Impact of the COVID-19 on the China Domestic Automotive Aftermarket - 30 days after business reopened

Dear Friends,

For those who asked, I am doing well, I have stayed in Shanghai, with my family, the whole time since the outbreak of the COVID-19, following public recommendation like everybody around me: wearing mask everyday, washing hands, reducing exposure, proactively comply to every temperature check and new process established to contain the infection. I have not been locked at home and was able to go out everyday when necessary.

To make short, I enjoyed this period with family, connected with friend and business contacts, feeling part of the whole country mobilized to fight the contagion. Feeling lucky to have heroes in front line in Wuhan (medical team, public servant, etc) to fight for us but the less visible heroes, the employee of delivery companies or residence/apartment block staff helping making our life easier.

Really a true "People's war".

I wanted to share with you some update on the situation of the China Aftermarket and hope it will be useful to you.

China produces about $40B worth of car parts for the OEM and the Aftermarket globally, this is the first automotive market in the world despite recent slow down and China will contribute to 50% of the growth of the global Aftermarket until 2030, thanks to an increasing and aging car population.

So the “COVID-19” outbreak has not only created a supply chain issue for the global aftermarket but has a significantly impact on overall YTD sales performance of most of Aftermarket suppliers.

Reminder:

• In 2020, Chinese new year took place in end of January. Taking into account most of sales in China aftermarket occurs in the last week of the month, January has been budgeted with sales lower than year average with February and March expected to catch up.
• Chinese New Year usually implies around 2 to 3 weeks of business interruption in production of part supplier or distribution due to logistic companies closing for holidays and migrant worker taking more time to back to work from home town. this is well know and player in the industry plan/build stock accordingly
• China government has placed Wuhan under effective quarantine on January 23 as air and rail departures were suspended.
• On January 30, the WHO declared Coronavirus a global emergency as the death tol in china jumped to 170, with 7711 cases reported in the country, where the virus has spread to all 31 provinces

• At this time each city region already implemented specific lockdown policies, closing school (closed already for CNY), limiting circulation between cities, closing parc, cinema, meetings, etc. Most of people at home, getting food delivered from online with package/good to be picked at the entry of the apartment centralized gate
• The second week of February, companies outside Hubei reopened with very different ramp up depending on the location and supply chain. White collar have been invited to work from home with rapid implementation of online working solution (Zoom, but also local ones) and business travel reduced to minimum. Plant ramp up facing challenge due to migrant operator still locked in their home town and or potential disruption in supply chain due to supplier located in Hubei. Whatever product being produced, delivery oversea or locally being another big challenge due to limited service/cargo/air freight. Despite companies back step by step to work, government has put top priority on containing the virus at all cost, implying shutdown for reopening factory with 1 infected employee or requiring 2 week quarantine for migrant worker back to work.

• March 10, Xi Jinping toured in Wuhan sending signal that the government believes the worst of the national could soon be over in China, with stronger focus on supporting the economy to recover and bringing back people to work. This new situation illustrated by reopening of Honda plant in Wuhan on March 11.
• As of Mid of March we can estimate an average 80% back to normal in China outside Hubei for Work. In term of offline shopping, confidence is starting to rebound as coronavirus comes under control, AutoNavi app shows an increase of 30% of traffic in and around shopping districts in Week End of March 14-15 compared to Feb 15-16. More and more people are stepping out.

Visible impact on China aftermarket:

China's nearly 2 month lockdown has dealt a hammer blow to the economy, with retail sales down 20.5% accross the combined 2 months of January and February. The virus has however proved to be a boon for China's ecommerce sector, as shoppers stuck at home buy even more online. Alibaba Online new retail platform "Fresh Hema" has seen 220% YoY growth of offline order with consumer not taking car to supermarket but getting food delivered at the gate of the residence/block to then be collected, as shown in picture below

Most of consumer have stayed at home, as an example, new car sales in China has dropped 80% in february and 18.7% in january compared to last year. Despite 4S reopening mid February and offering aggressive promotion or free operation to bing back customer.

