Ukraine Crisis Derails Automotive Recovery

The potholes on the road to post-covid recovery for the global automotive sector seem never-ending. The back-to-back waves of COVID-19, followed by the semiconductor shortage and lack of auto spare parts supply forced the auto industry to axe nearly ten million vehicles from production in 2021. It was expected that 2022 would be better, as the auto industry was recovering from the chip shortage. But Russia’s invasion of Ukraine has pushed the auto industry, especially European players, into a vulnerable situation.

Without even bringing the supply of crude oil and natural gas into the scenario, the effect of this ongoing crisis on the automotive industry can be analyzed in two parts:

1. Production halt due to shortage of critical components and raw materials:

  a. Direct short-term impact on production lines:

Vehicle production across Europe, especially Germany has been severely disrupted as Russia invaded Ukraine. Ukraine is one of the major suppliers of wire harnessing that connect and power all electronic components in a vehicle. An average car can have over 5.5km (3.5 miles) of wire harness. As many suppliers are based in Western Ukraine, German automakers have been able to procure them easily. But as Ukraine became engulfed, the harness supply chain has been disrupted, bringing the production lines of auto factories in Germany and other neighbouring countries to a halt. Auto OEMs including Volkswagen, BMW, Audi, Mercedes-Benz, and Porsche have either reduced production of selected models or temporarily halted production in certain plants across Germany, due to a shortage of wire harnesses. This is a direct effect of the war, and it has had an immediate impact. If the crisis stretches on, other sectors like component manufacturing will also be affected. The impact on the European auto OEMs could be greater than the COVID-19 outbreak.

b. Medium-term impact on component manufacturing:

Ukraine and Russia hold reserves of some rare elements required in the production of semiconductors, vehicle batteries and other related components. Ukraine caters to almost 70% of the world’s neon demand. This neon gas is required in lasers for lithography used in microchip production. The neon gas is a by-product of Russian steel plants, which is then filtered and supplied by Ukrainian companies. Similarly, palladium is used as a catalytic element for manufacturing microchips. If the crisis persists, the impact to raw materials could again impact semiconductor availability just as supplies were recovering. Similarly, nickel and cobalt are two major raw materials used in the production of automotive batteries. The larger manufacturers of microchips and batteries hold some material in reserve, but these are likely to be quickly depleted if the crisis stretches on for months. This will lead to increased prices of the respective components. With the financial sanctions imposed on Russia, the prices of these elements are likely to increase by at least 20%, which will make the production of electric vehicles more costly.

2. Revenue loss due to imposition of financial sanctions/business closures:

Russia is one of the bigger automotive markets globally. Vehicle sales in Russia exceeded 1.5 million and 1.6 million respectively in 2020 and 2021. But since the crisis started, almost every Western automaker has suspended business in Russia, denting revenues. Moreover, tier-1s and contract manufacturers have also suspended production and services. Auto OEMs such as Volkswagen, Ford, Toyota, General Motors, Honda, Bentley, Nissan, Porsche, Jaguar, Ferrari etc; and tier-1s and component manufacturers such as Continental, Magna, Aptiv, Leoni have all halted their exports to, and production in, Russia. The component suppliers and manufacturers are trying to shift their Russia production to other plants across different countries to curb the component supply shortage in the longer term. In Russia, Renault is the largest automotive seller and due to a $1 billion deal signed in 2007, Renault was unable to pull out of Russia and is bound to keep the production line open. Alongside Renault, Skoda also kept two of its factories in motion, but the production is severely impeded by sanctions imposed on Russia by the West. In this dark time, China is seeing some strong business opportunities. With almost no competitors, Chinese auto OEMs expect to win some extra market share and profit in Russia. China is walking a fine line between neither condemning nor condoning Russia’s action in Ukraine. This could pay dividends for Chinese auto vendors. But given the weak currency situation in Russia, it may not be an easy business to win.


Counterpoint Research Russia Vehicle Sales by Brand 2021

The automotive industry is currently going through a very vulnerable period. Auto OEMs will be scrambling to enact contingency plans to deal with a persistent crisis. Though vehicle production lines and production of critical components are being shifted to other regions, the void for raw materials created due to the crisis is not going to be easily filled, which will force auto OEMs either to cut production or to offer vehicles with reduced specifications.

Counterpoint Research Russia Vehicle sales Forecast by 2025

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