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Anonymous

Current General Manager, Procurement and Supply Chain, SAIC General Motors Corporation 

COVID-19 Impact on China: March Update

Tesla Brand Positioning in China

China Auto Parts Procurement COVID Disruption

COVID-19 - China Auto Parts Procurement

{audio:0:00:02} Liang, could you just provide an update on the volume trends, through Q1 this year, in the automotive industry, in China?

{audio:0:00:12} Actually, for this year, in January, the performance is normal, compared to last year, which is a total sales volume of 1.72 million vehicles. In this 1.72 million vehicles, for passenger vehicles, there are around 22% which are premium automotive and the remaining 78% are the mass production. This is the performance for January, for premium and mass auto. But as you know, with the spreading of the coronavirus, especially at the end of January, people are afraid to go outside. Also, at the beginning of February, it was Chinese New Year, which is a Spring Festival. So the performance of the auto market in February, is not good, which is a total sales volume of only a quarter of what we would expect. For the percentage of premiums, it’s around 23% and for the mass production, around 77%. The volume for the premium auto is 52,000 in February and, for the mass, the total volume is around 175,000. Compared to January, the volume has decreased. If we look at the year on year comparison, to 2019, the decrease is around 80%, compared to February 2019.

{audio:0:02:12} For the volume in March, there is some expectation that we will have better performance, compared to February. In China, many of the cities and the provinces, they have already reported a zero increase for infected people, each day. Now, the people are starting to go outside. They do still need to wear their masks, but now they can go to public places, which means that they can go to the shopping centers, go to car dealerships. The expected volume for March for the premium autos is around 125,000 vehicles. For the mass, it’s around 375,000 vehicles. Which means that the premium auto takes up about one quarter of the total sales volume.

{audio:0:03:18} You can understand that, for each month, the premium autos is getting higher. This is the actual situation in China. In the past, maybe 10 to 20 years ago, people had one vehicle but now, the families who need their vehicle, already have one, so they are trying to upgrade their consumer to the higher grade. This means that they will get a second vehicle or they will switch to a premium vehicle. You can see that the percentage of the premium market, it has gone up from, approximately, 20% from last April, to now, approximately 25% of the total sales volume. This is the actual and realistic situation.

{audio:0:04:21} Do you see material change in consumer demand, in March?

{audio:0:04:32} In terms of the coronavirus, from January to February, are consumers now willing to spend on cars? I know you said it’s going to increase in March, but are consumers delaying this expenditure, or do you see them coming back to normal? Was this, really, just a temporary blip for coronavirus?

{audio:0:04:58} Actually, I think the current situation will, gradually, come back to normal. Why I say this is because, especially in February, most of the people are not able to go outside. Which means that they have to stay at home. As they are not able to go anywhere, such as dealerships, that’s why the volume is quite low, compared to the previous year or compared to the previous months, such as January.

{audio:0:05:32} But now, we have seen a strong control on the spreading of the virus and now most of the cities and provinces, they have almost zero increase daily. That’s why I say it will gradually return to normal. But in the meantime, I couldn’t say that there will be a structural change in the consumption. For example, I couldn’t say, that because of this virus, people want to buy a new car. Especially for many of the smaller and medium enterprises, due to the coronavirus, their performance and their operation was greatly affected. This means that their daily and monthly income of the workers or management, they certainly have not had an increase, but may have had a decrease in their income. That’s why there is not such a high demand for buying of cars, because of lowering income.

{audio:0:06:38} They are just returning back to normal. Some families, before the Chinese New Year, they were preparing to buy a new car. But due to the virus, they postponed their plan, to March and maybe to April.

{audio:0:06:59} Could you just explain the environment in China? You mentioned that people are willing to go back outside, willing to act more normally. What is the situation if you want to go into a shopping mall? Do you have to be tested? What’s the situation like, to that extent?