With people staying at home getting food delivered, reduced daily drive to work due to home base work, most of last miles delivery from shop to consumer done by electric motorcycle: Miles driven for light vehicle have significantly decreased

Due to limited traffic, also collision has been limited

On the other hand, by fear of contamination, car owner has postponed car wash, car maintenance.

Large number of workshop have reopened late to reduce risk of contamination for employee or just because not enough customer or not enough workshop technician back to work as locked in their hometown

As a result, Aftermarket Part Supplier have seen a huge drop of sales in February with decrease of 50% to 80% from the initial plan. Mainly due to impossible to ship the good to customer due to regional lockdown, distributor not reopening or protecting cash flow and team home base not able to travel on site to push the order.

From February 20th to March 2nd, the AASA China Aftermarket Forum, has conducted a mini-survey in relation to the coronavirus and its impact on companies operating in the Automotive Aftermarket in China.

The survey was answered by 24 major global automotive supplier operating in China, leader in their categories. Those 24 companies foresee an average drop of sales for Q1 of 28% compared to last year.

Part supplier are still cautious about recovery in Q2, with 55% of participant to the survey still expect Q2 sales to be lower than last year with 22% only expecting an YOY growth

Overall still expecting an average drop for 2020 between 8% -10% sales due to COVID-19

Trend and innovation from Covid-19 crisis:

This crisis remind us how it is critical to build robust sourcing strategy and include risk management when doing sourcing. For example avoiding to rely on single source. We have seen companies urgently looking for alternative supplier because previously strongly relying on 1 supplier located in Hubei.

Safety and health of our employees, partner and customer remain our top priority, so it is important to provide mask, hydro alcoholic gel and aligned with workshop to properly communicate online and offline about the cleaning/desinfection of the working place

With car owner staying at home without using car for long period of time due to lock down, we expect an increasing demand for oil change and battery. As health being the main focus currently, several O2O platforms have launched bundle/promotion Oil or Battery or Filter change combined with disinfection/air refresher spray to attract customer. Such spray does not guarantee full desinfection of Virus as only 75% alcohol liquid can do that and not to be applied in closed area like car...

With Online gaining market share Vs offline and car owner reluctant to go to workshop, we could expect that DIY (very low in China) would increase. but no, consumer learned cooking during the lockdown but not changing oil for car.

Also, at this stage we have not seen a significant increase of door to door service.

In term of new trend, the AASA China Aftermarket Forum survey shows that online training has grown drastically and is perceived as a trend that will sustain for part supplier to train own team but also to train customer (distributor or workshop). Utilization/acceptation of Alibaba/Wetchat/Zoom application for conf call or CRM has significantly increased during the last 2 months. Acceptance of such online tool also come from children being at home with school closed and all family getting used to remote work and study/training.

The china Aftermarket remaining extremly fragmented, the current challenging environment will increase pressure on company with limited cash flow. Consolidation should be accelerated by the COVID-19

Online player proposing O2O should be reinforced by the increasing influence of online on the whole retail after COVID-19, this will confirm that online player will drive the consolidation and major M&A

Conclusion:

China Aftermarket has faced significant challenge with the COVID-19 crisis and the recovery will take time.

China remains the driver of the global aftermarket growth whatever it sales less new car than expected because the car population in china will still drastically increase and get older, entering into the golden age of Aftermarket

Online and O2O will be even reinforced, for sales but also for CRM and training

With Covid-19 now becoming global, plant oversea shutting down, China aftermarket might face supply issue of imported components, so secure stock might be relevant on specific SKUs. On the other hand, Chinese aftermarket supplier exporting to US and Europe might face lower demand from oversea and PO cancelled.

In term of sourcing, before giving up on China suppliers, as crisis becoming global, i recommend to assess carefully the business case and not underestimate the capacity of Chinese supplier to develop competitive global footprint for aftermarket like the Chinese OEM supplier have done for the OE business.

Philippe Thegner

Chairman of the AASA China Aftermarket Forum