Ukraine crisis has deep effect on auto

WITH Russia’s invasion of Ukraine dominating headlines around the world, the automotive industry’s supply chains are under renewed stress.

In addition to component deliveries, challenges are arising in terms of critical raw materials amid supply disruptions out of Ukraine and trade sanctions imposed on Russia by the United States and European Union. 

The first disruption car-makers felt was a delay in deliveries of components to European factories. As many 22 companies based in Ukraine produce and export automotive components, such as wire harnesses, electronics and seats. 

As a result, Volkswagen has temporarily halted production at two of the German car giant’s electric vehicle plants in Germany – Zwickau and Dresden, which produce VW, Audi and Cupra models built on the VW Group’s MEB platform, Automotive News Europe reported.

Since the military invasion of Ukraine began last week, the United States and several European nations have instituted wide-ranging trade sanctions against Russia, especially banning several of the country’s banks from the Swift global financial payment system, which has made it cumbersome for many companies to conduct any type of trade with the nation, even in sectors that are not being sanctioned.

Renault, for example, said it would suspend some operations at its Russian car assembly plants due to logistics bottlenecks caused by parts shortages.

The action was said to be a consequence of “reinforced borders” between Russia and its neighbouring countries (through which parts are transported by road freight) and the decision by many European nations to close off their airspaces accordingly.

For the Renault Group, Russia is its second-largest market (after France) by virtue of its controlling stake in AvtoVAZ, which produces vehicles for the country’s market-leading Lada brand in Togliatti. It also has another assembly plant near Moscow. 

"Tighter border controls in transit countries (have) forced the need to change a number of established logistics routes," a spokesperson for AvtoVAZ said recently.

Meanwhile, the VW Group, Stellantis, Continental, Magna International and Visteon (among others) have facilities in Kaluga (180km southwest of Moscow) – the centre of the Russian auto industry.

And with at least a quarter of parts used in the production of Russian-made vehicles needing to be sourced from abroad – including the US – those assembly plants could have trouble continuing to operate while sanctions are in place, analysts and industry officials told NBC News.

Until the crisis is resolved, automotive companies with operations in Ukraine and Russia will have to compromise to reduce the negative impact of the conflict and sanctions on their businesses.

Finnish tyre maker Nokian said it was switching production of some key product lines from Russia to Finland and the US, while Automotive technology supplier Aptiv reportedly shifted high-volume production of parts out of Ukraine over recent months in anticipation of possible hostilities.

Suffice to say that the Russian automotive retail sector has already begun to feel the brunt of the sanctions.

The value of the Ruble has plummeted by 40 per cent against the US dollar (its decline started in late October) and Russia’s Central Bank responded by more than doubling its key interest rate to 20 per cent.

Volvo was the first major car manufacturer to suspend car shipments to the Russian market “until further notice” because of "potential risks associated with trading material with Russia, including the sanctions imposed by the EU and US," it said.

The RIA news agency reported that Volkswagen temporarily stopped deliveries of cars already in Russia to local dealerships and Swedish and German truck makers AB Volvo and Daimler Truck said they had halted all business activities in Russia.

Although not immediately apparent, the biggest impact of the crisis might be to the automotive industry in general, because of the potential scarcity and steepling prices of commodities and raw materials usually supplied by Russia and Ukraine.  

US-based semiconductor producers import neon gas and hexafluorocyclobutene almost exclusively from those countries, Techcet – a research group that analyses dependency on critical materials – said to the Wall Street Journal (WSJ). 

The paper went on to say Russia’s MMC Norilsk Nickel PJSC mined 40 per cent of the world’s palladium (a major component of catalytic converters), as well as around 11 per cent of global nickel production (used in the manufacturing of stainless steel and lithium-ion batteries).

Russia mines around four per cent of the world’s cobalt (also used in batteries), a quarter of its vanadium, used in steel-making, and 3.5 per cent of its copper.

Even though there are alternative countries from which those materials can be sourced, the price of palladium – in particular – had begun to climb before Russian forces had marched into Ukraine.

The same is likely to happen to nickel, all of which will push up vehicle production costs and invariably be passed on to car buyers. 

Because of the closure of Ukrainian ports, there were “at least 22 tankers that were clogging the Kerch Strait, a key Russian-controlled waterway”, WSJ reported.

Further, cargoes of steel and iron ore had been unable to leave ports in Mariupol, Youjne and Pivdennyi. The interruptions prevented steel operations, such as ArcelorMittal SA, from restocking raw materials and Ferrexpo PLC from exporting iron-ore pellets. 

Global steelmakers such as Japan’s Nippon Steel Corp and Austria’s Voestalpine AG,

which usually buy these pellets, have had to scramble to find alternative suppliers.

Finally, it remains to be seen whether Russia will retaliate to the sanctions by cutting off its supply of raw materials and whether its traditional allies may follow suit.

“The big question is what China does,” WSJ quoted Sam Abuelsamid, principal auto analyst for Guidehouse Insights, as saying.

“If we put (heavier) sanctions on Russia, (it) might respond and cut us off from many of the things we need, such as the lithium.”