COVID-19: global impact on vulnerable APAC automotive industry
COVID-19 didn’t just start anywhere in China. Wuhan, the city that hosted the first major outbreak of the coronavirus, is one of China’s major automotive production (parts & cars) sites. GM, Honda, Nissan, Peugeot and Renault all have manufacturing plants in Hubei Province, of which Wuhan is the capital. It is fair to say that the car industry was the first economic victim of COVID-19, and the economic impact of the virus became global faster than the virus itself. Asia’s economy is a complex web of individually acting countries, with few free trade agreements (e.g. ASEAN), several geo-political hurdles (e.g. North-Korea) and close to no infrastructure to deal with corona-type disasters in a consolidated manner. Most Asian countries do have one thing in common: their dependency on the Chinese economy, either as provider or client for local production. Vehicle Sales It’s therefore not surprising that the consequences of corona were immediate and dramatic: most countries registered double digit drops in car sales. Like in other countries in the world, the impact comes from The interruption in the production process of cars and parts The complete stop of marketing activities, such as car shows The postponement of corporate and consumer buying intentions due to fear, carefulness or isolation. PASSENGER VEHICLE SALES JANUARY/FEBRUARY Jan/Feb 2019 Jan/Feb 2020 Y-o-Y Japan 887,402 790,288 -10.94% China 3,250,000 1,831,000 -43.66% India 552,334 514,230 -6.90% Malaysia* 44,264 39,127 -11.61% Philippines 16,958 14,636 -13.69% Thailand* 78,090 71,688 -8.20% Australia 55,201 43,142 -21.85% Korea** 221,771 181,324 -18.24% * January sales only ** Domestic OEM sales only (Source: marklines.com) Leasing Industry Leasing figures are not available in APAC, except for the Australian market. Ron Sullivan, CCO at OviDrive: “We’re already beginning to see the extension of buying cycles: clients are holding on to their assets longer. As this will inevitably impact car sales, OEMs and dealers will start discounting, which will have an impact on residual values and profitability. Many of the Australian FMOs (leasing companies) are publicly listed, which means that it will become more difficult for the leasing industry to obtain funding.” “We’re at the start of what could become a cycle that we’ve already witnessed during the global financial crisis a decade-or-so ago. Our recommendation to fleet clients is to keep a close eye on their fleet’s TCO and utilisation rate, act fast and be innovative: don’t be afraid of car sharing, swap high mileage cars with lower mileage cars and make sure that your contracts reflect true utilisation. Lease prices will go up and expect recalculations and end-of-contract to go up as well.” China The Chinese economy was already slowing down in 2019, not only due to trade disagreements with the US but also because China is in a transformation process from a low-tech to a high-tech market. This has left the country’s economy slightly fragile and in need of oxygen. Analysts, back in December 2019, were positive about the 2020 outlook, as the major global export markets (South-East Asia, Japan, US) were doing well and their growth would reflect positively on the Chinese GDP. Now, China has been hit twice in 24 months and its massive economy will need time and investment to recover. Being a centrally driven economy however, it is likely that China will do so faster than other countries, but this doesn’t take away that the country relies on the rest of the world to sell its products and services. Japan Japan deals with numerous challenges, such as an ageing population and a Japan-centric economy that doesn’t export much, except for cars and tech. The car industry itself is heavily reliant on the Chinese market (parts and production), which has led carmakers to stop Japanese production, as parts were not available, and lose sales on the Chinese market at the same time. In addition, the Japanese car manufacturing industry is not as flexible as the German one, and uncapable of acting fast and switching production from one plant to the other. Japan therefore needs to lock in domestic sales first, but the Japanese consumer was already buying fewer cars. The increase of VAT from 8% to 10% in October last year slowed sales down even more. India As far as India is concerned, the true impact of the coronavirus is yet to come. Compared to other countries in APAC, India has waited a long time to implement measures such as social distancing or lockdowns (only on 23 March has the first large-scale lockdown been implemented). Due to the country’s size and its unequally accessible health infrastructure, the current sudden increase of virus cases is alarming and it’s highly unlikely that a back-to-normal will come in the next few months. India’s car sales and production, as well as its small leasing industry, will be taking a hit – for the second time in a short period, as the introduction of the GST system had slowed down car and leasing sales. Wave 2 Messages that the Chinese market, and other APAC markets, have the coronavirus under control, are not entirely correct. It’s true that in several countries, the number of “imported” or “wave 2” cases exceeds the number of local contaminations, but this does not imply a back-to-normal. Singapore, for example, has now shut its borders to all short-term visitors and people transiting through the country. Nothing indicates that recovery will be fast, nor that the pre-crisis economy will be restored any time soon. Until then, governmental support and business strategy will be important, both for the health of the citizens and the APAC economy.