COVID19 – What It Might Mean For Our Industry

Susanna Gotsch / Client Updates, COVID-19 /

As of late February 2020, there have been over 82,000 known cases of the coronavirus, or COVID-19. Tragically, over 2,800 individuals, the majority in China, have lost their lives to the virus. As new cases are diagnosed across multiple continents, fears of a global pandemic are very real. As fears mount, the stock market has taken a significant hit – February 27th the U.S. financial markets experienced their biggest drop since August 2011. And brent crude, the global benchmark for oil, has dropped nearly 3 percent to $50.26 per barrel, its lowest point since December 2018. S&P Global is forecasting the U.S. economy will slow to a 1 percent annual growth rate in the first quarter versus growth of 2.1 percent in fourth quarter 2019. One-half percent of the anticipated decline they attribute to the coronavirus. However, if the virus were to badly hit the U.S., the Congressional Budget Office estimates economic output could decline by over 4 percent.

Beyond the loss in human life, there have been innumerable studies and articles projecting the potential impact to the overall global economy. Because the virus originated in China, COVID-19 is “… both a demand and a supply shock to the global economy.” If the production stoppages worsen or continue into the second quarter, analysts project a global supply crunch could have severe repercussions for an already weakening manufacturing sector, potentially impacting jobs and overall economic growth. Economists, analysts, reporters and others have drawn parallels to several major historical events in order to better understand the potential wide-sweeping impact COVID-19 may have on the global economy. Among these are the following events, and information why each does not help provide a clear formula for what we can expect with the outbreak of the COVID-19 virus.

  1. The 1918-1919 influenza pandemic, or Spanish flu, that killed at least 50M individuals worldwide. Nearly 1 in 3 people in the U.S. alone were infected, and 500,000 people died. While the impact was global, it was relatively short-lived, and occurred before people could travel globally via jet travel, or before the establishment of complex supply chains. 
  2. The SARS epidemic in 2003. While this virus has proven to be deadlier than COVID-19 so far, the virus was contained fairly quickly. China’s weight in global exports is also twice what it was then. 
  3. The 9.0 magnitude earthquake that devastated the eastern coast of Japan on March 11, 2011 and the tsunami that followed destroyed huge swathes of land in northern Japan. Among the industries significantly impacted was the automotive industry. Many automakers experienced significant damage to their own research and manufacturing facilities and saw their new vehicle production slowed or even halted as numerous suppliers also saw extensive damage. Within a month of the earthquake, the Original Equipment Suppliers Association conducted a survey and found that 78 percent of respondents sourced some portion of their product from Japan. Over two-thirds had not seen production schedules impacted to date but anticipated some output reduction over the next several months. At that time, Japanese suppliers were key producers of electronic components such as integrated circuits, sensors, and semiconductors; as well as powertrain components including gears, clutch packs, solenoids, and specialty materials. Many of these parts were among the most difficult to quickly swap out with another supplier. High-tech electronic circuits and components used in engine control units, antilock brakes, airbags, and other systems remain particularly difficult to resource as they are vehicle-specific, and require significant redesign, retesting, and recalibration if they have to be resourced elsewhere. Many suppliers experienced significant damage to their facilities in Japan, delaying return to production for many months. Many suppliers like Renesas Electronics Corp, one of the most impacted by the 3/11/2011 earthquake rebuilt in Japan, but also opened new plants in China, which were also recently closed due to COVID-19. The good news is that the ramp-up and return to full production should be significantly faster in China where plants have been closed to prevent spread of the COVID-19 virus but are otherwise still fully operational. Additionally, according to the Center for Automotive Research “…[t]he North American impact of the supply chain disruption may still be a few weeks out as it can take 30-60 days for parts sourced from Asian factories to reach the point of production here. Additionally, the disruption may impact parts and components sourced from other countries, and each level of the supply chain has an inventory that may serve to buffer and further delay production interruptions in North America.”
  4. In September 2019, UAW-represented workers began a strike with General Motors. Among the workers participating were workers at GM’s 22 parts distribution centers nationwide. The strike lasted 40 days, and cost GM an estimated $3.8B, and about 300,000 units in production lost. And repercussions were felt among its suppliers, dealers, and more. A survey conducted by CollisionWeek at the time reported four out of five shops surveyed indicated they had seen GM parts’ delays. However, only less than two in five of the GM vehicles needing repair were impacted and use of alternative no-OE parts enabled the shops to reduce the overall impact to vehicle delivery times. However, while the GM strike had a more immediate impact on the collision industry given the delay in replacement parts delivery, the coronavirus seems to be impacting the auto industry further upstream where parts are being interrupted for new vehicle manufacture. Additionally, while there were some shortterm delays, overall industry-wide data reveals there was limited impact, in part due to the strike duration.