{audio:0:07:16} Actually, whenever the Chinese people go to public places, such as going to parks or go to the train station or the shopping mall or some other public place, there is always temperature testing, especially their body temperature. Whenever they discover that their body temperature is higher than normal, they are not allowed to go into the public place, such as to go on a train or take a plane or go to the shopping mall or go to the dealership. This is a counter-control. The people, actually, will take their body temperature at home. They will put some kind of software in their smartphone, to tell the administration of public health. This is also some kind of control and anti-virus controls.

{audio:0:08:15} The government distributed all these tests to both families and also public places, to contain the virus?

{audio:0:08:24} Yes, you are right. We test our body temperature twice or three times a day and we will also make a record, each day, and we will submit this record to the public health office.

{audio:0:08:42} How have you seen prices change, for automotives, through March?

{audio:0:08:48} Because of this virus situation, especially the automotive dealers, they are facing strong pressure on the currency flow and they want it to return to normal. Normally, they have been giving a bit of a promotion, such as 3,000 RMB equipment with the vehicle. This equipment can be placed on the new vehicle, which is something that will kill the virus, inside of the car.

{audio:0:10:52} Liang, could you just explain the major points of disruption you are seeing in the automotive supply chain, due to coronavirus?

{audio:0:11:04} Firstly, the situation for the raw material, the components that we need delivery of, for the mass production, they are not able to supply these on time, due to transportation. Locally, we have a closed railway and highway. For the raw materials and the components, they are not able to ship to different areas in China. So there are supply shortages of the raw materials or finished goods, in the impacted areas, especially in the Wuhan area.

{audio:0:12:09} Secondly, because most of the people, especially in February, they were constrained, inside their homes. They were unable to go to their work. There is no white collar or blue-collar workers, which are able to go out. Also, from the purchasing side and the sourcing side, because we are restricted on travel, so we are unable to go to certain areas, such as in the epidemic center in Wuhan, because Wuhan is responsible for one quarter of Chinese automotive production. So local suppliers and global suppliers, they were focused on that area. For sourcing, we are unable to go to this area, so we are not able to start new projects or new programs and to be able to undertake transactions.

{audio:0:13:31} Also, there is an issue regarding logistics, because the established hubs and supplier networks, they are currently experiencing limitations in their capacity and the availability. So even if materials are available, they would not be able to be shipped to their destination and they are stuck somewhere else. Also, finding the authority for goods to be transported is very difficult, because of the lockdown of the cities and provinces.

{audio:0:14:15} The other issue is regarding the consumers. The consumers are also restricted to certain areas and they are unable to go out normally, as I said, such as going to the dealership in order to limit exposure to the virus. Many have moved to online sales, which is also challenging. So these are all effects of the virus, in China.

{audio:0:15:00} Can we focus on sourcing and the big issues that you are having on sourcing and shipping them to the correct location. How are you managing that challenge today, with Tier 1 and Tier 2 suppliers?

{audio:0:15:19} Actually, regarding the sourcing sector, I think currently, we are trying many different types of methods, especially, trying to find some alternative suppliers, in some other regions in China, in the southern or north eastern part of China. China is a very big market which means, even for the same assembly or the same product, there two or three different suppliers. So we are trying to find an alternative supplier. We will even try to import from other regions, such as from Europe or from the United States. But, as you know, in the US, there are their own kind of issues. It’s just trying to find other solutions.

{audio:0:16:32} On the other hand, because, as you know, before every Spring Festival in China, we create extra stock, which means that stocks will last us through the spring break. Normally, it’s around one or two months’ supply; it depends on different products and programs. For this kind of stocks, this can also last a certain period, before we find the new solutions. Nowadays, some suppliers have already come back to normal, which means they are returning to their normal production. So this is also a solution.

{audio:0:17:16} But before they return to normal, we can use our stocks, to support our production line. These are the kind of solutions that we are undertaking, when we are facing these types of issues.

{audio:0:17:30} So you are focusing on sourcing other parts from different regions, in China. But there’s a global lockdown, outside of China and, therefore, it’s very hard to source parts globally?

