When talking about the impact of COVID-19 on the automotive industry, one critical aspect lies in the financial blow to automakers and auto component suppliers.

Recently, global automotive parts giant Aptiv stated that the COVID-19 outbreak in China has cut the company’s revenue by USD 150 million to USD 200 million and operating profit by USD 60 million to USD 80 million, exceeding prior forecasts. Earlier, during its Q4 earnings call, Aptiv predicted revenue and operating profit would take hits of USD 50 million and USD 20 million respectively, as production at some factories would be postponed until February 9.

Similarly, Beijing Benz was previously reported to suffer daily losses of as much as RMB 400 million due to insufficient component supplies stemming from delayed resumption of work by its Tianjin-based suppliers. Consequently, Beijing Benz had no choice but to send official letters to the Tianjin Municipal Government and Wuqing District Government of Tianjin, requesting special approval for 19 auto parts suppliers in Wuqing to resume production ahead of schedule.

Both Aptiv and Beijing Benz are merely representative examples of numerous enterprises battered by the pandemic. Owing to delayed post-holiday production restart, coupled with risks of raw material shortages and capital strain, many players along the automotive industrial chain face substantial pressure on business performance. Smaller enterprises with weaker risk resistance are struggling the most.

A recent survey conducted by Gasgoo regarding the resumption status across the automotive sector reflects this grim reality; most respondents were employees at auto component manufacturers. According to the survey, only 1% of participants were optimistic that their company’s Q1 revenue would grow against the headwinds. 5% believed revenue would remain largely unchanged, and 13% were uncertain. The remaining 81% expected their firms’ Q1 revenue to decline due to the pandemic. Breaking down the figures further:

• 25% expected a revenue drop within 20%;
• 37% anticipated a 20%–50% slump;
• 15% forecast a 50%–80% decline;
• Another 4% projected revenue losses exceeding 80%.

The statistics appear bleak, yet the reality may match the outlook, for three major reasons:

First, delayed work resumption drastically reduces effective working days in Q1. Per the survey, although many automakers and component factories gradually restarted production, most resumed operations only in the second and third weeks of February. This means the effective working time for many enterprises in Q1 has been shortened by at least 10 days compared with original plans. Component manufacturers not only endure losses from lower output, but also face a string of follow-up risks, such as contract breaches caused by disrupted parts supply and the threat of being replaced by competitors.

Back in early February, Huda Huzhou was reported to be unable to deliver goods to overseas clients on schedule due to pandemic-related production suspension, exposing the firm to heavy compensation claims. Officials from Huda Huzhou noted that without official certification justifying its failure to fulfill contracts, the company would bear direct contract losses worth RMB 2.4 million, plus approximately RMB 30 million in compensation for two-week production shutdowns incurred by its overseas customers. To mitigate losses, Huda Huzhou turned to the Huzhou Council for the Promotion of International Trade for urgent assistance to obtain force majeure certification.

Furthermore, strict local government controls over production restart mean some factories have still not resumed work, especially vehicle and component manufacturers located in Hubei Province. Under Hubei’s newly issued regulation stipulating that all types of enterprises across the province shall not resume production earlier than 24:00 on March 10, local businesses may not restart until mid-to-late March. For these companies, effective working days in Q1 are effectively halved, or even fewer.

On the other hand, fixed costs including staff salaries and factory rent still need to be covered, compounding operational pressure, especially for small and medium-sized enterprises (SMEs). Relevant statistics show there are more than 1,200 auto component manufacturers in Wuhan alone. Apart from multinational giants such as Bosch, Valeo, Visteon, Aptiv and Faurecia, the majority are local SMEs. Under current conditions, many may fail to restore normal operations by the end of Q1, bringing about self-evident operational strains.

Second, even for factories that have reopened, employee return rates remain low. While major automakers and component firms gradually resumed production starting mid-February, many workers could not return immediately due to regional traffic restrictions, shortages of pandemic prevention supplies including masks and disinfectant, as well as mandatory two-week quarantine requirements for migrant employees.

The survey shows merely 28% of respondents reported employee return rates reaching 80% at their factories; 41% saw return rates between 50% and 80%; 22% stated less than half of staff had come back; and 9% said their factories were still shut down.

“Our office originally had ten employees, and only three local Shanghai-based staff are on-site. I am from Hubei and cannot return due to traffic controls. The production line utilization rate is also grim, below 20%,” shared an employee from an upstream raw material supplier. Reportedly, low operating rates have prevented the firm from fulfilling numerous pre-pandemic orders. Some impatient customers have begun searching for alternative suppliers, yet very few manufacturers are capable of taking on extra orders. “Virtually no one can accept new orders — everyone is facing the same predicament.”

Insufficient staffing, together with raw material supply bottlenecks caused by transportation disruptions, inevitably limits factory output capacity. The survey indicates only 14% of participants reported factory capacity recovery rates hitting 80%; 39% saw capacity restored to 50%–80%; while 30% operated at below 50% of full capacity.

