Weekly Brief: Global Auto Industry sent Reeling by Russian Invasion

Commentary By Andrew Tolve

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28th February 2022

The auto industry is braced for more turmoil as Russia unleashed war on Ukraine.

Worldwide supply-chain delays and car shortages were already a problem after two years of global pandemic. Last week, as Russian tanks rolled into Ukraine and missiles rained down on Kyiv and Kharkiv, the world was reminded of how fragile peace can be and how one leader’s ambitions (or delusions) can create a seismic shock to our individual and collective realities.

As of Sunday night, the UN human rights office reported that at least 240 civilians have been injured in Ukraine since the Russian invasion began, including at least 64 dead. It noted grimly that the actual number of civilian casualties is likely “considerably higher”. Meanwhile hundreds of thousands of Ukrainians have been displaced within their country and nearly as many have fled the country outright, according to the UN refugee agency. Cities are besieged. Buildings are burning. Children are among the dead. Supply chain delays and higher prices at the pump are, by comparison, insignificant.

Yet, the effects of war between Russia and Ukraine could be significant for the car industry. Renault, which produces nearly 40% of all cars made in Russia, announced last week that it will halt operations at its Moscow plant this week owing to delivery bottlenecks at the Russian border. A shortage of electrical components from Ukraine will cause Volkswagen to cease operations at two car factories in eastern Germany in early March. More operation delays are likely to follow. If you look at the German car industry alone, carmakers and their suppliers have about 50 factories across Russia and Ukraine.

How long these delays drag on is uncertain. Over the weekend, Ukrainian President Volodymyr Zelensky and Russian President Vladimir Putin agreed to meet on Monday for peace talks near the border of Belarus. Even if the war is cut short (let us hope it will be), the sanctions that Western powers issued last week against Russia will be more long-lasting. Russia is one of the world’s biggest oil producers. Worldwide gas prices were already at record highs. Now, experts expect the price of oil to spike above $100 a barrel. Last week Germany paused the Nord Stream 2 Baltic Sea gas pipeline project. That’s bad news for a car industry that was already asking consumers to pay more for new cars, due to supply shortages.

If gas prices and car prices get even more expensive in the wake of the Russia Ukraine conflict, the auto industry may sell 400,000 vehicles fewer in 2022, JD Power announced last week in an updated sales forecast. Record high gas prices would normally be a boon for the electric vehicle industry. However, to make an EV you need an electric battery and to make an electric battery you need nickel and lithium. Russia is one of the world’s largest exporters of lithium and nickel. With the sanctions already announced, EV makers will have to look elsewhere for those elements, which will drive prices higher.

More worrisome than the price of gas or the production of electric batteries, Russian sanctions could exacerbate the current semiconductor shortage. The vast majority of semiconductors are made in Eastern Asia but semiconductor manufacturers need neon gas to make semiconductors and more than 75% of that neon gas comes from Russia. Carmakers were hoping to be back to normal by 2023. The longer war lasts in Ukraine, the more unlikely that target date may become.