms and hotels. Restaurants.

We are going to see a global drop in demand for cars of no mean proportions. For a year or two, cars are often the ultimate discretionary purchase.

This is a long-tail event, even assuming stimulus measures and that the case count drops within four months. The global economic impact will be much larger than 9/11, for example.
Mike Smitka profile picture
Automotive News China just came out, I don't know if this is behind a paywall. The gist is dealerships have no customers. Like, zero. So why worry about production...?!


Key quotes: "...as of Wednesday, Feb. 26, only half of the nation's franchised dealerships had reopened..." while for the half that were open showrooms remain mostly empty as are the service bays, so revenue is at most 20% of Feb 2019. The article points out, based on interviews, that slowness to reopen is partly because they lose less money closed with no customers than open with no customers.
Maxed Out Mama profile picture
@Mike Smitka

I can only imagine the sensations of the business owners on the ground trying to deal with this. Most natural disasters (I suppose this should be classed that way) inflict great damage, but also produce demand. Flood or fire or earthquake or hurricanes destroy a great deal, but also produce a great deal of new demand. So provided interim financing can come from somewhere, things do ratchet back up.

But this - this is more like a neutron bomb. Everything's there but the people.

It looks to me as if at least a third of the population has lost at least a twelfth of their annual incomes. The small-to-mid business owners are obviously in deep, and as you say, they are unbankable.

Nor, obviously, is anyone flipping a switch and going back to normal.

Money flow just nearly STOPPED.
Davewmart profile picture
Many thanks for an incontrovertible article.

I'd just note that potential customers for cars once production does resume have also taken a big hit, so may not be in the mood for big ticket items.

I happened to phone up today to find out what has happened for an order I had placed for a few summer shirts as there was no sign of it.

Turned out it was to come from a shut down China,

I nearly cancelled, but they said they would ship it by March 6th.
That was for an order placed on Feb 15th.

Whether that will happen or not I don't know, but clearly supply chains and importantly income are being disrupted across the board.

An interconnected world means interconnected problems.

Quite a hit to the global economy, and in particular to big ticket discretionary items, one imagines.
Mike Smitka profile picture
@Davewmart Now think of what this would look like if you were a retailer trying to put in an order for Christmas 2020 that needs to get in the production queue now for shipment in late summer, to make sure it gets into a container and clears a port on this end by the 1st of October, to get to a distribution center and broken down to be sent out to you and then to individual stores in time for pre-Thanksgiving placement. It's not just the auto industry wondering about broken links in the supply chain. Disney needs those branded goods from their latest movies in stores soon, and Walmart needs them, too. Apparel is hard, but their toys need plastic injection tooling, machining dies is a slow process and the designers can't even get to work when that part of the process should already have been finished.

But yes, the bourgeoisie in China are in real trouble, they are unbanked and so beyond the reach of normal central government policy tools, monetary policy does nothing for them, and fiscal policy takes a year to gain traction. Their wealth is in condominiums and locally peddled investment trusts of dubious liquidity. I think that as visibility into what's happening improves – visibility that is not much worse for us than for the senior leaders in Beijing – we'll find that China has taken a bigger hit than we did in in the US in 2008-2010. [For who has visibility, it's the China Beige Book in New York, not the People's Bank of China in Beijing. Unfortunately I can't afford a CBB subscription, which the last time their head talked to my students ran $100,000 a year.]

So not being able to produce is not so bad, it hides that you really don't have customers to take what you might have produced. The January sales decline appears to have been unexpected. That means dealers have more inventory than they anticipated, and they most of them were closed the full month of February. They aren't going to be rushing to order more cars (er, SUVs) in March, and April will be grim. There will be no "V"rooom to the recovery.
Maxed Out Mama profile picture
@Mike Smitka wrote "There will be no "V"rooom to the recovery."

Exactly. There won't. There is much more likely to be an extended sag as the uncertainties continue to mount for at least two more months, and as companies start hoarding money.

Italy and Japan will be very badly impacted. Italy is a luxury exporter to China, and tourism dependent. Japan is very dependent on Chinese tourism, and I cannot believe that Japan's auto sales in China will not be affected badly over the next year.

In particular, before all of this there were smaller-bank issues in China. One assumes that the Chinese government will try to mandate easier loan policies, but the banks cannot do it, and remain unwilling to lend except to companies with some sort of government backing.

Also the impacts of this are going to hurt the regional Chinese government finances badly, and because they are responsible for so much project financing, it is hard to see how China can rapidly rebound.

My best guess is that this is the event that pushes Chinese GDP down toward more of a 4% level. They were already cranking pretty hard to stay at 6%. So much debt will be added that I don't see them coming out the other side of this tunnel in 2021 with any momentum.
Mike Smitka profile picture
@MaxedOutMama This quarter is deeply negative, achieving 4% growth for the year (when the optimistic baseline was 6%), well, I don't see how that can happen.

As you note, LGFVs are tapped out so localities can't do anything, and even if they had money, could they really tempt developers to start new projects? And over what time frame?

How can undercapitalized businesses be helped? – monetary policy does nothing. The SOEs are a modest slice of the overall economy, and are more capital intensive that private businesses so are poor job creators.

Unfortunately, the sorts of policies that worked in 2009 & 2010 won't work this time around. Then the downturn was limited to export-oriented manufacturing. Now that sector did employ a few millions, and mass urban unemployment is an authoritarian government's nightmare. At the time construction already employed far more people, and plans for the highway network and high-speed rail system were already in place, shovel-ready to use American slang. Today every sector needs stimulus, there is no healthy sector that can pushed to grow faster.

Maybe the PLA can recruit a million grunts over the next month...and another million the following month. And the following.
Dreamcars profile picture
Highly plausible numbers, cooly laid out. And , thanks for the tip @vooch
vooch profile picture
Finally - someone who knows what he is talking about vis a vie global supply chain subject. This is worth a close read.

@Stewart Foreman
Mike Smitka profile picture
@vooch Thanks! I recognize your handle, and that of @MaxedOutMamma, from browsing comments on SA. (When I'm not in the mood to attend to other tasks, I not only browse to excess but also comment to excess. Time to be more disciplined and write articles!)
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.