22.6 C
Bucharest
August 10, 2022
EDITORIALOP-EDOPINIONPOINTS OF VIEW

Ukraine conflict stalls the automotive industry’s engine

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu

The car manufacturing industry worldwide is bracing for bigger issues following the Russia – Ukraine conflict. The globalization of production, with part of it being in the conflict region, is breaking up supply chains and is halting production of cars inside and outside Russia and Ukraine. Reports are foreseeing a worsening of the electronic chips crisis since some crucial raw materials are coming from the region. The fear of stagflation might also hinder automotive sales by postponing unessential purchases.

Due to a lack of parts from Ukraine-based suppliers, including Fujikura, Nexans and Leoni that produce essential wire harnesses for the German cars, the production of Audi A4 and A5 models at Audi’s home plant in Ingolstadt, Germany, is suspended from March 7-11. In Neckarsulm, production of A6 and A7 models is paused from March 7-18. Audi has also imposed an order freeze for its hybrid models because of production interruptions, with Porsche suspending Macan, Panamera output, while the BMW Group is halting production at plants in Munich and in Dingolfing, both Germany, next week, as well as output at the group’s Mini factory in Oxford, England. Mercedes-Benz expects to reduce production at some of its European plants as supplies of parts produced in Ukraine run short. Ukraine hosts more than 20 global automotive companies like Bosch, Fujikura, Eurocar, Prettl, Aptiv and more than 30 automotive plants. There are over 60,000 employees in the Ukrainian automotive industry. While most of the companies are located close to the western border with Hungary, Slovakia and Poland, still outside of the military operation zones, the conflict already disrupted supply.

In the longer term the crisis in Ukraine has the potential to worsen the chip crisis. A grim estimation of the Secretary of Commerce Gina M. Raimondo finds that “median inventory of chips has fallen from 40 days in 2019 to less than five days.” This means that if something disrupts a foreign semiconductor facility for even just a few weeks, it has the potential to shut down manufacturing facilities in the US and not only. The chips manufacturer Taiwan Semiconductor Manufacturing Company (TSM) that represents 50% of the global pure wafer foundry market declared that it will observe Russia sanctions. But Russia accounts for 42 percent of palladium, 70 percent of neon, 40 percent of nitrogen and 30 percent of xenon global exports which are critical ingredients of semiconductor production. If Moscow retaliates by stopping exports, the world’s semiconductor industry will be affected. Experts estimate that Taiwan had diversified its sourcing for these ingredients and had already stockpiled inventory. According to research company Techcet, the 2022 Electronic Gas market is expected to top US$7 billion, driven mainly by logic chip fab expansions. There are other sources for the raw materials than Russia and Ukraine. However, in a global market if one supplier is cut off, other suppliers get the opportunity to raise prices. Palladium prices exceeded 3000 USD per ounce already, the highest price ever. The cost of materials doesn’t automatically get passed on to consumers, but if the shortage is long and severe enough that automakers decide to or are forced to make fewer vehicles the prices for vehicles would go up.

Following the conflict and sanctions, several car makers like Renault, Toyota, Volkswagen, Mitsubishi paused production at car factories in Russia while Volvo, Daimler stopped producing trucks. The impact of these measures for the large automobiles manufacturers is so far limited despite losses in business and stock prices but for the Russian automotive industry they are very important. Days before the military conflict in Ukraine started, the Association of Russian Automakers was publishing the car sales in January when 85.002 units were sold. The top selling car was Lada – manufactured in Renault controlled factories AvtoVaz -, followed by KIA, Hyundai and Renault. In 2021, almost 1.5 million cars were sold in Russia out of which 2131 electric vehicles. 52.6% of the cars were SUVs followed by 34% cars from the B and B+ class. In the SUV department, the most sold was Dacia Duster with 40662 units, followed by Toyota RAV 4 – 37212 and Volkswagen Tiguan with 28504 units. The most sold electric car last year was Porsche Taycan followed by Tesla Model 3 and Audi e-Tron. As for trucks, 6294 were sold in 2021, an almost 29% increase year on year. The top was dominated by the Russian brands, Kamaz, GAZ and Ural followed by Volvo, Scania Mercedes, but the Western brands were only 44% of total sold trucks. In 2020 the automotive industry contributed nearly one percent to Russia’s GDP, while its share in all engineering industries amounted to nearly 40%. The sanction and production cuts will affect the 320,000 people employed directly in the industry and more than 3.5 million employees in connected industries like material manufacture, vehicle operation, maintenance and repair.

 *

Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.

 

About eToro Group

 

eToro is a multi-asset investment platform that empowers people to grow their knowledge and wealth as part of a global community of successful investors. eToro was founded in 2007 with the vision of opening up the global markets so that everyone can trade and invest in a simple and transparent way. Today, eToro is a global community of more than 27 million registered users who share their investment strategies; and anyone can follow the approaches of those who have been the most successful. Due to the simplicity of the platform users can easily buy, hold and sell assets, monitor their portfolio in real time, and transact whenever they want.

 

 

Related posts

Pact with the future

Bloody arithmetic

A different kind of national day