Magna, for instance, commented that while many of its Chinese factories have resumed operations, plant utilization remains sluggish. Magna has run operations in China since 1996, operating 31 manufacturing sites, 10 R&D centers and sales offices with over 10,000 employees nationwide. Its Zhenjiang plant had gradually restarted production earlier.

Third, suppressed end-market automotive demand reduces vehicle manufacturers’ component procurement volumes, weighing on Q1 performance. Since late January, strict travel restrictions imposed in many regions for pandemic control have remained in place, preventing potential car buyers from visiting dealerships to view and select vehicles. In addition, dealerships have seen low resumption rates. Research data from the China Automobile Dealers Association showed that as of 16:00 on February 26, among 4,950 dealerships belonging to 82 dealer groups surveyed, the comprehensive resumption rate stood at merely 23.53%. While staff resumption reached a relatively optimistic 49.5%, sales efficiency was only 16.6%.

The China Automobile Dealers Association attributed this primarily to local governments prohibiting business restarts or pending approval of restart applications. Other contributing factors include shortages of anti-epidemic materials, travel barriers for returning employees, and insufficient business volume to cover operating expenses even after reopening. Notably, these hurdles also explain why most enterprises remain closed or operate at low capacity.

With constrained supply-side production and suppressed consumption demand, overall market performance is understandably gloomy. Gasgoo Automotive Research forecasts that domestic passenger vehicle sales in February would plunge over 70% year-on-year due to the pandemic. The decline would narrow moderately to roughly 28% in March as production and daily life recover nationwide. The market downturn would continue easing afterwards, with full-year sales projected to slide by 6.4%.

As the Chinese automotive market faces headwinds, global markets are also far from optimistic. Leading global credit rating agency Moody’s recently predicted global auto sales would fall from 90.3 million units in 2019 to 88 million units in 2020, representing a 2.5% drop, worse than its earlier forecast of a roughly 0.9% decline. Moody’s added that global auto sales would see a mild rebound of 1.5% in 2021.

Against this backdrop, major component suppliers issued cautious outlooks for Q1 2020 alongside their Q4 2019 earnings releases. Visteon projected the pandemic would slash its Q1 revenue by USD 60 million. Last year, Visteon’s net income tumbled 57% to USD 70 million amid falling auto production, unfavorable exchange rates and customer pricing pressure, while sales edged down 1.3% year-on-year to USD 2.95 billion.

Tenneco also stated that at least four weeks of factory shutdowns in China triggered by COVID-19 would negatively impact its Q1 incremental revenue by approximately USD 150 million and reduce EBITDA by USD 50 million. For full-year 2020, Tenneco expects revenue ranging from USD 16.7 billion to USD 17.1 billion, with adjusted EBITDA between USD 1.3 billion and USD 1.45 billion.

Sensata Technologies noted that amid the evolving uncertainties surrounding the COVID-19 outbreak, the company made best-effort estimates of business disruption when formulating Q1 2020 guidance. Multiple variables remain unpredictable: the end of quarantine measures, lifting of travel restrictions, factory restart timelines and the ultimate impact on end-market demand. In its full-year and Q1 2020 guidance, Sensata foresaw a USD 40 million drop in sales and a USD 20 million decline in operating profit. The profit loss includes expected revenue shortfalls, plus underutilization costs and stranded expenses stemming from the pandemic.

While Valeo and Faurecia had not yet quantified the pandemic’s impact on their 2020 results, their production restart status suggests unavoidable disruption. Valeo operates three production sites plus a technology center in Wuhan, responsible for developing intelligent vehicle components. Although its other 32 factories outside Hubei have resumed production, these sites account for 90% of its total China revenue, meaning the remaining 10% of business volume remains unattainable. Faurecia runs 58 factories across China, six of which are located in Hubei. These six sites are still suspended. The other 52 only officially restarted on February 17, nearly two weeks later than originally scheduled.

The companies mentioned above are relatively large players in the automotive industrial chain with complete systems and robust supply chain management capabilities. Even they have suffered heavy losses amid the pandemic. Smaller enterprises face an even grimmer outlook.

Worse still, the automotive industry features an extended industrial chain; a shortage of a single component can halt the whole production project. Within just one month of the outbreak, the pandemic triggered production suspension risks at numerous major automakers’ domestic and overseas factories worldwide, a situation that persists to this day.

Latest updates show that Toyota is set to decide operations at its Japanese plants in the week of March 9, amid risks of disrupted Chinese supply chains caused by ongoing production and logistics bottlenecks at some Toyota-related factories in China. Separately, as COVID-19 spread across northern Italy, FCA introduced restrictions barring personnel from high-risk regions from entering its European manufacturing facilities.

As the old saying goes: When the nest is overturned, no egg remains intact. As the pandemic lingers in China, confirmed COVID-19 cases have surged in Japan, South Korea, Italy, Germany, Iran and other regions. It remains unclear who will be the next to bear the brunt.