Coronavirus China: Impact On Global Automotive

Summary

• 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.

Background

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 may be "resuming production," but they await both a full complement of workers and an inventory of parts. Source: Automotive News TV, February 21, 2020

Automotive

China is the largest economy in the world. Reflecting that, its domestic vehicle market, at 28 million units in CY2018, is one-third larger than either the North American or the European market (each at 21 million units; OICA data). Overall it accounts for 30% of the global industry. For the auto industry what happens in China matters. A lot.

Only this past weekend did photos from China show people returning to the streets and in subways. Nevertheless, Hubei remains on lockdown. The most recent statements from Honda indicate their plants will remain closed through March 11th (source: Automotive News China). However, throughout the major eastern regions of China, those finally able to return from their extended holiday face 2 weeks of quarantine. So plants won't even be able to staff for normal operations until the end of the first week of March, and it will take 2-3 weeks for output to normalize. For example, while Toyota's 4 assembly plants began reopening on February 17th, they are running only 1 of the normal 2 shifts, and not always for a full day (source: 朝日新聞ネット).

That's just as well, because sales were down 19% in January and 92% in the first two weeks of February. Dealers don't need additional inventory, and sales will remain depressed. Part will be the anticipated continuation of 20 months of decline (presuming February will be a down month, duh). The Chinese Association of Automotive Manufacturing (CAAM) had already predicted a 5% decline for CY2020 prior to the coronavirus outbreak. But it's also that the small business owners who comprise the core of the market have now lost 5 weeks of income, which will put many out of business. Most have little or no access to formal credit markets, so government monetary easing will do nothing for them. By the end of 2020, the industry will have seen 29 months of falling sales.

The New Years Effect: The Good Side

From the standpoint of epidemiology, the New Years timing was a worst-case scenario. From the perspective of the auto industry, it was a best-case scenario. Why? - because firms build up inventory in advance of the holidays, as over New Years assembly operations shut down across the automotive industry. For producers away from the epicenter in Wuhan, production interruptions will be short-lived and random, as with the "3/11" (March 11, 2011) earthquake and tsunami in northeastern Japan. Then, shortages of a single pigment made meant that certain black paints used in Europe ran out. It was similar with damage to the Tohoku plant of Renesas (OTCPK:OTCPK:RNECF). Certain options were unavailable, at Toyota and others, until a replacement plant in Malaysia started deliveries.

The impact on sales was trivial: dealerships hold inventories, and could steer customers towards other models, trim packages and colors. Furthermore, over the last 10 years not just the Japanese but the industry in general have improved their visibility into their "just-in-time" supply chains, from materials suppliers to 3rd- and 2nd-tier suppliers. They have used that knowledge to identify vulnerabilities and develop alternate sources and backup inventories. Lean is good, but you do want fat strategically located. (Unfortunately, while the auto industry can do that, all I manage is a spare tire.)

Hubei: The Bad Side

A short-run interruption, particularly to one well upstream in the supply chain, may thus never be visible to new car purchasers. OEMs, however, will be plagued with inefficiency, and extra costs to overcome bottlenecks. That will be apparent in China. The Hubei lockdown is now over 4 weeks old, and does not affect just a handful of suppliers.

By chance, as an academic economist in my first year of retirement, I have a research project underway on the geography of the Chinese auto industry. Using 2018 data, Hubei accounted for 17 out of 104 final assembly plants, more than any other single province. Most prominent is Honda (NYSE:HMC), whose 3 assembly plants are the sole production sites for their best-selling CR-V and Civic (at over 200,000 per year, they have been a large and profitable success). In addition the province is home to plants of GM (NYSE: GM), PSA (Peugeot, OTCPK:OTCPK:PEUGF), Renault (OTC:OTCPK:RNSDF) and Nissan (OTCPK:OTCPK:NSANY). While plants in the rest of China are gradually resuming operations - the photo above should indicate that phrasing may hide more than it reveals! - those in Hubei are currently scheduled to reopen only from March 11th, six weeks beyond their original post-New Years target. Honda notes that while they expect employees to return on the 11th, it will be 3 days before any production actually resumes (source: 自動車ニュース＆コラム2020年2月21-23日号). [A globalization aside: with the exception of one low-volume variant, the 10th generation Accord is made in Thailand and Guangzhou China, and Marysville Ohio but not in Japan.]

