Lorena Isla
Director, Mobility Latin America
Frost & Sullivan

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Auto Industry Feels the Wrath of The Russia-Ukraine War

By Lorena Isla | Tue, 08/02/2022 - 16:00

On Feb 24, 2022, we woke up to the news that Russia had invaded Ukraine. After almost five months, the war appears to be far from over. The terrible effect that this war is having on Ukraine relative to loss of life and the impact on the population cannot be denied. But what impact can we expect on the global automotive industry?

First of all, we need to consider the role of both countries in global vehicle production and in the components supply chain, which is very different for the two countries. In 2021, Russia produced around 1.6 million vehicles, including passenger cars, cargo trucks and passenger buses, while Ukraine manufactured only around 8,153 vehicles. In terms of components, Ukraine is an important manufacturer of vehicle parts, such as wire harnesses, electronic component units (ECUs) and engine management systems, while Russia is the supplier of around 40 percent of engine requirements for VW Group plants in Eastern Europe.

So, the impact can be seen from different angles. At Frost & Sullivan, we have identified at least two. First, the impact on vehicle production that is coming not only from the number of cars, trucks and buses that are not being manufactured in these two countries but also from the angle of auto parts shortages that are affecting vehicle production in neighboring countries, such as Germany, and others in Eastern Europe. The second impact is expected to come from the raw materials supply chain disruptions that most likely will impact other component manufacturing in the near future.

The OEMs that are most likely to be directly affected are those that manufacture vehicles in Russia, such as the VW Group, or those that have joint ventures, such as Renault-Avtovaz and Daimler-Kamaz, that are also facing vehicle component import restrictions in Russia. Companies indirectly affected in their operations in other parts of Europe are certainly Volkswagen, BMW, Hyundai-KIA and Porsche, which have paused or slowed production at other facilities, like those in Germany, as some Tier-1 suppliers with operations in these two countries have also slowed down parts deliveries.

In the case of Russia, many countries and companies have applied import/export sanctions in protest over the Ukraine invasion. Michelin was manufacturing between 1.5 and 2 million passenger car tires per year, Continental was producing brake and engine components, and Magna Automotive was supplying body parts from Russia all have suspended operations in the country. In the case of Ukraine, companies including ZF, which manufactures several components (gear boxes, steering systems, ABS units, etc), Sumitomo Electric, Fujikura, Leoni, a producer of wire harnesses, and Aptiv, with advanced technology components, all have had to shut down facilities as there are no conditions to operate.

Turning to raw materials, it is important to consider that Russia accounts for 40 percent of global palladium production and 5 percent of nickel, making it the third-largest supplier in the world. Ukraine is the leading supplier of neon gas, contributing more than 70 percent of global production. And what are the implications of disruptions of these materials in the automotive component production? In the case of palladium, automotive is its biggest application as 80 percent of global production is utilized in the exhaust systems of cars. In the case of nickel, it is a resource that maybe at this moment is not critical but due to the increasing adoption of electric vehicles across the world, it will become a very important resource in the near future due to advancements in technologies related to battery development that consider nickel as one of the key chemicals in its composition.

Finally, neon gas. Neon gas is a key component for lasers utilized during the semiconductor manufacturing process. As we all know, the semiconductor industry has been impacted by the COVID-19 pandemic since 2020 and the automotive industry was the hardest hit by this situation. The chip shortage for vehicle manufacturing seems to have eased in recent weeks but as Ukraine is the leading supplier of neon gas, it cannot be discarded that the industry may see additional hits in the upcoming months, especially if the war continues for a prolonged period.

The implication of all these disruptions, based on the law of supply and demand, is that price increases can be expected on the components mentioned above and ultimately on vehicle prices. This along with increasing inflation rates across regions and countries may translate into further delaying a recovery in vehicle sales from decline started during the COVID-19 pandemic.

Automotive companies across the globe are taking action to re-balance all these effects from the vehicle production angle, as well as from the supply chain disruptions that were already affected. As a rule, having business continuity plans is becoming a must for every company in the automotive industry, as history is teaching us that disruptions can come from different directions, and might not come alone. Nearshoring, or “de-globalization,” is expected to become more the norm than the exception, which will bring additional opportunities for the industry to re-balance, and also for some regions to stand out in this new regime.

Photo by:   Lorena Isla