Keep Monitoring COVID-19 Spread
The author is an analyst of Shinhan Investment Corp. He can be reached at yjjung86@shinhan.com. -- Ed.
The COVID-19 outbreak is raising concerns over the auto industry. Hyundai Motor Group suspended operations at its production units in China for 10 business days (February 3-16). The disruption of imports of auto parts caused domestic plants to shut down for one to 10 business days. Last weekend confirmed cases of novel coronavirus soared in Daegu and Gyeongbuk province where a large number of parts plants are located, adding to worries of further supply disruptions. Automakers have short inventory days due to a just-in-time (JIT) manufacturing system adopted to achieve maximum efficiency, which makes them vulnerable to a glitch in the parts supply.
Keep monitoring but no cause for excessive concerns
China’s auto demand is weaker than market expectations (50-80% YoY drop in February). Auto sales volume for the first two weeks of February plummeted 92% YoY. We believe it is time to focus on the strength of recovery instead of the severity of the fallout of the COVID-19 outbreak. The Chinese authorities are stepping up stimulus to boost domestic demand, including car sales. The Guangdong provincial government plans to offer subsidy for car purchases from March. We believe China’s auto demand will largely hinge on future policy measures.
For now, it is not easy to predict disruptions in domestic production. The inventory shortage of wiring harnesses seems to be resolved with the gradual production ramp-up at auto parts suppliers in Shandong, China and overtime work at domestic parts vendors. Except for the rise in confirmed coronavirus cases in Daegu and Gyeongbuk province, we expect the plants to return to normal operation this week. The issue is the possibility of operation suspension at domestic parts plants. Concerns mounted as Seojin Industrial, the primary parts vendor of Hyundai Motor Group located in Gyeongju, shut down its plant for a day after one of its workers died from coronavirus. We expect no additional shutdowns after the cleaning and disinfection work.
Relatively positive for domestic automakers less sensitive to China demand
Hyundai Motor Group has carried out restructuring measures to reduce its dependency on the Chinese market for the past two years. China accounts for only 12.6% of the group’s global auto wholesale (as of 2019), vs. the 26% average of the five largest global automakers. Its lower sensitivity to China demand is a plus.
We need to keep monitoring the spread of COVID-19 as it has the potential of causing additional disruptions in the parts supply chain. With recent share price fluctuations already reflecting the COVID-19 issue, we expect further downside to be limited. Manufacturers of parts competing against Chinese imports, such as wiring harnesses, tires, and brake pads, are positioned to benefit slightly.