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China's Road to Recovery from the Pandemic: Demand & Supply Shocks for the Automotive Manufacturing Sector

China's Road to Recovery from the Pandemic: Demand & Supply Shocks for the Automotive Manufacturing Sector

By Mr. Hui Liang, President NETSOL Technologies, China on 10-04-2020

Pandemic Review: Mainland China and the Rest of the World

As of April 9th 2020, the Covid-19 pandemic has infected 1,518,484 people globally.

More than 3,303,19 people have recovered from the coronavirus but sadly, 88,549 people who were infected did not survive.

However, recently China has seen a drop in its rate of new coronavirus cases. Starting from March 19th until now, zero or only single-digit new Covid-19 cases were reported in Wuhan. Consequently, for several consecutive days there were no new reported cases which has brought great relief to the people of Wuhan since the outbreak began in late December. China's president, Xi Jinping, recently visited the city for the first time since it was put in lockdown. Wuhan is no longer regarded as the global epicenter of the novel coronavirus outbreak by the WHO. More than 82,000 people known to be infected in mainland China have since recovered. However, at least 155 other countries have shown an upward spike in reported Covid-19 cases.

The country is now underlining the significance of ensuring that travelers from countries where infections are on the rise do not bring the pathogen to China again which might cause a second outbreak.

Economic Bearing: Precaution for Policy Makers

On the economic front, it seems that a steep global recession cannot be eluded, and some economists are already calling for governments and international institutions to announce measures to shore up aggregate demand. This alone, however, will not be adequate enough as the global economy is suffering from its own disease right now - an unprecedented supply shock. The workforce is not contributing to the GDP because people are either sick or quarantined. If not addressed properly, the global economy can hit stagflation where the prices continue to inflate by a demand pull, yet production fails to meet the market demand due to dwindling levels of production.

China registered a GDP worth USD 13.6 trillion in 2019, sustaining the position as the second largest economy in the world in the year after the US, since 2010. This did not surprise anyone as the country's economy boasted a growth streak that lasted for decades. Now, however, it seems that the same economic growth might not endure the Covid-19 pandemic, making it extremely challenging to escape a slowdown, while the other economies will face difficulty.

The National Bureau of Statistics revealed that China's industrial output diminished at a staggering rate of 13.5% in the first two months of 2020, the fastest ever on record. Moreover, statistics show that urban unemployment reached the highest ever rate in February - 6.2%.

Consequently, the latest economic data further revealed that China's retail sales plunged 20.5% year on year in January and February while fixed asset investment plummeted 24.5%, down from 5.4% growth when the data was last reported. These statistics bode poorly for the country's economic outlook in 2020.

Automotive Manufacturing Industry: Shock & Awe

Demand for automobiles in China was plummeted by the Covid-19 outbreak as sales plunged 80% in February. This marked their largest ever monthly decline.

The China Association of Automobile Manufacturers (CAAM) reports that sales in the world's largest automotive market tumbled to 310,000 vehicles from the same month a year earlier, falling for a 20th consecutive month. Lately, all market players from leaders such as Volkswagen AG and electric-car manufacturer Tesla Inc. to smaller local challengers have been struck by both demand as well as production side compressions. PCA data shows that wholesalers from carmakers to dealerships also consequently plunged 86% in February.

Road to Recovery: Automotive Manufacturing & International Supply Chain

Carmakers in China are gradually cranking up production operations as the disease subsides and more staff return to work. As per Xin Guobin, Vice Minister of Industry, vehicle-parts makers in Hubei province are renewing their production in a systematic manner. He also mentioned that his ministry will make sure that global supply chains are stabilized soon, whereas the China Association of Automobile Manufacturers (CAAM) also said that more than 75% of automakers had resumed their production.

Nonetheless, the pandemic is compelling many international carmakers to reconsider their dependence on China as a source of components, and that they are thinking to diversify their supply chains for times ahead. China too suffered from a supply shock, with its manufacturing units unable to function. But many economists are concerned that China could witness a nose-dive in demand for its output as the rest of the world starts to cut down on imports, further adding to its current economic woes.

Even if automotive manufacturers are returning to normal, it is still not clear when local Chinese consumers will feel ready to spend or consider buying a car. Day-to-day life remains more or less curtailed in many cities, as people tend to avoid markets due to the speed at which the virus is spreading in other parts of the globe and its tendencies to return to China. Experts are, however, hopeful that over time the demand for cars will be back to normal as people will prefer private transportation over public. As a matter of fact, there are also actually some positive signals shown since the first week of March. Even though experts are predicting that the entire recovery of the automotive market will take a longer time, a rebound in sales might be expected from April. The facts that several Auto Finance Companies are having a substantial increases of their sales in March is supporting their argument.

Recently, Chinese state-owned carmaker Beijing Automotive Group (BAIC) and ride-hailing giant Didi Chuxing partnered up with other industry stakeholders on a platform that will offer BAIC's cars for lease, amid a slump in new car sales during the coronavirus pandemic.

Remedies for Recovery: Financial Market Stimuli

Officials in Beijing suggest that from a broader economic perspective, the impact of the novel coronavirus is "short term, external and manageable." On Monday March 16th, 100 billion Yuan ($14.3 billion) of liquidity was injected into financial markets through the medium-term lending facility by China's central bank. The amount of cash reserve that a bank must hold was also slashed. The move would also pump 550 billion Yuan ($78.6 billion) into the banking system.

But traders are not expecting to witness an instantaneous cut in benchmark lending rates as this may not help the real economic cycle, where supply chains and other industries have been struck by coronavirus. However, it is expected that Beijing will take additional financial relief and policy easing measures in the months to come. These measures might include cuts to the medium-term lending facility rate and the benchmark deposit rate along with cuts in tax and rent discounts for industries.

Experts say that an increasing rate of inflation in China has acted as a major constraint in restoring economic growth with discounted credit and hefty borrowing.

Policy makers highlight the importance of fiscal measures to save companies and banks from bankruptcy, so that they can recover quickly once the pandemic is over. Policymakers should also be considering various forms of tax relief and public guarantees to help manufacturers and other businesses borrow if necessary.

Written By:
Mr. Hui Liang, President NETSOL Technologies, China

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