In China, heavy snow in late January hit several provinces along the Yangtze River. Some large auto manufacturers are located along this river - snowfall in this region is rare. Snowstorms started earlier this week and have led to expressway, railway and airport closures. Light vehicle production in the region has been affected due to component/ material and power supply shortages.
The power supply is one provinces is limited due to the lack of coal and ice destroying the distribution grid. Manufacturers and suppliers there have had to cut hours or shifts of vehicle/ component production. OEMs affected include Changan- Ford Chongqing, Changan- Suzuki and Changfeng Auto. Production in February was already expected to be slower due to the annual Spring Festival. Output is expected to recover quickly due to the insertion of extra shifts after the Spring Festival (or even during the Spring Festival) if no more heavy snowfall occurs in late February.
The provinces affected by the snow are located in central China, a key manufacturing region. As severe snowfalls seldom hit this region, the sudden onset of snow and sleet has severely impacted traffic flow - already heavy due to coaches and trains traveling home for the Spring Festival. Traffic jams have slowed the supply of some Tier 1 and Tier 2 components and knock-down parts to OEMs. In recent years, China OEMs have reduced inventory buffers and have increasingly adopted more Just-in-Time supply programs to lower costs.
Manufacturers most affected by the heavy snowfall are Dongfeng-Honda, Dongfeng-PSA, Chery, Dongfeng-Nissan, Changan-Ford Nanjing and Nanjing MG. All of these manufacturers closed plants or cancelled shifts for one to two days this week. From 1 to 4 February 2008, another round of icy rain and blizzards will impact the region. By next week, only Shanghai-Volkswagen and Shanghai-GM will not be affected by weather-related interruptions.
Major areas affected by snow through 31 January 2008 were the Jiangsu, Jiangxi, Anhui, Hubei and Hunan provinces, located along or south of the Yangtze River. Although these areas are not the largest auto markets in China, sales will be adversely affected as the weather hinders consumers’ ability to reach dealerships. Additionally, transportation of finished vehicles from these regions to the major sales regions on the coast has been stalled. Vehicles built along the Chinese coast have trouble reaching inland destinations.
Several OEMs are better-positioned than others in respect to vehicle inventories and thus can withstand short-term interruptions. Dongfeng-Honda, Dongfeng-PSA and Chery dealers do not have enough cars to sell due to strong sales and the subsequent production interruptions. Changan- Ford and Changan-Suzuki also face serious logistical issues, as sending their vehicles out of Chongqing to eastern and southern China is difficult. For now, all dealers have stopped discounts, driving consumers to wait even longer to purchase newly-launched vehicles when supply replenishes. The usually strong sales season before the Spring Festival (6-12 February) will now shift to late February and March.
The snow’s impact on China’s economy should be noted, but overall the economy will not be adversely affected in the medium or long term. Pent-up demand, driven by this week’s short supply, which also led to longer lead times, may be exasperated by another round of snow from 1-4 February. The Spring Festival follows on 6-12 February. Demand will not disappear completely. It will resurface after the Spring Festival when weather conditions improve. We can therefore expect March and April sales to be strong. Sales demand in 2008 will be influenced by economic constructs, income growth and access to credit - these weather-related issues are temporary in nature. In the end, vehicle output lost this week will be easily compensated for over the next four to eight weeks.
For questions, please contact Zherui (Jerry) Huang, Senior Analyst, China Vehicle Forecasts at zheruihuang@csmauto.com or +011 86 216888 9599