{audio:0:17:42} Yes, you are correct. In the past, when there was no lockdown in the other countries, you could also source from other regions. But currently, this solution is not suitable anymore, because the European markets and the US market are also in lockdown.

{audio:0:18:06} How do you think that this is going to impact the global supply chain, in the long run? After we come out of this issue, how do you think this is going to change the way the market and industry functions?

{audio:0:18:18} I think, especially with the wider spreading of this virus, in different regions and different countries, I think, after this epidemic, each location and each plant, should think of a better way in the future, of how to deal with this kind of situation. Because in the past, we had SARS, but now it’s become four or five times that. That was in 2003. To be honest, in the past, we have never faced this kind of situation. There are some things, such as earthquakes or riots, in other regions or in other countries. But this kind of situation, which has affected much of the Chinese automotive market, but it has also affected companies such as Jaguar Land Rover, Volkswagen. This is not just affecting China, but globally, there are companies that have not been in this situation before. I think, in the future, the solution for this is that we will try to develop and secure current supplier bases. This is a key point.

{audio:0:20:08} Also, just now I mentioned, we needed to find two or three alternative suppliers, in the same region, in case the epidemic center, such as Wuhan, is locked down. The other suppliers could continue to supply us. These are things that, in the future, we should consider. Also, we need to think about safety stocks for each plant. We could consider having a good buffer stock, before we find a stable source.

{audio:0:20:56} Is sourcing your parts from different regions, more expensive?

{audio:0:21:03} Yes. To a certain extent, we could say that, if we sourced from different suppliers, we would need to have some investment, such as equipment and our facilities. But in the meantime, we also find that we could use these kind of alternative suppliers to supply our different projects. You have several different projects, several different programs. We also need to consider to give the alternative suppliers some new projects, to make sure that we develop a long-term relationship with them. This would ensure that, in case there is an epidemic again, we would find a solution with them.

{audio:0:22:08} Liang, could you explain how, when you are sourcing in a situation like today, where you have the coronavirus epidemic, you have demand that has taken a massive hit and then, potentially, coming back much slower than expected. How do you make sure you manage the inventory of parts and the demand, in the supply chain?

{audio:0:22:37} For this, we need to keep at least two weeks’ worth of stock, comparing to before, where we kept one weeks’ worth of stock. Because in the past, at normal practice, we have around one week of safety stock. In the future, in case we are going to have to deal with this kind of coronavirus epidemic, we need to have at least two weeks safety stock.

{audio:0:23:11} When you are doing this now, you have two weeks on demand? How many days of inventory do you have today, for parts?

{audio:0:23:24} Currently, we have only one week. But it depends on variables, such as before the Spring Festival, we would have a higher level, as we know that we will have one or two weeks off, during that time. Normally, we only have one week.

{audio:0:23:45} What other strategies are you using to reduce costs in the supply chain, today?

{audio:0:23:53} Actually, to reduce the cost, we find different suppliers, so we put them together – so we put the transportation together or we find a supplier which is especially for the big components or big assembly parts, such as panels, to make sure that we have the lowest transportation costs. This is normally what we do.

{audio:0:24:39} Can you explain a bit more about the travel disruptions and how you are trying to navigate that change?

{audio:0:24:46} In the future, I think we still need to consider that we try, as much as possible, to find suppliers that are surrounding our assembly. This is a solution when, especially, we are facing some supply chain disruption, like the epidemic or an earthquake or a flood. This method will solve a lot of the problems.

{audio:0:25:23} When looking at the global, automotive supply chain today, like you said, China sources products from around China, but also from around the world. Europe and the West rely heavily on Chinese parts and also retail goods and other manufacturing goods. What do you think is required, today, to maintain that global supply chain sustainability?

