In this modern world, the principles of interconnection are best observed in our economy. There is no significant change in the world that is not affecting the economy and vice versa. We directly experienced this concept during the COVID-19 period, these past two years. But just as the world started to recover, another crisis erupted. This time it was Russian aggression on Ukraine, which began in late February of 2022. Although Russian officials call it a “special military operation”, it has turned into an all-out war between two major European countries. The war has already displaced millions of people and caused billions of dollars in damage. Seting aside the political debate, let us observe the profound impact of this conflict on one of the biggest industries in the world – the automotive industry and car trade.
Before we look at the direct consequences of this war, we will throw light on just how big the Russian and Ukrainian car markets are.
With over 1.6 million cars sold in 2021, Russia finds itself in 8th place on a global scale, just ahead of France. In comparison, Ukraine greatly trails that number, with just over 100,000 vehicles sold in 2021, but this is still very relevant on a European level. Furthermore, both countries are very important locations for car production since both Russia and the Ukraine host numerous assembly plants: not just for their own local brands, but for a lot of Western companies. As the bigger sales market with 160 million inhabitants, Russia has far more assembly locations than even Renault-Nissan, BMW, Mercedes, Ford, and Volkswagen, just to name a few. In Ukraine, the car production is limited to a few local truck brands, a smaller Chinese brand, and Skoda models for the local market.
Interestingly, both countries are very important suppliers of automotive parts and materials. Russia exports steel, aluminum, copper, and oil, while Ukraine has numerous factories that produce car industry components, parts, wiring harnesses, car interiors, and so on. So, when two such countries collide, many industries suffer, including the global car industry.
Almost immediately after the first day of invasion, on the 24 February 2022, the effects were beginning to show. Nearly all European companies were affected by either a lack of raw materials or components. A few examples: Mere days after, BMW was forced to temporarily shut down its production in Germany due to a lack of wiring harnesses coming from Ukraine. Porsche’s EV production had been stopped due to the lack of battery components coming from Russia, and Audi’s March output had been dramatically reduced due to several shortages in components.
But the effects weren’t just limited to Europe. Ukraine is the world’s largest producer of neon, which is a key element in the production of semiconductor chips. About 70% of the global neon supply is produced in Ukraine as a by-product of the steel production in Russia. As we all know, the chip shortage that has plagued the industry for over two years still isn’t over, and now it has taken an additional hit with the Russo-Ukrainian War. Even though not all Ukrainian factories are located in the war zone, and some are still functioning in the west of the country, exporting has been severely limited to land transports since the Russian Navy controls the Black Sea and therefore blocks maritime transport.
As a first reaction, the Western governments were united in declaring harsh economic sanctions on Russia, including ceasing all trading agreements, withdrawing from the market, and stopping production.
The car industry complied, and in a matter of days, Russian plants were idle, car workers were sent home, and new car prices rose 40% on average. All of this forced Russian car sales to drop and resulted in overall losses to the manufacturers. All relevant car companies have temporarily ceased Russian operations, condemning the invasion. Even the companies that sell very few vehicles on Russian soil and don’t have local plants, like Ferrari, have joined the cause and stopped exporting vehicles to the Russian market.
On the other hand, Russia declared that it is considering expropriating, nationalizing all companies and their assets that are located on their territory, and stopping their operations. In this highly controversial move, which is forbidden by international trade law, the Russian state will be the sole owner of dozens of Western car factories and assembly plants. Mercedes Benz, which has a big truck assembly plant in Tatarstan, has estimated that this move will cost them 2.2 billion dollars in assets.
Even though the car companies took the biggest hit, we shouldn’t overlook the used car market since it is an essential aspect of the car trade.
In 2021, Ukraine imported over 600,000 used cars, not just from Europe but also from the United States. At the same time, almost 1 million second-hand vehicles were imported into Russia. Over 150,000 imported vehicles came from Japan, which also stopped exporting its cars to Russia due to sanctions. Lack of demand means lower prices for the used cars and thus smaller profits for the dealers.
After almost three months into this conflict, the situation has slightly improved, but is far from sustainable. Most European manufacturers have been looking for alternative solutions for parts and components coming from Ukraine and raw materials from Russia, to resume production. Some Ukrainian companies have resumed activity in parts of the country that are not in danger, but it is still far from their pre-war levels. And it seems that Russian operations will continue to be frozen for months to come. Along with the chip shortage that still troubles the car industry, companies have taken a big financial hit due to the lack of sales, factory downtime, and rising production expenses. Other companies even donated considerable sums to Ukraine relief funds, and Tesla will pay salaries to their Ukrainian workers who are called to defend the country.
Since the war is still raging, accurate predictions are hard to make. Amongst the experts, there is a general consensus that global vehicle output will be reduced by 2.6 million vehicles in 2022 as a result. However, it does not end there: the global car industry has already suffered losses which can be measured in billions, even without the threats of Russian expropriation.
The Russo-Ukrainian war has shown a great impact on many industries, including the car industry. Many countries have condemned the actions of Russia by ceasing all trading agreements, withdrawing from the market, and stopping production. Both countries also provide important components and raw materials for other countries, forcing many manufacturers to look for alternative solutions to maintain their production levels.