Auto sector not expected to face supply disruption


  • Auto
  • Thursday, 06 Feb 2020

An analyst from a local bank-backed brokerage said he did not see the coronavirus outbreak having a significant supply risk on local companies.

PETALING JAYA: The local automotive sector is unlikely to face supply disruption in the wake of the coronavirus outbreak, although it has direct exposure to China.

MIDF Research, in a report yesterday, noted that Hubei, the epicentre of the coronavirus outbreak, is one of China’s major automotive hubs.

“Contagion to other provinces increases the possibility of extended plant shutdowns.

“Component supply is a risk, given the complex automotive value chain and impact on downstream output, ” it said.

It emphasised, however, that unlike natural disaster-driven crises such as the 2011 Japan earthquake and the Thai floods, supply disruptions could recover quickly as infrastructure and inventories remain intact.

“Malaysia’s major source of completely-knocked-down kits and components, namely Thailand, has exposure to auto part imports from China, but mainly for replacements and supply to Chinese original equipment manufacturers’ local assembly.”

An analyst from a local bank-backed brokerage said he did not see the coronavirus outbreak having a significant supply risk on local companies.

“Proton may be exposed given its tie-up with China’s Zhejiang Geely Automotive Co Ltd (Geely).

“But even then, it may only occur if things got critical, to the point that plants get shut down, which we don’t foresee happening.

“Other than Proton, Sime Darby Motors has direct exposure respectively to China’s automotive market.

“In an extreme scenario, they could be affected.”

MIDF Research highlighted that the Sime Darby group has dealership operations in China, carrying the BMW, Mini, Lamborghini, Rolls Royce and McLaren marques.

“The China, Hong Kong, Macau and Taiwan operations collectively account for 47% of Sime Darby’s motor segment revenue (54% of profit before interest and tax). Sime Darby Motors in turn, contributes some 57% to group revenue.”

In the context of the coronavirus outbreak, MIDF Research said a demand slowdown for car sales in Malaysia might only come indirectly.

For example, this might either be a knock-on impact of a potential disruption/slowdown in the Chinese economy and tourism restrictions on the Malaysian economy, it said. “Still, it is too early to make a call on this depending on how long the outbreak lasts. The expected slowdown in China within this short period so far, might still be able to be compensated later in the year if the outbreak is contained in a timely manner.”

MIDF Research noted that during the SARS outbreak in 2003, Malaysia’s total industry volume (TIV) fell by 6.7% year-on-year to 405,745 units.

“However, it is important to note that it was only Malaysia among the big four auto markets in Asean that saw a TIV contraction back then, given a Malaysia-specific issue.

“Consumers adopted a wait-and-see attitude on expectations of a fall in car prices as the government back then revised its tariff structure in preparation for the Asean Free Trade Agreement.”

As an alternative, MIDF Research said there was always the possibility of existing vendors shifting production to overseas plants, should the situation warrant it.

“Temporary outsourcing/ supplier substitution is another option, though this means limited volumes over a specific period and may increase unit cost. The requirement to share blueprints of components to external manufacturers complicates the exercise however.

“On the bright side, unlike the magnitude of disruptions caused by natural disasters such as the previous Japan earthquake or the Thai floods in 2011, operations can come back on stream much quicker once China’s coronavirus outbreak is contained, given that supporting infrastructure and inventories remain intact.”


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