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Coronavirus keeps VW’s China factories shut

  • February 17, 2020

Volkswagen has postponed the start of production by a week at all the Chinese plants that it runs in partnership with China’s SAIC, citing supply-chain and logistical issues caused by the coronavirus outbreak.

The German carmaker now expects to resume production on February 24. However, production at some of the plants that VW runs with the Chinese FAW Group resumed on Monday with the remaining plants expected to be operational in the coming days.

“We are working hard on getting back to our normal production schedule, while facing delays due to national supply chain and logistics challenges as well as limited travel options for production employees,” Nikolas Thorke, spokesman for Volkswagen’s China operation, told DW.

Volkswagen’s Chinese JVs delivered 4.21 million vehicles, or about 40% of total VW global sales, to buyers on the Chinese mainland and in Hong Kong in 2018.

VW rival Mercedes-Benz’s Chinese joint venture Beijing Benz re-started production of luxury passenger cars last Monday (February 10), about a week later than otherwise scheduled. The JV is also reported to be facing supply-chain issues.

Fresh woes

The coronavirus outbreak in China is expected to hurt car sales in the world’s biggest auto market, dealing a major blow to German carmakers, which depend on the Asian economic powerhouse for a bulk of their sales.

Analysts at Swiss investment bank UBS expect car sales in China to fall by more than 50% in February and a loss in production capacity of more than 20% in the ongoing quarter as carmakers struggle with extended factory shutdowns, supply-chain disruptions and a drop in demand.

The virus is the latest headache for the German auto industry, already reeling from pollution concerns, exacerbated by the “Dieselgate” emissions scandal, waning global demand amid weakening economic growth, higher tariffs caused by US-China trade tensions and a costly transition to electric and self-driving cars.

Mercedes Benz-owner Daimler and Volkswagen’s Audi unit have announced nearly 20,000 job cuts in the past few months as they look to save costs to fund their electric car drive. Car parts suppliers Continental and Robert Bosch also plan to cut thousands of jobs.

“German automakers and suppliers are the most exposed in Europe [to the coronavirus],” Emmanuel Bulle, senior director at Fitch Ratings, told DW. “The risk for German manufacturers comes chiefly from lost sales rather than immediate disrupted production, since BMW, Daimler and VW have no factories in Hubei,” he said referring to the Chinese province — an auto-production hub — at the heart of the outbreak that has claimed more than 1,700 lives. 

German automakers, unlike Chinese and US makers, have been increasing their market share in China even as the auto industry in the Asian country witnesses its worst slump in over two decades. China accounts for 4 out of every 10 Volkswagen cars sold worldwide and almost 3 out of every 10 BMW or Mercedes cars delivered globally. BMW’s and Daimler’s shares of earnings coming from China are even higher.

  • Dieselgate: A timeline

    The disaster unfolds — September 2015

    About two weeks after Volkswagen admitted behind closed doors to US environmental regulators that it had installed cheating software in some 11 million of its diesel vehicles worldwide, the Environmental Protection Agency shared that information with the public. It was September 18, 2015. The ensuing crisis would eventually take a few unexpected turns.

  • Dieselgate: A timeline

    The boss must go, long live the boss — September 2015

    Volkswagen’s then-CEO Martin Winterkorn (above) had little choice but to step down several days after news of the scandal broke. In September 2015, he tendered his resignation, but retained his other posts within the Volkswagen Group. Winterkorn’s successor was Matthias Müller. Until taking the reins at VW, Müller had been the chairman at Porsche, a VW subsidiary.

  • Dieselgate: A timeline

    Raiding headquarters — October 2015

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  • Dieselgate: A timeline

    Hell breaks loose — January 2016

    On January 4, 2016, the US government filed a lawsuit against VW in Detroit, accusing the German automaker of fraud and violations of American climate protection regulations. The lawsuit sought up to $46 billion for violations of the Clean Air Act.