Hubei however is not just a locus of final assembly. It is also integral to the lower Yangtze automotive production network that accounts for half of all Chinese vehicle output. As part of an academic research project, I have so far compiled data on the location of 6,300 electrical, drivetrain and chassis suppliers in China. [Yes, I read Chinese. And Japanese and German.] Of these, 373 or 6% were located in Hubei, and the nature of my data mean that this is an underestimate. Now with 17 assembly plants, some of this is expected. Thus I deliberately left out seating plants from the above total. Why? - in China as elsewhere, "just-in-time" production means these only supply nearby assembly plants. Whether they operate or not doesn't affect the auto industry elsewhere.

The key issue is that not all the plants focus on customers in Hubei; some export to Asia, Europe and North America. Examples include major global suppliers such as Bosch (privately held) and Magna (MGA). These (alongside Denso) are the 3 largest global Tier I's. No individual factory is large enough to matter for their overall profits. But lack a seat recliner bracket (one of Bosch's Hubei products), and you as a Tier I seating supplier aren't shipping seats, and your customer's assembly plant shuts down. Supply changes are complex, and a month-plus stoppage in a key production center will with certainty have global ramifications. [I have fought off my impulse as an unreformed academic to provide a detail-laden list. Rest assured: these aren't two anecdotes, but two examples from a large dataset. Valeo, Dana, Cummins, Xiangyang (bearings), the list of significant players is long.]

China in Global Context

Few motor vehicles are exported from China. In 2019 the US only imported 68,573 cars and light trucks, all made at the plants of global OEMs and so their origin is unnoticed by most consumers. European import levels were similar. In contrast exports from the US significant, totaling 192,210 cars and light trucks, such as the BMW (OTCPK:BMWYY) Honda Motor Co., Ltd. (HMC) Stock Analysis & NewsX-series models for which all global production is in South Carolina. (US Department of Commerce data). Car dealers in the US and Europe won't be affected, but the February hiatus will knock 10,000 or so units off of exports. Overall the impact on vehicle sales and production outside of China is too small to concern investors, absent any future parts shortages.

Components are a very different story. The US exported $2.5 billion in automotive parts to China in 2019. One example is Gentex's (NASDAQ:GNTX) autodimming mirrors, found on high-end vehicles globally, all of which are made in Zeeland, Michigan. In contrast, we imported $15.6 billion in parts from China. Now much of that (say, 50%) is for the aftermarket, feeding into the sales of Advance Auto Parts (AAP), Autozone (AZO) and O'Reilly (NASDAQ:ORLY). Their business models rely upon carrying frequently used parts locally. In the aggregate they have a lot of inventory, so we'll hear of service shops having to reschedule a brake job or oil change until they can get a part shipped in from some other store. Not a big financial hit, since all three will be in the same boat. Or rather, the same boat will have left all three stranded. (Er, something like that, don't look to economists for fine prose.)

But then there are those printed circuit boards that lie behind the buttons on the armrests of doors, the gearshifts on consoles, and those for sunroofs and the climate control system. Those come from small suppliers, who depend upon resin suppliers, and guess what? Apple (or rather, Foxconn) can pay double without blinking an eye to see that their vendors get dibs on inventory. Circuit boards are their lifeblood. A Tier III auto supplier has little leeway to pay extra. It will be Webasto (sunroofs) or some similar supplier that will find itself unable to ship product.

Again, in the auto industry materials and components are stockpiled in advance of the Chinese New Year. While light-weight parts can be shipped via airfreight, bulk items move on ships. At the fast end, those take 3-4 weeks (source: Transit Times from Shanghai), from the loading of a container at a Chinese factory to its unloading at a firm in the US Midwestern "auto alley" or the EU French-German-Czech-Polish "auto corridor." But plants don't necessarily ship containers daily, and other delays mean the norm is about 6 weeks. In addition, ports in China have been shut, and it will take at least 2 weeks for them to start regular operations. (At least automotive doesn't need refrigeration. Produce containers are going to have to be emptied of rotting contents, and thoroughly cleaned, which no one is set up to do.)