{audio:0:25:55} I think is also a very important sector that we need to consider, in the future. We say today, that as well as Chinese production, many Europeans have also stopped production in their market. The whole global market has the same situation. In the future, I think, in order to have less impact from this kind of epidemic, each country needs to have more control, such as the anti-virus campaigns. I think the reason why the virus spread so fast in Europe or in some other regions is because the people didn’t put very high importance on the control of the virus. That is why it has spread very fast, in other regions. We need to consider, for the Chinese especially, that China is a major manufacturer for the global market. They should also place high importance on this kind of epidemic, in the future. As you know, at the end of last year, they already discovered this virus, similar to SARS, but the local government in Wuhan, they didn’t place high importance on it. That is why it has spread so fast and infected so many people. I think we need to be more sensitive to this, in the future.

{audio:0:28:08} Moving on to looking at the manufacturing and the factories. Are factories opening again, in mainland China, for the automotive big OEMs?

{audio:0:28:20} All of them, they are already back to normal. They came back to normal at different times. For example, Volkswagen, they reopened in the middle of February. For GM, they reopened at end of February. Most of the OEMs are already back to normal.

{audio:0:28:41} What is the situation inside the factories, in terms of the workers and the processes? Has it materially changed?

{audio:0:28:49} They are sometimes short of material because some components, some parts they come from the epidemic center, from Wuhan. As you know, Wuhan is still locked down by the government, so they are not able to produce these kind of components and parts. So for each OEM in China, they are already back to normal production, but the production volume is much lower, compared to last year. They are maybe at around 50% compared to the same months last year.

{audio:0:29:32} So huge decline in capacity utilization?

{audio:0:29:36} Yes. In February, the sales volume and the production volume is 80% reduction. For March and April, it would normally go back to normal, but it’s only going to be around the 50% level compared to last year.

{audio:0:29:58} Do you estimate that in April and May, you will return to capacity utilization and volume demand, on trend with 2019? Or do you think it will take much longer?

{audio:0:30:14} I think the epidemic in China, it will end around April, which means that for March and April, the sales volume will be half of last year. But after April, maybe May or June, then it will gradually become, maybe 70% or 80%, which means it will gradually come back to normal, I think.

{audio:0:31:09} I just want to turn to the point on consumer behavior and demand. We expect demand to come back in April, May, I think you said. How are the dealers reacting to this, in terms of inventory on the ground and financing themselves, in this time?

{audio:0:32:15} For the dealers, in the first quarter of this year, they are also facing very high pressure, especially on their currency flow. They want to have a better performance in the second or third quarter of this year. Normally, they are working, very closely, with the OEM, to have a better prediction on the forecast of the sales volume, in the second and third quarters. They work very closely with the OEMs, to make sure that they are going to get enough stock and enough vehicles to be placed in the dealerships.

{audio:0:33:03} They also have very strong promotions, especially in the coming one or two months, to attract the customers. As we said, to give the customers, free of charge, some equipment to kill the virus or even give some cash to the customers, and some discount, and so on. This action, in the coming months, for the dealers, will help.

{audio:0:33:37} Are the government funding the dealers to give the cash to the customers?

{audio:0:33:44} If the customers buy or purchase a new car, then the dealer, will give a red packet. For this, I think the government is fine, because they only use their customer’s money, because the customer will buy the new car and the dealer will give them money. The dealer will only return a certain amount to their customer. It is okay with the government.

{audio:0:34:23} Can we move on to discuss Tesla. What developments are you seeing, in consumer awareness and behavior, around the brand of Tesla?

{audio:0:34:41} Actually, in China, the Tesla brand has good performance. If you think about this brand, from the Chinese consumers, they think positively about it. As you know, their localization in China, normally their price is much higher. But since the end of last year, they have a factory in Shanghai and their price has decreased a lot, approximately 20% or 30%, compared to the imported Tesla. Therefore, the Chinese customers, they think that this brand is good.

{audio:0:35:35} But in the meantime, there are also some other new low energy vehicle brands in China, such as the Chinese own brand of the low energy vehicle. They also have strong competition with Tesla. In China, the consumers will compare not only on the price, but also the performance of each brand, each type of low energy vehicle. It’s similar to the bucket of the total industry, where it is getting stronger, with more fierce competition, for the low energy vehicles.

