Weekly Brief: Virus ‘Silver Lining’ Could End Auto’s Dependency on China

As the coronavirus pandemic spreads around the world with frightening speed, the automotive industry has braced itself for what could be a long and costly disruption to operations.

Some companies, like Ford, General Motors and Fiat Chrysler Automobiles, tried to get out in front of these disruptions in the United States by implementing work-from-home directives for all of their employees. Naturally, that excludes those employees who work in essential roles on the assembly line and keep factory production humming along. Of course, essential roles may quickly come to seem very much non-essential if America experiences an outbreak akin to Italy, where the government has implemented a nationwide lockdown to try to contain the pandemic. FCA has been forced to close four of its Italian factories in the past week.

More lockdowns are coming and with them will come more disruptions to the auto industry. Spain and France both announced sweeping restrictions over the weekend. Bars and restaurants have been closed. Citizens are prohibited from leaving home except to go to work and buy essential goods and medicine in both countries. Given that the World Health Organization now considers Europe the epicenter of the disease, those restrictions could intensify and spread to Germany and Sweden as well, which could have further effects on some of the world’s most prominent carmakers, from Mercedes-Benz and BMW to Volkswagen and Audi.

Expect car sales to take a major blow around the world. An environment where hospitals are overloaded, family members are getting sick, stocks are hemorrhaging and people’s net worth is plummeting by 25% or more is not conducive to selling new cars. Or old ones for that matter.

Gamble: Volkswagen’s massive investment announced November 2019 just as Covid-19 was emerging.

In China in February, when the coronavirus outbreak was at its worst, car sales were down 80% from what they had been in February 2019. That hurt domestic carmakers in China but also foreign carmakers like GM, Volkswagen, Nissan and Tesla that have made the Chinese market a focal point for their vehicles in recent years. Depressed car sales will probably follow suit throughout Europe and North America in March and April.

All this is to say nothing of the fact that, over the past two decades, the car industry has made a collective decision to anchor its supply chains in China –  the very supply chains that are now in disarray after the Chinese government enacted martial law and shut much of the country down, factories included. Most of those factories are now reopened and beginning to churn out their parts again, although numerous carmakers are experiencing challenges because of the supply chain breakdown.

Operations at a FCA factory in Serbia came to a stand still because parts from China were nonexistent. Rumors are circulating that production of GM trucks and SUVs could be delayed owing to supply shortages. Honda in Japan and Hyundai in Korea have reported similar challenges.

If there’s a silver lining here, it could be that the coronavirus pandemic forces automakers to diversify their supply chains and thus decrease their dependency on China. Bringing factory jobs back to domestic markets or to new countries and partners could become more appealing.

China has thrived on the calculus, made time and again by corporations in the US and Europe, that the positives of buying from the world’s second biggest economy outweigh the negatives of dealing with an autocratic government and local businesses that often deny their workers fair wages and basic human rights. The result is unmatched profits but also perhaps unmatched risks. Is that a calculation carmakers are willing to continue to make?

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