Global carmakers and luxury goods firms are facing a hit to their business in China due to disruption caused by the spread of a deadly virus that could drag down an already slowing economy.
Wuhan is one of China’s “motor cities,” home to numerous auto plants supplying the world’s largest market for cars.
General Motors (GM), Nissan (NSANF), Renault (RNLSY), Honda (HMC) and Peugeot owner PSA Group are among several companies that have large manufacturing plants in Wuhan — ground zero of the coronavirus outbreak that has already claimed dozens of lives.
All of the Western automakers operate the plants through joint ventures with Chinese automakers, including GM’s partner SAIC and Dongfeng Motor Corporation, one of the country’s largest auto groups. The GM-SAIC plant in Wuhan has about 6,000 employees, about 10% of GM’s total work force in China.
The city of 11 million people, is under partial lockdown after its airport and railway stations were closed to departing passengers on Thursday as fear over the outbreak spread. All public transport services in the city have been suspended, and some of the main highways closed.
At least 10 cities and almost 30 million people in China’s central Hubei district are facing travel restrictions. Beijing and Shanghai are at the highest level of alert for a public health emergency.
The transport disruptions could cause headaches for businesses,and hurt consumer spending at a time when carmakers are already struggling with falling sales. The global auto industry is in a deep recession, which shows few signs of abating. The number of cars sold in China, the world’s largest market, fell by 2.3 million in 2019, according to LMC Automotive. Chinese officials have said sales could fall again this year.
Virus-related shutdowns are expected to hit spending over the upcoming Lunar New Year holiday, when consumers typically spend more on travel, entertainment and gifts, ratings agency S&P Global said Thursday. If spending on services such as transport and entertainment fell by 10%, China’s overall economic growth would contract by about 1.2 percentage points, it added.
Carmakers in Wuhan
French carmaker Renault sold nearly 180,000 vehicles in China last year, or about 5% of its global car sales. It manufactures its flagship SUVs — the Kadjar and Koleos 2 models — at the Wuhan plant.
In 2018, Renault produced 16,459 Kadjars and 31,299 Koleos in Wuhan to cater to the needs of the Chinese market, spokesperson Rié Yamane told CNN Business.Sales figures for 2019 will be available in March, she added.
According to Renault’s website, the Wuhan factory has a workforce of 2,000 andannualcapacity of 300,000 vehicles.
Renault’s shares were trading 1% weaker in Paris on Friday, extending the stock’s losses for the week to 7%. Shares in the company have dropped nearly 14% so far this year amid continued fallout from the scandal surrounding former chairman Carlos Ghosn.
PSA Group sells its Peugeot and Citroën brands in China. Last year, the company sold about 117,000 vehicles in the country, a 55% decline on the previous year. A company spokesperson did not respond to a request for comment on the size of its operations in Wuhan, but said that the firm is “applying the recommendation of Chinese authorities.”
Honda’s Wuhan joint venture contributed about 11% to the group’s revenue for the year to March 2019 and accounted for the majority of its Asian automobile revenue, financial statements show. The company opened a third plant in Wuhan in April, according to a press release.
Given the upcoming Lunar New Year, companies may not feel the effect of the lockdown for a while.
Renault and Honda said their Wuhan plants were already closed for the holidays. A spokesperson for Honda said its plant was closed from Thursday until February 2.
“We are studying carefully the issue internally through the different departments and China,” Renault’s Yamane said. “We are of course respecting the Chinese authorities’ regulations,” she added.
GM says it is staying abreast of the development and advising employees who are not feeling well to not come to work.
“The most important thing is to contain the virus - production is secondary to the health of the team and community,” said GM spokesman Jim Cain.
Luxury firms falter
Shares in luxury goods companies, which usually benefit fromincreased consumer spending over the Chinese New Year, have also taken a hit this week, although they recovered a little on Friday.
LVMH (LVMHF), which owns Louis Vuitton and Fendi, has fallen 4.5% since Monday. Gucci and Balenciaga parent Kering (PPRUF) is down 5%, while Richemont, the maker of Cartier watches, has dropped 6%.
These companies are “bracing themselves for a potential hit to their sales,” said David Perrotta, the UK head of international payments provider, Planet.
Travel restrictions could have a “significant impact on sales during this crucial two-week spending period” when “luxury retailers would typically be expecting a windfall in sales to Chinese shoppers,” he added.
In 2018, Chinese consumers at home and abroad spent 770 billion yuan ($115 billion) on luxury items, equivalent to a third of the global spend, according to McKinsey. The management consulting firm expects Chinese consumers to account for 40% of the world’s spending on luxury goods by 2025.
Kering and Richemont declined to comment. LVMH did not respond to a request for comment.
— Charles Riley, James Griffiths and Steve George Kate Trafecante, Vanessa Yurkevich and Chris Isidore contributed reporting.