Slowdown in New Vehicle Production

Wuhan, the capital of Hubei Province, China, the epicenter of the COVID-19 virus is one of the top auto-industry hubs in China, with factories for hundreds of suppliers, including half of the Top 20 global parts makers. Factory shutdowns and quarantines in China and now elsewhere have disrupted the global supply chain. As of late February, automotive suppliers have been warning automakers that they may run out of certain parts used for vehicle production in the U.S., especially electronic components in coming weeks. Ten percent of auto parts imports into the U.S. in CY 2019 came from China, but China also manufacturers many parts that ultimately as components used in production of larger components imported ultimately from other countries.

Additionally, analysis conducted by CCC reveals more and more vehicle repairs include the replacement of an airbag, wire harness, camera or sensor, parts that are dependent on components from China.

And while numerous specialized components for automobiles and electronics are produced in China, the International Monetary Fund estimates China accounts for only 8 percent of ‘risky’ hard-to-replace product, versus 13 percent for the U.S. and Germany. However, for every 1 percent increase in these risky imports from a country which suffers a natural disaster, there is a 0.7 percent fall in the importer’s exports during the same year.

Among the parts that come from China, and that were already impacted from tariffs include: catalytic converters, compressors, bearings, speed sensors, spark ignition piston engines, wipers, electric signaling parts, electrical lighting equipment, defrosters, brake pads, drums, rotors and hoses; bearings; mufflers; drive axles; steering and suspension parts. floor mats, air bags, air bag inflators, speedometers, wipers, gaskets, gaskets, tires, safety glass, suspension parts, and mirrors, seats, hinges, locks, and radio components.

Auto parts coming from China are predominantly shipped via ocean freight to the U.S., taking several weeks to be shipped, subsequently delaying impact of part shortages for vehicles produced in North America. Automakers producing vehicles in China, South Korea and Japan saw more immediate impact, as many operated with less inventory stockpiled due to being able to get their parts from parts suppliers in China much quicker.

Numerous automakers have halted production in China, Japan, South Korea, and Italy. And while some have started to bring some production back on-line, as the virus spreads outside China, further production could be impacted. IHS Markit estimates 1.7 million fewer vehicles may be produced due to plant closings. On Feb. 26th, Moody’s Investor Service cut its 2020 outlook for global sales auto sales by 2.5 percent, an increase from its previous estimate of a 0.9 percent decline. Sales in China they projected would decline by 2.9 percent in 2020, versus prior estimates of 1.0 percent decline. Auto sales in China plunged 92 percent during the first two week of February alone, after falling 19 percent for the full month of January. However, an unexpected outcome of the SARS epidemic was a 30 percent plus surge in vehicle sales in China in 2003 versus the prior year, as urban populations began to shun public transport.

Finally, as workers have been told to stay at home to work in China, Italy, South Korea and other countries, the number of telecommuters has grown exponentially. If this strategy is found successful for businesses trying to operate through the health crisis, many companies may look to expand telecommuting and reap productivity gains, especially where employees are in different locations or time zones. This has the potential then to lead to longer-term declines in miles driven, particularly at peak driving times, where congestion has been shown to drive auto accident and claim frequency.

Trying to assess what the long-term impact of COVID-19 to the automotive, insurance and collision repair industries is difficult. However, analysis of claims data can potentially provide some basic framework for understanding the extent to which the automotive claims and collision repair industries might be impacted.

Among the potential outcomes of the coronavirus to the automotive insurance and collision repair industries are:

  • Fewer potential accidents as miles driven fall;
  • Larger decline in new auto sales in the U.S. than originally projected for the year;
  • Larger decline in new auto insurance premium related to new auto sales;
  • Inability to get certain replacement parts;
  • Longer fulfillment time of certain replacement parts driving up claim and repair cycle times.

Automakers are scrambling to identify at-risk components, and where necessary, looking for alternative suppliers or manufacturing locales for affected parts. All are watching inventory levels of these at-risk parts closely, and in some cases slowing new vehicle production to conserve these parts. Analysis of vehicle appraisal data from CY 2019 conducted to understand the potential impact of tariffs on auto parts coming from China revealed those parts accounted for reveals these parts accounted for roughly 5 to 10 percent of total dollars for replaced parts. However, as the virus spreads, impact could be much broader in scope.

