War in Ukraine Putting European Carmakers in a Tight Spot

Ola Kaellenius, chairman of Daimler AG attends the presentation of the new Mercedes-Benz S-Class at the Daimler production plant in Sindelfingen near Stuttgart, Germany, on Sept. 2, 2020. Ralph Orlowski/Reuters

Russia’s invasion of Ukraine has further disrupted global supply chains with automakers facing challenges like shortages of components and rising material costs, leading to an overall decline in availability of cars in international markets.

European carmakers Mercedes-Benz and Audi have announced plans to scale down production at their plants due to supply disruption of auto parts from Ukraine, especially wire harnesses.

Ukraine has been a popular place to manufacture wiring systems owing to its cheap labor, well-educated workforce, and proximity to European car factories. Wiring harnesses tend to be one of the first components installed in a vehicle. As such, their shortage means that vehicle production essentially grinds to a halt.

“Wire harnesses are the most critical near-term bottleneck, in our view, already causing significant production interruption amongst all German OEMs,” UBS analyst Patrick Hummel said in an investor note. “We think significant downtimes in the next few weeks are likely, but limited to European production because wire harnesses are typically sourced regionally.”

The supply of semiconductor chips, which were already constrained, could get even tighter because of the ongoing Russia-Ukraine conflict. Ukraine is one of the major suppliers of neon gas crucial for lasers used to manufacture chips.

Kyiv accounts for over 90 percent of U.S. semiconductor-grade neon supply. The neon gas mostly comes as a byproduct of Russia’s steel industry, which is then purified in Ukraine.

Russia accounts for around 35 percent of the global supply of palladium, a metal crucial for semiconductors. The prices of palladium hit record highs in Monday trading, reaching $3,440 an ounce. The metal is also used for making catalytic converters in cars.

Nickel, a metal used for producing stainless steel, crossed the $100,000-per-ton level for the first-time ever on March 8. Though Russia only accounts for five percent of overall nickel production worldwide, around 20 percent of the world’s high-grade nickel is sourced from the country.

Nickel is a critical metal for manufacturing car batteries in electric vehicles (EV). Any disruption has the potential to impact EV sales and climate emission targets. Batteries are one of the most expensive parts of an EV.

“That’s the main concern for the battery supply chain in that you’ve got record high lithium prices, and very, very high cobalt and nickel prices,” Caspar Rawles, chief data officer at specialist consultancy Benchmark Mineral Intelligence (BMI), told Reuters. “This is just adding to battery mineral woes.”

European car production for the year is predicted to be down by 700,000 due to the Russia-Ukraine conflict according to Jeff Schuster, President, Americas Operation and Global Vehicle Forecasting at LMC Automotive.

Vehicle production in Russia and Ukraine is expected to halve this year as per estimates by AutoForecast Solutions, declining to around 800,000 units.