To understand how the coronavirus could affect the U.S. auto industry, we must first understand what caused Honda sales in China to drop by 85 percent, Toyota to fall 70 percent, Volkswagen by 91 percent, and GM sales were down 92 percent. There are two primary factors tightly linked by one overriding event: the Chinese government’s decision to put much of the Hubei province on lockdown, including the massive capital city of Wuhan. By preventing about 60 million citizens of Wuhan and Hubei province from leaving their homes except to get groceries or medical attention, China created two big problems for the auto industry. First, no one could go out to buy cars, and second, even if there were customers, auto manufacturing plants were shuttered with no one to build the cars.
Hubei, however, is only China’s 14th largest province by land mass and 9th by population, so it alone cannot account for the sales drops. Hubei wasn’t the only province to experience lockdowns, though. At its peak, at least four provinces (of 26) and nearly 50 cities had imposed some kind of lockdown, including major business hubs such as Beijing, Shanghai, Guangzhou, Shenzhen, and Chengdu.
China isn’t the only country on lockdown, either. Earlier this month, the entire country of Italy was placed on lockdown to slow the spread of the virus. While democratic Italy’s measures are far less strict than authoritarian China’s, it has nonetheless led the country’s largest domestic automaker, FCA, to temporarily close three plants in the country which produce roughly 600,000 vehicles annually for both domestic and export markets. Late in the day Friday, Lamborghini announced it would close its factory until March 25 and the Ferrari factory is running at reduced capacity. Meanwhile, the country’s largest dealer network has closed until the end of the month.
Lockdowns in America
The same could happen in America if the outbreak gets bad enough. America’s first lockdown has been put in place in the New York City suburb of New Rochelle, and serious outbreaks in Washington State and Santa Clara County, California, have raised the possibility of similarly drastic measures. In just the past 48 hours, every major sporting league in America, from the NBA to NASCAR, has either cancelled its season or postponed games or races.
The auto industry was quick to cancel major events including major auto shows in Geneva and New York. Smaller auto shows in other communities have also been cancelled. Not only is this a financial hit for companies who spent millions in preparations and elaborate stands with their latest vehicles on display, but it will impact future auto sales which the auto shows would have stimulated.
An outbreak at a U.S. factory has a large and immediate impact on a community. If that plant happens to supply key components, such as engines or transmissions, it can quickly shut down assembly plants that rely on a steady supply of parts. Likewise, the closure of a parts supplier’s plant anywhere in the world could grind assembly lines to a halt. Many parts are sourced from China which is disrupting the supply chain. While some of China’s plants are beginning to come back online, most are believed to be running well below capacity, though specific information on which plants are open and their operational capacity are hard to come by. In the U.S., Detroit’s automakers have told reporters they have enough parts to keep production running until nearly the end of the month, though there are also reports of certain parts being flown in at great expense to keep the lines running.
The bottom line is, if Chinese parts suppliers don’t get back up and running soon, there are going to be fewer cars to sell in the U.S. or anywhere else.
Buyers Staying Home
It may not matter, though, if customers stay home. Individual outbreaks and precautionary measures like bans on large gatherings across the country will keep potential car buyers out of showrooms. Dealers in affected areas are already reporting lower foot traffic. Even areas not yet touched by the coronavirus are seeing smaller crowds at dealerships as people avoid public areas and practice social distancing.
More than just a fear of catching the virus, many people are likely to put off a major purchase over economic uncertainty. After all, a car is the second-most expensive purchase the average person makes in their life behind a house. While the economy hasn’t crashed as of this writing, Wall Street has had several of its worst days on record in just the past week and the cancellation of major festivals and sporting events will have a noticeable economic impact. With a great deal of uncertainty over the state of the economy, consumers are likely to keep their money in savings until things get better, just as they did during the Great Recession. If people start losing their jobs or the country falls into a serious recession, it will only exacerbate the downturn in car sales.
How bad will the downturn be? No one knows for sure, but earlier this week, Morgan Stanley released a report predicting a nine-percent drop in car sales for 2020. Blaming customers who put off car purchases due to economic uncertainty, the report expects annual sales to drop from 17.1 million in 2019 to 15.5 million in 2020. This report was released, however, prior to the announcements from major league sports and the stock market taking yet another dive.
Better indicators of the seriousness of the problem could come as soon as next week, when North American plants are predicted to begin running out of Chinese-sourced parts which could force production to slow or stop. The full impact will be evident when first-quarter sales figures are released in April. Despite a strong February, bolstered by President’s Day sales events, March results could be abysmal with the rapid deterioration of the stock market and consumer confidence.
How long the pain lasts depends on both supply and demand. As long as consumers avoid showrooms out of health or financial concerns, auto sales will suffer. Even if the coronavirus pandemic were to end tomorrow, addressing disruptions to the supply chain and filling the product pipeline could take some time. With the situation changing daily for both consumers and automakers, it’s impossible to predict when and where this will end, but we’ll keep you updated as we learn more.
