Coronavirus: Auto Supply Chain Impact

Liang, could you just provide an update on the volume trends, through Q1 this year, in the automotive industry, in China?

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.

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.

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.

Do you see material change in consumer demand, in March?

In which sector?

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?

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.

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.

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.

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?

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.

The government distributed all these tests to both families and also public places, to contain the virus?

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.

How have you seen prices change, for automotives, through March?

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.

Liang, could you just explain the major points of disruption you are seeing in the automotive supply chain, due to coronavirus?

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.

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.

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.