Automobiles China Autos – Do we expect supply chain disruption amid COVID-19?

In China, we believe locally made premium cars use c.50% imported parts while mass-market uses only 5%. Key component inventories should last until May/June ; most overseas parts plants could resume at least partial production by April-May

22 Apr 2020

Source countries of China's imported auto parts (2019)

Source:China Customs

This figure is a pie chart; it shows what percentage of China's imported auto parts come from a number of countries.

Supply chain issue in debate

As China has resumed car production and sales, while most of Europe and the US remain in various degrees of lockdown, we think some investors are concerned about Chinese autos experiencing key component shortages in the next few months. In this note, we analyze the China auto industry's reliance of imported components, and look at historical lessons learnt from Japan's 2011 earthquake. Our conclusion is the risks appear moderate for now, and the demand recovery in the coming months should not be dragged by supply-side constraints.

Risks appear moderate for now

We believe locally-made premium cars use about 50% imported parts while mass-market cars use only 5%. While some small key components, such as censors and chips, still rely on imports, the industry has probably learnt some supply chain management lessons from Japan's 2011 earthquake. Our discussions with different original equipment manufacturers (OEMs) suggest they mostly have key component inventories lasting till May or June, while most overseas parts plants are scheduled to resume production, at least partially, by late April or early May. We believe it will be reasonably fast to supply to China.

Multi-year megatrend unchanged

Some investors appear more concerned on a macroeconomic level, that the trade conflict and COVID-19 could potentially lead the industry to re-organize the global supply chain, and move some production outside China; however, we disagree. In the near term, we believe China's containment of the epidemic, uplifting of lockdown and rapid recovery in demand should support China's auto supply chain. In the long term, China still enjoys competitive advantages in costs, efficiencies and supply chain clustering, as evidenced by Tesla's Shanghai plant. The migration to electric vehicles (EV) and China’s dominance in the EV supply chain could also further shift the global autos centre towards China

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