Over the past two months the coronavirus has gone from a slight concern to a global epidemic that has seen thousands get affected across numerous countries. As China dashes to contain the rapidly spreading virus, building one hospital in 10 days, it not only affects the people of China but is also having a major impact on the auto industry as well. Some of the biggest car brands in the world have made a major investment into their supply chain in the industrial nation. Meanwhile parts of China have been placed on lockdown, some areas since January, companies and investors alike are becoming unsettled.
Auto Industry heavyweights from across the globe have major production in China, as the country makes more cars than any other country around the world. The likes of Volkswagen, Toyota, Daimler, General Motors, Renault, Honda and Hyundai all have planted their flag in the automotive hub and for the most part the relationship has been fruitful with these brands as they are able to cut production costs. Workers in China earn around $10 per day opposed to the places most of these brands are from like, for example, America where the average minimum wage for an auto worker earns anywhere from $28-38 per hour ; a sizable difference in net profit and bigger earnings they bring to their investors.
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Since China usually had most of its plants closed during this time of year because of the Lunar New Year holiday anyway, the industry has not yet felt the full effect of these closed factories. However, Hyundai has shut down factories in South Korea solely based on the fact that they cannot operate without the parts from China. A staggering 29% of Hyundai’s parts originate from China. The same thing is happening in Europe as Fiat Chrysler said that it has one of its plants is at risk if China is not back on track within the next couple of weeks. That being said, according to S&P Global Ratings, the outbreak is going to force carmakers in China to cut production by 15% in the first quarter, greatly hindering the global supply chain of many companies. GM CEO Mary Bara described the situation as “fluid” during the company’s capital markets day as she tried to put shareholders’ minds at ease amid the building panic of the overseas market.
Having over 60 million people living in lockdown alongside factories being shut down, is certainly enough to give anyone a moment of pause. This is going to affect the biggest global brands in some way, but one automotive brand in particular has been put into an especially big predicament is Volkswagen. The German brand has put a lot of its eggs into one basket as 40% of the company's production comes from 24 of its chinese factories. Almost like they said, “Hey Hyundai, hold my beer while I show you what it really takes to put yourself at the mercy of others.”
Having over 60 million people living in lockdown alongside factories being shut down, is certainly enough to give anyone a moment of pause. This is going to affect the biggest global brands in some way, but one automotive brand in particular has been put into an especially big predicament is Volkswagen. The German brand has put a lot of its eggs into one basket as 40% of the company's production comes from 24 of its chinese factories. Almost like they said, “Hey Hyundai, hold my beer while I show you what it really takes to put yourself at the mercy of others.”
Parts availability isn’t just a problem for new car manufacturers, it’s an industry wide problem that will start to trickle down to every corner of the auto industry. These are the effects that will come to the forefront over the next several weeks, as everyone realizes how much of the global economy actually relies on cheap Asian labor. Just yesterday, Microsoft (link to article) followed suit behind other tech companies to warn about the coronavirus affecting their bottom line in Q1. We hope that this is a wake up call to all industries about investing into a more diverse business model that helps boost their local economy. If companies worked on a healthy mix of production spread out across multiple junction points, global production problems would have less of an effect on stability.
Think we’re asking for too much? Consider these statistics (https://en.wikipedia.org/wiki/List_of_epidemics):
In the 20th Century 1901-2000: 32 epidemics were reported.
In the 21st Century 2001- Present: Over 60 epidemics have been reported thus far.
We are 1/5th of the way into this century, with more than double of the epidemics reported already.
As every passing day goes by the situation in China only seems to be getting worse. It has now come to the point where two thirds of China’s vehicle production is now closed and has knocked down total production 7% already and at this rate could possibly bring production down by 32%! From the mounting pressure from global governments to eliminate internal combustible engine vehicles from the roads to the Brexit deal still not made with the European Union the auto industry is in a unique position. From being an immovable pillar of the global economy to being launched into all kinds of levels of uncertainty, this will be something closely to examine only two full months into the new year.