{audio:0:36:21} How is Tesla differentiated from the Chinese electric vehicle brands?

{audio:0:36:29} Normally, it’s per miles, after each charge. It is higher compared to the Chinese local brand. I think it’s mainly due to the battery and also, the control on the electronic system, for the battery management. This is an advantage, compared to the Chinese local brand. Normally in China, the local brand, they don’t have this high average, per charge, of the battery.

{audio:0:37:09} So Tesla are building a new factory in Shanghai. Obviously, it has been well-documented in the press. Do you think that the Chinese consumer would be willing to pay less for the Teslas manufactured in Shanghai, versus in the US or Europe?

{audio:0:37:32} Yes, this is their strategy. They have set up this new facility in Shanghai. The purpose is that their new product, produced by this Gigafactory, they will sell to the Chinese market. They price will be around 20% or 30% lower, compared to the same types that they produce in US. This is Tesla’s strategy, for their localization in China, to attract the Chinese customers.

{audio:0:38:10} How much cheaper will it be, compared to the Chinese EV brands?

{audio:0:38:16} Normally, the Tesla brand, their prices are higher compared to the Chinese brand, because the Chinese brand are not as famous or not as widely known, as Tesla. Currently, the Chinese low energy vehicle brand are around 10% to 20% lower, compared to Tesla.

{audio:0:38:45} In terms of Tesla’s brand identity in China, it’s around the distance of the car, in terms of post-charge? Does it have a luxury feel to it or futuristic feel? How would you explain the brand of Tesla, in China?

{audio:0:39:05} In the current Chinese automotive market, the brand of Tesla, it would be categorized as a premium auto. They have the same standard or level as BMW, Mercedes Benz. In China, we define the Tesla brand, currently, as a premium auto. Their price is around from around 300,000 RMB to maybe 400,000 RMB, per vehicle.

{audio:0:39:46} Tesla plan to produce vehicles at 20% to 30% lower unit cost, in Shanghai, than in the US, and sell it on a similar price point as BMW and the premium manufacturers. Do you think this is possible?

{audio:0:40:07} Yes, this is what they are currently doing. I understand that they have lower cost, compared to Europe or US. In the Chinese automotive market, they define Tesla as a premium auto brand, so the sales price, compared to BMW and Mercedes Benz, they are similar price. After they localized production in China, they have very good manufacturing costs, compared to US or Europe, for Tesla, I think.

{audio:0:40:49} Just because of the scale of the operation?

{audio:0:40:55} What do you think is the major risk for Tesla, in China?

{audio:0:41:00} I think it’s still the supply chain shortages. They only stepped up their mass production at the end of last year and now, with this epidemic of the coronavirus, they are also short of their supply of components for their assembly parts. They have postponed the introduction of their new types, due to the epidemic in China. I think their major shortage is due to this supply chain problem, where they are depending on so many products abroad, or depending on the epidemic center, in Wuhan area, where there are many global part productions, located there. I think this is also a problem for automotive products, we are facing currently.

{audio:0:42:02} So Tesla is still relying a lot on European and US parts, for their vehicles in Shanghai?

{audio:0:42:11} Yes. Because they only started up their mass production at the end of last year. Currently, they still have a lot of imported components and assembly parts. But due to the coronavirus, there are many countries that are in lockdown, so it is very hard for Tesla to sustain their mass production, currently.

{audio:0:42:46} How would you describe the growth in penetration of electric vehicles in China?

{audio:0:42:59} Actually, for the past two or three years, the growth in penetration is around 10% to 20%, each year, year on year. I can predict, that maybe in the coming years, it will stabilize and maintain the same penetration rate in growth.

{audio:0:43:32} Back to the Tesla question, do you have any idea on what percentage of parts are sourced from Europe and the US, for the Shanghai plant?

{audio:0:43:43} There is a rough calculation. The current situation for Tesla’s plant in Shanghai is around 70% localized parts. Which means there is still around the 30% mark which are from other regions.

