The author is an analyst at NH Investment & Securities. He can be reached at email@example.com. -- Ed.
Concerns are rising towards instability in China’s automotive supply chain stemming from the Covid-19 outbreak. While short-term uncertainty in Chinese auto demand is likely to increase on deteriorating consumer sentiment and production delays, deferred demand is expected in 2H20 upon confirmation of stabilization.
China’s sluggish auto demand continues
In January, Chinese auto sales reached 1.71mn units (-21.0% y-y). We attribute the largest y-y decline seen since 2005 to both a deterioration in consumer sentiment due to the spread of coronavirus (Covid-19) and a decrease in the number of working days related to the Lunar New Year holidays (Jan 24~Feb 9).
In January, xEV (EV/PHEV) sales plunged to about 42,000 units (-56.5% y-y), with the related share of the overall automotive market sliding to 2.5% (vs 4.5% in Jan 2019 and 6.1% in Dec 2019) due to the spread of Covid-19 and pent-up demand for Tesla’s Model 3. However, we expect long-term growth in the Chinese EV market to sustain, backed by full-scale production at Tesla’s Shanghai plant and tightening environmental regulations.
Chinese market uncertainties linger in near term, but deferred demand expected in 2H20
HMC and Kia’s January Chinese sales (retail) totaled 66,085 units (-40.1% y-y) and 21,145 units (-53.9% y-y), respectively. We mainly attribute the drop in sales to high-base effect (increased promotions to clear out inventory). HMG’s market share in China stood at 5.1% in January (vs 7.2% in Jan 2019 and 5.2% in Dec 2019). In January, HMC and Kia recorded ex-factory sales of 33,251 units (+1.9% y-y) and 23,027 units (-23.7% y-y), respectively.
While a number of companies have restarted operations following the Lunar New Year holiday (ended Feb 9), utilization rates have yet to normalize due to the delayed return of many production workers. As a result, concerns are in play towards stability in the vehicle supply chain. We note that the Hubei province accounted for 8.8% of China’s auto production in 2019, including a concentration of production plants for major automakers such as GM and Dongfeng. While uncertainty in Chinese auto demand is likely to intensify in 1H20 due to worsening consumer sentiment and production delays, we expect sales to recover in 2H20 on the back of production normalization and deferred demand upon a resolution of Covid-19 issues.