Suddenly, the assembly lines came to a standstill. On 24 February this year, Russia began its large-scale assault on Ukraine. The world was in shock and large parts of the world's industry were paralysed. The war and Western sanctions against Russia as well as Russia's counter sanctions meant that important raw materials, production sites and markets suddenly simply ceased to exist for car manufacturers and suppliers. At the beginning of March, the three major German manufacturers Volkswagen, Daimler and BMW announced that they would stop both production in Russia and exports to Russia until further notice. Numerous suppliers did the same.
The importance of the markets in Russia and Ukraine for the European automotive industry is clear to see. Russia has long been viewed as an important future market for the global automotive industry, but the share of sales it actually generates is low, particularly for German companies. According to the Association of the Automotive Industry (VDA), local car manufacturers have exported more than 40,000 vehicles to Ukraine and Russia in the past year. This amounts to just 1.7 per cent of all cars exported from Germany. The Volkswagen Group and suppliers Bosch and Continental generated around two per cent of their turnover in Russia. For BMW and Daimler, the proportion of sales was around three per cent. The problem is less the market importance of Ukraine and Russia, but more their function as suppliers of components and raw materials. After all, many assembly lines are brought to a standstill if even just one component is missing.
Decreasing revenues and increasing costs
‘The war in Ukraine has affected the European automotive industry in many respects. Disrupted supply chains meant that production lines and factories were closed at very short notice. This led to unpredictability, which is the worst thing for our industry. In order to work efficiently, we are dependent on reliable forecasts. Revenues are going down, operating costs are going up. And the cost of goods such as steel, copper and aluminium are rising faster than inflation, which is already increasing rapidly anyway’, says Mike Sturgeon, Executive Director of the Association of European Vehicle Logistics (ECG).
European car makers primarily source raw metals from Russia. Alongside crude oil, natural gas and coal, they are some of the country's most important exports. In addition to aluminium, nickel and titanium, the industry in the European Union is highly dependent on palladium, which is used in the production of catalytic converters, for example. More than 40 per cent of the world's palladium exports come from Russia. It also provides around ten per cent of the global demand for nickel, which is required e.g. in the manufacture of electric batteries. The uncertainty on the markets as a result of this is exacerbating the shortage of semiconductors, which were already in short supply anyway.
Wiring harnesses: imported from Ukraine
The most important imports from Ukraine for the automotive industry are wiring harnesses. These are highly complex, handmade wiring systems, the lifeline of a car. They must be available at the start of production because they cannot be retrofitted. Around one fifth of Europe’s wiring harness production industry is based in Ukraine. One of the most important suppliers is the German company Leoni, which operates two factories in western Ukraine and employs around 7000 staff there. ‘Our task force is analysing and evaluating the fluid situation almost around the clock. Given this exceptional situation, the Leoni world has once again been brought closer together, and the commitment and motivation of our Ukrainian employees in particular is just amazing. That was the main reason why it was possible for us to resume production in Ukraine just a few days after the outbreak of war – in line with the declared intentions of the Ukrainian government, the commitment of customers and wishes of the workforce. At the same time, we began – again in close cooperation with customers – to duplicate Ukrainian production capacity in other locations in our production network, mainly in eastern Europe and north Africa, to support the factories in the war zone as needed’, reports Gregor le Claire, press spokesperson at Leoni AG. Leoni has even been able to ramp production back up to pre-war levels because of this.
Crisis after crisis: corona, microchips and war
Another, often underestimated aspect, is the lack of drivers. ‘The political situation is exacerbating this situation dramatically because many drivers come from Ukraine and thousands of them returned to their country when war broke out so they could fight’, says Mike Sturgeon.
Furthermore, the two main pre-war crises in the automotive industry – the Covid-19 pandemic and global shortage of microchips – may well have become manageable, but they still exist. Moreover, Covid-19 and the situation with semiconductors showed how protracted and complex the restructuring of supply chains can be. A study by the McKinsey Global Institute in August 2020 investigated 23 industries for their susceptibility to crises, including pandemics, cyber attacks, trade wars, natural catastrophes and climate risks. The result? On average, companies across all industries have to reckon with months-long disruption to the supply chains every 3.7 years. Along with the automotive industry, the aviation, mining and oil production industries were the most vulnerable.
Strengthening resilience and supply chains
The automotive industry has long been dominated by overcapacity, but this is now changing. The costs of raw materials are increasing, supply chains are disrupted, production has been crippled and car buyers must wait a long time for the vehicles they have ordered. Above all else, it has become significantly more difficult to plan. However, there is some good news: demand continues to be strong. The McKinsey experts predict that up to a quarter of global supply chains will shift over the next few years. Companies, regardless of the industry, are likely to need to find a new balance between just-in-time production with supply chains that are as streamlined as possible and minimal inventories.
‘Stable supply chains are more important than ever. Companies should diversify their supply chains and must remain agile’, emphasises Mike Sturgeon. ‘After 100 years of very little change in our industry, almost everything has changed in the last decade, whether that be products, customers, markets or sales. The challenges are huge, but the industry is incredibly adaptable – and I am optimistic'.
Voices of the sector
‘Given the current geopolitical situation, we have shelved local production and car exports for the Russian market for now. The war in Ukraine has also had effects on the automotive supplier industry there, such as wiring harness manufacturers. In combination with the continuing semiconductor bottlenecks, these supply restrictions might lead to adjustments in production and disruptions in our European factories. We are in constant intensive discussions with our suppliers. We are evaluating the situation together and coming up daily with measures to safeguard production. The overall consequences for the automotive market are extremely difficult to predict because they are so heavily influenced by the ongoing course and duration of the war.’
‘We condemn Russia’s war against Ukraine and wholeheartedly support the sanctions imposed as a result. The war in Ukraine has left Europe facing shortages and price increases in raw materials and intermediate products. The hostilities are also having a significant impact on supply chains. Russia's war against Ukraine makes it clear that Germany and the EU need an active policy on raw materials. Time is pressing. We must conclude energy partnerships across the world with greater urgency and thus gain access to renewable energies. Wind and solar energy must be massively expanded, but we cannot cover our energy needs alone. This is why a functional hydrogen economy must be established as quickly as possible. As a country poor in raw materials, we must secure Germany to a much broader extent than before – and this can only be done via global partnerships and trade agreements. Russia's breach of international law makes collaboration with other countries more necessary than ever before’.
Hildegard Müller, President of the Verband der Automobilindustrie e. V. (German Association of the Automotive Industry)
‘The embargoes and sanctions against Russia could affect electric vehicles primarily because of the metal nickel. Nickel is a key element in lithium ion batteries with high energy densities. In 2021, Russia produced a good nine per cent of the world's nickel. In 2022, the start of the war coincided with a dramatic increase in the price of nickel, but the reason behind this increase was actually only tenuously linked to the war. The price of nickel has now fallen again, but it is still high. However, the price rise is not currently posing a risk to the production of lithium ion batteries and the short-term direct effects of the Covid-19 policy in China are probably more extensive than the effects of the Russian invasion of Ukraine.’
Dirk Uwe Sauer, Chair of Electrochemical Energy Conversion and Storage Systems at RWTH Aachen
- Transport & Logistics