That means that, in the normal course of events, post-Chinese New Year production would not make it to customers in the US until the first two weeks of March. Furthermore, just-in-time logic means that global suppliers have plants everywhere that their OEM customers have operations - Europe, Southeast Asia, Japan/Korea, North America, Brazil. What happens in the regions adjacent to China should thus give a foretaste of what will happen in Europe and North America at the end of March.

Disconcertingly, Korea - with ports within a day's sail of China - saw frequent interruptions from mid-February, driven by shortages of wire harnesses. This affected all producers there, including Hyundai/Kia (OTCPK:OTCPK:HYMLF) and GM's Daewoo plants. That's partly driven by the aggressive move into production in China by Kyungshin, its key wire harness maker. It is however only one of some 170 Korean Tier I's and Tier II's to set up in northern China, with its good logistics into Korean ports (Automotive News Feb 13). Japan is only starting to see an impact. Toyota, Nissan and Honda source their wire harnesses coming from the Philippines, not China, but Nissan Kyushu closed for 3 days and planned 4 days of short hours (sources: 日経新聞・電子版, 自動車ニュース＆コラム and author visits to wire harness manufacturers). Toyota has announced that they may have to curtail operations from March 9th, driven by the inability to ship, which also means that some of their suppliers have yet to resume production because they can't get parts. The key word is "curtail" - not stop. Even at Hyundai's plant in Ulsan, where today (Feb 28, Nikkei) a worker was found to have Covid-19, only the assembly line where he worked was shut down. The other 4 lines in the huge complex continue to operate, as key suppliers have increased production outside of China and as at least some deliveries from China have resumed.

With the exception of a short-term issue at a Fiat plant in Serbia, North America / Europe. However, Denso has just announced that their car audio operation in Spain will stop March 16th (Automotive News). That is consistent with the above timeline. Problems based further up in the supply chain (the production of precursors for plastics) may not appear until April. Absent direct effects from quarantines, as in China, the story so far is one of interruptions. That will change if Hubei cannot resume production as scheduled in mid-March, and the same will be true of Europe if northern Italy is quarantined.

Financial Implications

What does all this mean for revenue and profits? While most plants are open - VW has 14 automotive assembly plants in China, and the last 6 were scheduled to reopen February 24 - production will be limited until operations normalize in Hubei. Nikkei XTech details major Japanese operations in China, across several industries, consistent with this picture of factories being reopened but operating at half capacity. Currently plants there will be allowed to reopen in the second week of March, but it will take several days to get underway. The effective resumption of operations thus will not be until the 3rd week of March, by which time employees who have returned from the provinces will be out of quarantine. But not all are returning. They have the understandable fear that Wuhan will be bad for their health, where many live in dormitories, and most must commute in crowded buses and subways, and eat with others in factory break rooms. In addition, firms didn't pay workers before holidays. Will a small supplier actually be able to pay them? Even if there are no further quarantines, firms will be understaffed and will only be able to work out of inventories of parts from before the New Years. March is mostly a lost cause, and output reduced in April.

First, even a conservative back-of-the-envelope calculation shows that this is not trivial. China accounts for 30% of global automotive sales for OEMs and Tier I suppliers. China's strong market, which only slowed in 2018, meant that profits have been higher, so that 30% in sales generated 40% of profits. Hence from the start of the New Years holiday through Friday 21 February, the industry has lost 4 full weeks of both output and sales (again, with dealerships closed throughout most of the country, sales in the first 2 weeks of February were down 92%). That is thus 1/3rd of 2020Q1 output and sales. With China 30% of the global sales, that's a 10% drop in global revenue, and (because automotive fixed costs are high), profits will decline by 15%-20%.

That is a conservative estimate because it only reflects what has already happened. Sales, however, will not recover in March. My own (off-the-record) conversations this week indicate that streets in Chinese cities remain unpopulated; the Shanghai high commuting report shows mostly green (here) while videos show subways largely empty (here, matched by data here). More important, again as noted earlier, small businesses have now lost a 5 weeks revenue: for all intents and purposes China is in a steep recession. Sales will remain down 75% through March, and if things go well, only recover to 50% in April. They were already down 19% in January. So let's average January, February and March: (19% + 92% + 75%)/3 = 62% decline for 2020Q1. This more realistic number means the hit to global sales 30%*62% = 19%. One in five dollars of global revenue isn't going to be there.