Auto sales globally fell 13.9 percent in January 2020, with China sales alone dropping 33 percent.

February 2020 sales in China are reportedly down 80 percent. As the virus spreads to more countries, leading to less driving due to quarantines and desire to limit overall exposure, sales in other countries will also fall. With fewer people driving, the industry can expect a drop in auto accidents and claims as well.

With the epicenter of COVID-19 now having moved out of China to Europe and the U.S. the overall impact to the global economy will be significant. We will continue to monitor the situation closely and provide additional updates during this unprecedented time.

  1. Eric Morath and Harriet Torry. “U.S. Coronavirus Outbreak Would Pose Risk to Record Expansion.” www.wsj.com, February 27, 2020.
  2. “Why stock-market investors fear a ‘supply shock’ that central bankers can’t fix.” Published: Feb 26, 2020 10:04 a.m. ET. https://www.marketwatch.com/story/why-a-supply-shock-is-biggest-stock-market-worry-as-viral-outbreak-continues-2020-02-25?cx_testId=3&cx_testVariant=cx_2&cx_artPos=6#cxrecs_s.
  3. “Could coronavirus really trigger a recession?” www.theconversation.com, February 26, 2020.
  4. Spencer Jakab, Stephen Wilmot and Justin Lahart. “The Coronavirus Scare: This Time Is Different.” Feb. 25, 2020 7:00 am ET. https://www.wsj.com/articles/the-coronavirus-scare-this-time-is-different-11582632012?mod=article_inline.
  5. Nathaniel Taplin. “Can Supply Chains Survive the Coronavirus? China, the U.S. and Germany Are Key.” Feb. 26, 2020 5:26 am ET. https://www.wsj.com/articles/can-supply-chains-survive-the-coronavirus-china-the-u-s-and-germany-are-key-11582712810?mod=djemheard_t.
  6. Chappell, Lindsay. “Suppliers prepare for a hit, search for Plan B.” Automotive News, April 11, 2011, p. 4.
  7. Sedgewick, David and Greimel, Hans. “High-tech suppliers are the toughest to replace.” Automotive News, April 4, 2011, pp. 1, 31.
  8. https://www.cargroup.org/coronavirus-update. Sourced 27Feb2020.
  9. www.autonews.com/manufacturing/strike-slows-flow-gms-replacement-parts.
  10. https://www.cnbc.com/2019/10/29/uaw-strike-cost-gm-about-3point8-billion-for-2019-substantially-higher-than-estimated.html.
  11. “Collision Repair Facilities Report Widespread Impact on Parts Supply From General Motors Strike. CollisionWeek. September 30, 2019.
  12. Ibid.
  13. Bloomberg. “Virus Endangers Parts Supply for Already-Embattled Auto Industry.” www.industryweek.com, February 4, 2020.
  14. https://www.wsj.com/articles/virus-fallout-threatens-u-s-auto-output-11582830773.
  15. Nathaniel Taplin. “Can Supply Chains Survive the Coronavirus? China, the U.S. and Germany Are Key.” Feb. 26, 2020 5:26 am ET. https://www.wsj.com/articles/can-supply-chains-survive-the-coronavirus-china-the-u-s-and-germany-are-key-11582712810?mod=djemheard_t.
  16. Mike Bird. “Coronavirus Quarantine Will Ripple Through Global Manufacturing.” Jan. 31, 2020 3:19 am ET. ttps://www.wsj.com/articles/coronavirus-quarantine-will-ripple-through-global-manufacturing-11580458591?mod=article_inline
  17. Palmer, Doug. “Trump’s tariffs put pressure on insurance companies and premiums.” www.politico.com, 11/05/2018 10:22 EST.
  18. https://www.wsj.com/articles/virus-fallout-threatens-u-s-auto-output-11582830773.
  19. Bloomberg. “Virus Endangers Parts Supply for Already-Embattled Auto Industry.” www.industryweek.com, February 4, 2020.
  20. “Moody’s, LMC cut 2020 global forecasts after China sales plummet.” www.autonews.com, February 26, 2020.
  21. Ibid.
  22. Ibid.
  23. Amy M. Jaffe. “Concerns Over the Coronavirus Spread to the Oil Industry.” Council on Foreign Relations, February 12, 2020.
  24. Ibid.
  25. Graeme Roberts. “Coronavirus leads to global vehicle sales nosedive.” www.just-auto.com, 4March2020.