Auto Sales in China Are Recovering Faster Than Suppliers Can Build Components

Silicon is a hot commodity in a connected world, but that's a problem when no one's around to manufacture parts.

China Manufacturing Exports
Barcroft Media via Getty Images—Costfoto / Barcroft Studios / Future Publishing

It's no secret that COVID-19 caused auto sales to falter during 2020. However, to say that the market is experiencing a rebound would be an understatement. In particular, the industry in China has been recovering phenomenally, so much that automakers fear it's outpacing the rate at which some suppliers can manufacture parts.

Like all foreign automakers (with the exception of Tesla), Volkswagen operates using joint partnerships so that it can sell vehicles within China's borders. Its ventures have been so successful that the German automaker has become the largest foreign automaker in China, representing 14.6 percent of all auto sales in 2019 across its brands. But despite the success, not even VW is protected from an unprecedented market recovery.

Speaking with Reuters on Friday, VW confirmed that at least one upstream manufacturer which supplies the automaker with imported chips for its electronics has been affected due to COVID-related uncertainties which may impact the rate at which it can produce cars.

"The chip supply for certain automotive electronic components has been affected due to uncertainties caused by the pandemic," a VW spokesperson told Reuters. "This has led to a potential interruption in automotive production, with the situation getting more critical as demand has risen due to the full speed recovery of the Chinese market."

While VW says that it has already started coordinating with its suppliers to mitigate any production woes, Reuters notes that the statement on the impact of automotive production refers to China's auto production overall and not just VW in particular. It's not yet clear if this is due to consumers buying more cars than when automakers paused production during the pandemic, or if suppliers simply aren't yet running at full capacity to meet demand. Regardless, other automakers may soon be feeling the heat from an unprecedented upswing in demand following the economic downturn caused by COVID-19.

Another uncertainty is how long demand will surge prior to a potential second round of manufacturing shutdowns. As the world begins taking measures to dampen the pandemic's resurgence, the future economic impact is simply up in the air. Manufacturing and sales may continue at their current pace, but they could also drop due to government- or industry-mandated shutdowns. If the latter happens, the auto industry may experience a sharp drop in sales until an equilibrium can be reached; however, it's too soon to make an accurate prediction.

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