Who is vulnerable?

China is of outstanding importance for Volkswagen: it is the region with the brand's highest unit sales. Last year, Volkswagen delivered 3.2 million vehicles to customers in China and is the clear market leader in the world's largest and most important automobile market. VW Corporate Newsroom

Potential vulnerability varies across firms. At the national level, the two market leaders in China are VW (OTCPK: VWAGY) and GM, with roughly 17% and a 12% market shares. In the luxury segment, Audi, BMW and Mercedes-Benz are roughly equal, selling roughly 600,000 vehicles assembled in China with additional imports. Then there's Honda, which has the misfortune to have 3 of its 4 plants in Hubei. All of these, however, are joint ventures, so while in good times they only share 50% of the profits, in bad times they suffer only 50% of the losses. (These firms also earn profits from licensing fees, finance, and marketing, which are not through the manufacturing joint ventures and are not detailed. Anywhere. I've looked for the past 5 years.) The other side, though, is that the pure domestic car companies (40% of the market) and components firms enjoy neither the costs nor the benefits of a partner.

A few firms stand out (all data are from company financial statements and investor presentations):

• VW: 40% of group sales were in China, where it has 15 assembly plants (including a commercial vehicle JV) and an additional 17 parts plants.
• GM: 40% of vehicles are sold in China, where CY2019 joint venture sales came to $39 billion. In 2019 they earned $1.123 billion in China, on an equity basis.
• Honda. 30% of sales (1.5 million vehicles) are from China, less than the market leaders, but most of their operations (including motorcycles) were in Wuhan.
• Adient (NYSE:ADNT): they have 86 manufacturing locations across 41 cities and 21 joint ventures in China; Asia accounted for 58% of CY2019 EBITDA.
• Hyundai/Kia: only about 10% direct sales in China, with about 660k vehicles made in their factories there. However, their risk from supply chain issues is higher than any other global OEM.

Summary

• Revenue: there has already been a substantial hit from the coronavirus on automotive revenue, at present about 10% of global automotive top-line.
• Earnings: China has been a major source of automotive profits. To my knowledge, the only 8-Ks to date are from Aptiv (NYSE:APTV) and Tenneco (NYSE:TEN). Aptiv notes up to a $200 decline in revenue and a $50 million drop in earnings, while Tenneco reports a potential $150 million drop in revenue and $50 drop in earnings. Yes: earnings fall 30¢-40¢ for every $1 loss in revenue. Autos are a high fixed cost industry. Until more reports, are issued, I do not want to extrapolate.
• I expect the coronavirus to wipe out all Q1 earnings at companies whose primary operations are in China. Publicly-traded assemblers include Beijing Auto Industries (BAIC: OTCPK:BCCMY), BYD (OTCPK:BYDDF), Geely (OTCPK:GELYF) Great Wall (OTCPK:GWLLF), and Guangzhou Automobile (OTCPK:GNZUF). There are also numerous start-ups, and most non-publicly-traded China-based global suppliers such as CATL (batteries), Joyson (airbags, steering gear), Yangfeng (interiors), and Wanxiang (diversified).
• This number will increase the longer the impact lingers in China - I estimate the final tally for 2020Q1 will be 20% of global top-line revenue.
• However, that assumes that coronavirus effects are limited to China. I do not attempt to incorporate what is happening in northern Italy and Daegu Korea into this analysis. Modest interruptions in Europe, Japan and Korea will wipe out all automotive profits for 2020Q1. It is only the ability to mobilize supply chains in these regions that have kept the negative impact on production outside China to a minimum.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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.

Comments

[Mike Smitka]

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]

Nice, but one needs to consider that like many "black swan" applecart upsets, the subsequent rebound is usually more than compensatory.

[Maxed Out Mama]

@Tdot

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]

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]

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]

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]

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...?!

www.autonews.com/...

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]

@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]

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]

@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]

@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]

@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]

Highly plausible numbers, cooly laid out. And , thanks for the tip @vooch

[vooch]

Finally - someone who knows what he is talking about vis a vie global supply chain subject. This is worth a close read.

@Tdot
@RickJensen
@Stewart Foreman
@MaxedOutMama

[Mike Smitka]

@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!)