War in Ukraine: Concerns for the automotive industry - will the sanctions crisis come after the chip crisis?

Created: 03/01/2022, 14:08

By: Patricia Huber

Vladimir Putin's policies are also hitting the auto industry hard.

© Aleksey Nikolskyi/Imago Images

The return of the war to Eastern Europe is also hitting the auto industry hard.

The effects of the Ukraine war at a glance.

Hanover/Berlin - Russia's attack on Ukraine is sending shock waves through the entire global economy - the auto industry, which is so central to Germany, is no exception.

It is not yet possible to say precisely how strong the effects of the upheaval will be.

However, it already seems clear today that peace and the rule of law are not a matter of course for industry that can be had free of charge.

The corresponding costs are likely to affect customers and employees alike.

Some hotspots:

Consequences of the Ukraine War: From the Chip Crisis to the Sanctions Crisis?

The car manufacturers have not yet recovered from the supply bottlenecks for microchips.

Since the available quantities of semiconductor electronics became increasingly scarce during the pandemic, production backed up in many places - "heaps" of half-finished cars and sometimes significant sales losses were the result.

The danger to life for employees in Ukraine and the imposition of the first economic sanctions against Russia are already leaving their mark: VW* plants in Saxony, for example, have to pause for several days because cable harnesses supplied from western Ukraine are missing.

In the opposite direction, the question arises as to whether factories in Russia can still be supplied with primary products beyond technology exports in the event of far-reaching trade restrictions.

Industry expert Stefan Reindl from the Institute for the Automotive Industry in Geislingen expects companies with local branches to “get into trouble on the production side”.

The following applies to Germany: "The global networking of the supplier level could also have a massive impact on car production in this country."

Should more Russian banks fall out of the Swift system, payments for imports and exports could also falter - or collapse altogether.

VW boss Herbert Diess* set up a working group to analyze the consequences of the war for the network of his group's more than 40,000 suppliers worldwide.

From Wolfsburg, it is said with caution that the situation could “lead to adjustments in production at individual locations”.

Consequences of the Ukraine war: Effects on prices and waiting times

Scarce goods usually mean higher acquisition costs and more patience when ordering.

Here, too, the Ukraine war could exacerbate the already difficult chip situation.

More profound and potentially more threatening with a view to the raw materials superpower Russia, however, is the energy question for car manufacturers as well: Electricity generation from gas, oil and coal is to be phased out in industrial production in the medium term, but regenerative sources cannot yet replace it - not to mention metallic resources such as copper, nickel or steel ores.

The Federation of German Industries agrees on a shortage of raw materials and higher prices.

"The war is creating additional uncertainty when it comes to importing raw metals and metal-containing precursors," says BDI President Siegfried Russwurm.

Things could get tighter for components for e-mobility, among other things.

And: "We have to expect further sensitive price increases." The head of the German Chamber of Industry and Commerce, Peter Adrian, has already warned of delays in delivery of cars due to the lack of palladium from Russia.

The element is required for catalysts.

Reindl also considers the possible decoupling of the raw materials business to be dangerous.

Together with transport difficulties, this could “make vehicle production more expensive and cause further delivery bottlenecks”.

In addition to semiconductors, steel, aluminum and copper are also scarce in the automotive industry.

In a cross-industry survey by the Munich Ifo Institute*, three quarters of the companies mentioned problems with purchasing - in the car industry it was 89 percent.

Consequences of the Ukraine war: Short-time work remains an issue

The workforces of the car manufacturers have become accustomed to recurring absences from work over the past two years.

First the slump in sales at the beginning of the Corona * crisis, then the missing electronics: Almost every week, further shifts had to be canceled at many locations and employees went on short-time work, whether at Volkswagen, Mercedes or - even over a longer period - at Opel.

For the VW headquarters, it has just been decided that most night shifts will soon be eliminated.

The example in Saxony, where several thousand people were affected, now shows that the war in Ukraine is increasing the level of insecurity.

Ukraine War: Concerns for Employees and Investments

First of all, the companies emphasize, it is now a question of ensuring the safety of personnel in the war zones.

Even before the Russian attack, VW offered to fly out colleagues.

The group does not say anything more specific, they generally take note of the development “with great concern and dismay”.

Just this much from BMW*: "We work together company-wide to continuously assess the situation on site and possible consequences for our company and our employees and to take the necessary measures."

So far, the companies have not wanted to publicly assess whether tangible and financial assets have a future in the event of a longer confrontation.

Industry expert Stefan Bratzel from the Center of Automotive Management believes: "The manufacturers have to completely reassess their investments in Russia." Reindl is also convinced: "Russia and the Ukraine will probably not be available as sales markets for a long time." Depending on the extent and duration, that could be the case involve neighboring countries.

Compared to markets such as China, Western Europe or North America, the region is less important for German car manufacturers.

War in Ukraine: Selling cars in times of political isolation

Fears of a new "Cold War" are also making the rounds in some economic control centers.

Reindl expects "sensitive, but in view of the rather low market shares, no existence-threatening effects".

In addition to demand and foreign trade barriers, the consequences of currency turbulence must also be taken into account: If the Russian ruble continues to fall after the first sanctions against the central bank, imports into the country would become increasingly expensive from the point of view of Russian consumers.

A strong euro at the same time could therefore further spoil German suppliers' business in Russia, even if the sale of western cars were still allowed.

Bratzel estimates: "The export of vehicles to Russia should initially come to a complete standstill." It shouldn't stay that way, should it even come to a "long-term economic war", which the foreign policy think tank European Council on Foreign Relations is already theoretically playing out.

A possible embargo on all gas and oil exports from Russia - what would that mean?

The West is still hesitating.

The costs for consumers could also be considerable.

Automaker: Outwardly concerned, inwardly on alert

The car manufacturers support the first waves of sanctions and generally refer to the "volatile situation".

Behind the scenes, however, the crisis response is already tying up capacities.

According to the industry association VDA, there are 49 production sites of German suppliers and manufacturers in Russia and the Ukraine.

Boss Hildegard Müller said: "The consequences for companies and their employees are currently not yet foreseeable."

Either way, there is a lot at stake.

The VW Group alone delivered almost 660,000 vehicles in Central and Eastern Europe in 2021.

Some competitors are already taking action: The world's largest truck manufacturer Daimler Truck has suspended its activities in Russia, including its cooperation with the armored car manufacturer Kamaz, for the time being.

The commercial vehicle manufacturer Volvo stopped production and sales.

Like VW, the Swedes are represented in Kaluga south of Moscow.