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Auto industry wobbles as China grapples with coronavirus

Murali Gopalan | Updated on February 06, 2020 Published on February 06, 2020

Vehicle makers and suppliers anxious as supply chain is in danger of disruption

As if the slowdown in China’s auto sector was not disturbing enough, the news of the coronavirus epidemic has pretty much got stakeholders worldwide in a state of near panic.

Reports have already indicated that top carmakers are cutting back production in the country while many others are struggling to cope with the reality of disruption in component supplies.

China today is literally the epicentre of the automotive world and even mild ripples can cause problems. The coronavirus threat looks even more lethal with every passing day, and it is anybody’s guess how serious the impact will be.

Needless to add, it is a huge human tragedy with death toll reports rising by the hour. The actual tally may be a lot higher and the fact that the virus could spread to other countries has all of them on high alert.

Airports are screening people a lot more carefully while organisers of events like the ongoing Delhi Auto Expo are extra vigilant, too, since they attract thousands of people and the infection could spread like wildfire. From the business point of view, this is a huge blow where nobody has a clue right now on how bad it could be.

The optimistic view is that this is a problem that will soon pass and it is only a matter of time before China bounces back. Not everybody is willing to buy into this ‘happily-ever-after’ script and believe that the problem could actually be graver. Their scepticism arises from the reality of the Chinese ecosystem on transparency.

It was but natural that all the top global car brands would invest heavily in China, since their own markets back home in the US or Europe were reaching a state of maturity. Be it General Motors or Volkswagen, China is their most important region of growth and they have emerged top players there. The economies of scale that the country offers in manufacturing, coupled with its huge customer base, is an attractive proposition, both to vehicle manufacturers and suppliers. Over the years, they have benefited from the frenzied pace of growth in China, which today accounts for annual production of 30 million cars.

The likes of VW and GM sell (through their many local joint ventures) the same number of cars annually there that the whole of India reports. China is just leagues ahead of the rest even though the first chinks in its armour began appearing recently with the slowdown.

The coronavirus threat, though, is of a completely different order because there is no telling how effectively and quickly it can be controlled. The sudden vulnerability and frailty of China has stunned the world, which was quite understandably under the delusional belief that the monarch would rule interrupted.

To global carmakers, this is something they did not anticipate and it is only natural that when a giant stumbles, others underneath feel the effect. Back home in India, there is a pretty impressive degree of sourcing from China, too, which means the plans of both OEMs and ancillary suppliers could be thrown completely out of gear. From India’s point of view, the timing could be particularly tricky, given that its automotive industry has its hands full with the BS-VI emissions deadline. To meet the costing challenge, Chinese parts would, in all likelihood, play a big role. If this sourcing programme is jeopardised because of the coronavirus scare, there could be some complications arising as a result.

If things end up looking even more dire as the virus spreads, China could have a serious problem in its hands as also a host of carmakers that have invested there. The world is also not in the best of shape either, thanks to geopolitical tensions that have seen the likes of Brexit, trade wars and conflicts in West Asia that could impact crude oil prices. The coronavirus spread could just end up being the proverbial last straw on the camel’s back.

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Published on February 06, 2020
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