  • Dieselgate: A timeline

    Quit or forced out? — March 2016

    In March 2016, the head of VW in the US, Michael Horn, resigned. In the initial days and weeks after the scandal broke, he was the one US authorities turned to for information. He issued an official apology on behalf of the automaker, asking for the public’s forgiveness.

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    Settlement — October 2016

    On October 25 2016, a US judge approved a final settlement that would have VW pay $15.3 billion. In addition, affected cars would be retrofitted with better, non-deceptive hardware and software, or else VW would buy them back completely from customers.

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    Imitators — July 2017

    When dieselgate first emerged in 2015, analysts said it was likely other car makers were also cheating tests. But it wasn’t until 2017 that other companies were targeted in probes. In July, German authorities launched investigations into luxury car makers Porsche and Daimler for allegedly cheating emissions tests. Others, such as Audi and Chrysler, have also been hit by similar allegations.

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    Public still supportive — December 2017

    Despite dieselgate, VW has managed to keep the emissions scandal from utterly tarnishing its image. According to several polls, between 55 to 67 percent of Germans continue to trust the automaker. In the US, polls show that roughly 50 percent still believe the German company produces worthwhile vehicles.

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    Fuming over monkeys — January 2018

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    Canadian court demands millions — January 2020

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    Author: Dirk Kaufmann, Elliot Douglas


Empty showrooms

Majority of car showrooms in China remain closed as the country slowly returns to work after an extended New Year break. Even the 20-30% dealerships that are open are hardly witnessing any footfalls, according to the China Automobile Dealers Association.

UBS analyst Paul Gong says while first-time buyers may have a stronger desire to own a private transportation vehicle to shield themselves from a virus, replacement buyers — which account for two thirds of the market — may delay their purchases for the time being, mainly hurting the premium German car brands.

Replacement buyers are existing car owners who are looking to upgrade to a more premium brand.

“For the replacement buyers who would have perhaps opted for German brands, they would not be too eager to replace their cars at this moment because that is obviously not a priority,” Gong told DW. “So, you would probably see some delay effect.”  

Volkswagen and Daimler told DW that while it was too early to gauge the full impact of the virus crisis, they do expect it to hit their sales.

“Facing the current challenge, we know that purchasing new cars is not a priority for most people,” said Thorke.

Volkswagen has tweaked its marketing strategy with a greater focus now on online interaction and transaction with customers via online showrooms. The company did not provide any data on the response to its online showrooms, but Gong said the online showrooms in general were not attracting much traffic.

Extended factory shutdowns

Gong said so far, it’s been a gradual ramp-up in production by the automakers, with many facilities working at just 20% of their full capacity. He said Daimler was also struggling to ramp-up production, with its suppliers unable to provide enough components.

While German carmakers may have, so far, escaped the worst of supply-related disruptions thanks to them not having factories in the auto production hub of Hubei, automakers elsewhere are bracing for a major fallout from the virus outbreak.

Fiat Chrysler has warned that it may have to shut a European plant in the coming weeks if Chinese parts suppliers cannot resume work. Hyundai Motor and Kia Motors shut down plants in Korea due to harness supply constraints from plants in China’s Shandong Province.

“There will be a time lag before shortages of materials and parts from China due to high inventories before Chinese New Year,” Gong said.

Brighter long-term prospects?

Auto analysts say some lost sales have only been postponed and that orders will rebound in the coming months. In fact, new car sales could even go up in the longer term as the experience of disrupted public transportation and ride-hailing services during the crisis may prompt more people to buy their own cars.

But, there is a caveat: Experts say if the crisis lingers for a few more months, then it would start hurting the broader economy and result in a loss in consumer confidence, hurting auto sales.

“It will be interesting to see whether or not the potential customers for the more premium products offered by Volkswagen, BMW and Daimler are more resilient in terms of their spending power,” Mark Fulthorpe from IHS Markit told DW. “I think you can probably suggest that they will be. They probably have more savings. They are probably better employed. So, there may be a greater resilience there.”

Article source: https://www.dw.com/en/coronavirus-keeps-vw-s-china-factories-shut/a-52403626?maca=en-rss-en-bus-2091-xml-atom

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