Though interruptions in vehicle production are coursing through the global auto market, the U.S. auto finance scene will likely be shielded from coronavirus fallout.
China has long been a hub for suppliers and auto production. There are 17 assembly plants in Hubei province, the epicenter of the novel coronavirus outbreak, plus another 183 throughout the country. Hubei is also home to 373 engine parts producers, with 6,000 more nationwide, according to data compiled by Mike Smitka, emeritus professor of economics at Washington & Lee University and author of “A Profile of the Global Auto Industry: Innovation and Dynamics.”
Daimler, General Motors, Honda, Hyundai, Nissan, Tesla, Toyota, Volkswagen and a host of other OEMs have operations in the country. Volkswagen, for one, has 23 vehicle and component manufacturing sites in China, and produces and sells almost 40% of its cars in the country, according to a report from S&P Global. Nissan produces about 1.5 million cars a year in Hubei, while Honda manufactures about 700,000, according to published reports.
Yet in recent years, carmakers have moved away from single-sourced components, a lesson learned in 2011 after an earthquake and tsunami rocked northeastern Japan, collapsing buildings and sweeping away parts of the coastline. The disaster halted production and shut down Japanese carmakers and parts suppliers, causing shipment delays. Some U.S. dealers were awaiting inventory six months after the disasters. OEMs have since worked to broaden their supplier networks and secure backup providers and facilities. Toyota, for example, developed its RESCUE (REinforce Supply Chain Under Emergency) system, which tracks information about thousands of parts stored at 650,000 supplier sites, helping the automaker bypass bottlenecks when a supplier gets knocked offline.
The next few weeks will be pivotal in determining the extent of the coronavirus’ effects on the U.S. auto finance market. Key indicators will include the pace of infection and the degree to which carmakers resume production. According to Johns Hopkins University’s coronavirus tracker, the rate of new infections appears to be slowing. Optimistic predictions expect the coronavirus to peak later this month; more conservative estimates call for infection to continue through April or May. Already, Ford Motor Co. has ramped up operations at two vehicle production plants in China. GM plans to restart production Feb. 15, with Toyota following suit later in the month.
While total cases continue to climb and questions surround how the disease is transmitted, as well as its rate of infection, coronavirus statistics pale in comparison to those of the flu in the U.S. As of Feb. 11, confirmed cases of coronavirus totaled 45,182 — primarily concentrated in China — with 1,115 deaths.
However, by way of comparison, as many as 19 million Americans have been sickened by the flu in the 2019-2020 season, and 25,000 have died, according to the latest reports from the U.S. Centers for Disease Control and Prevention. In other words, U.S. sales and financing face a much greater threat from the flu than from the coronavirus.
Also, the timing of the coronavirus outbreak has worked in the auto industry’s favor. Originally identified in December 2019, the virus only started to spread in late January, coinciding with the Chinese Lunar New Year. Suppliers and carmakers had already built up inventory in preparation for planned closures during holiday celebrations. Even if production is stalled for several more weeks, U.S. dealers will probably avoid a pinch. Vehicle parts from China tend to move by container, so three or four weeks’ worth of inventory is likely already in ports and on ships, Smitka noted. In addition, dealers typically carry two months’ worth of inventory on their lots, which would further cushion production hiccups. Delays likely wouldn’t affect U.S. deliveries until May or June.
Besides, only certain U.S. vehicle models would presumably be affected, so consumers could either hold off on purchases or choose alternate vehicles or trim levels, like they did after the 2011 disasters in Japan. In addition, sluggish production could dovetail with the anticipated decline in new-car demand expected in the U.S. this year.
In a worst-case scenario — should the outbreak swell and the virus spread within the United States — new-vehicle sales will almost surely slide. The duration of that downturn will dictate carmakers’ incentive spending later in the year. The longer the slowdown, the greater the likelihood of rebates and special financing rates to spur sales. And should the global economy go into a tailspin, interest rates would presumably decline, which would also stimulate car purchases.
For the next few weeks, the U.S. auto finance market will likely continue unhindered until the coronavirus’ path is pinned down and production ramps up. Ultimately, might vehicle sales and financing slow this year? Yes, but probably not because of the coronavirus.