{audio:0:44:05} Which parts, typically, are outsourced to Europe and the US?

{audio:0:44:11} The electronic control units; this kind of electronic control units have their patents and technology know how, so the global OEMs, such as Tesla, they do not want to localize these kind of components and the parts. For these control units, they are imported from other regions.

{audio:0:44:41} Do you think that is the advantage that Tesla has, in their technology for the batteries and the battery management system, that drives that range for the vehicle, which the Chinese EVs cannot compete with?

{audio:0:44:55} Yes, I think this is a major advantage. Tesla is very good at this electronic control and the battery management system. Compared to the other low energy vehicle brand, in China, currently they lack this kind of good technology on the control and the battery management system. I think this is also where Tesla can expand their business faster, because of these advantages. If you compare this with traditional OEMs, in the automotive market, they don’t have many advantages. But comparing to the battery management systems, such as the electronic controls, this is an advantage and this is why the brand is growing their business so fast. They can even compete with some major OEMs, such as GM or Ford and so on.

{audio:0:46:00} I want to move on to discuss Jaguar Land Rover. What progress have you seen, over the last six months, for the company in China?

{audio:0:46:15} Regarding Jaguar Land Rover, actually, in the last year, they have made big progress in their quality controls. Also, you can see from their sales volume in the last year, they have stopped their decrease. In the previous years, their sales volume decreased a lot. As long as they keep strong control and awareness of the quality system of their products, already, their sales volume is becoming stable. Though we can’t say that they have increased back to their previous years. But now they have already stopped their decrease on their sales volume. We could say that this is true to their strong quality control. I think, this year, along with their quality control of their products, with the new types of their vehicles that are going to be introduced, their prediction is that, this year, Jaguar Land Rover will have a better and higher performance, compared to their previous years. This means, this year they may have a volume increase.

{audio:0:49:22} What is the biggest lesson that you have learnt from this coronavirus epidemic, from a supply chain standpoint?

{audio:0:49:30} From the supply chain standpoint, our biggest lesson is that, in the future, we need to find alternative sources for our different assembly parts. Why we say this is, in the past especially, we have concentrated our major components, in the epidemic centers, such as Wuhan, which is also where many global parts are located. But from this, we can see that we are unable to meet our daily mass production, as the factories of Wuhan have been shut down by the government. So in the future, we will try find alternative suppliers, from different regions and different provinces. This is the first point.

{audio:0:50:25} The second point is that, in the future, we will have a larger amount of safety stock. In the past, we have only kept one week of safety stock. But now we can see that this one week is not enough. Going forward, we are going to have at least two or three weeks of safety stock, to make sure that, in case of this kind of epidemic, we could have a period of time to find a solution, before our mass production is running out of the parts from our current suppliers. These are the major lessons we have learnt, from this epidemic.

{audio:0:51:11} On the inventory stocks, are you suggesting that we have two to three weeks, throughout the whole year, or just at certain points in time?

{audio:0:51:23} These two or three weeks is for our daily production, which means we always have this two or three weeks stock.

{audio:0:51:36} So you are saying that we should grow the inventory stock available, each day, to two to three weeks, rather than just one week?

{audio:0:51:52} Won’t this make it more expensive, for the products and less efficient for the OEMs?

{audio:0:51:59} Actually, I don’t think it will be more expensive or less efficient. Our suppliers, they have set up their warehouse and stocks, inside our mass production area. We could ask the suppliers, to make this stock larger for our mass production. Although they maybe have to use a larger area or they will have more products that need to be shifted to a similar plant nearby.

{audio:0:52:47} This is, potentially, a criticism of the just in time production method, in your opinion?

{audio:0:53:01} Liang, thank you very much for your time today.

Coronavirus: Auto Supply Chain Impact

An update on the recovery and current situation in China to contain COVID-19

Impact of the disruption on the automotive supply chain

How the industry could protect against future pandemics but increase the level of safety stock of parts