The least important thing about the Ukrainian invasion…

It is difficult to watch the news coverage of the Russian invasion of Ukraine and think about anything other than the human suffering.  You would have to be inhuman to do otherwise.  However, we all have a business life, and within that the impact of the conflict is likely to be significant.  We have been asked by a number of members over the last couple weeks what that might mean.  Will chip shortages look modest by comparison?

Before trying to address that question, it's worth stepping back for a moment to consider the lost opportunity from a Russian perspective.  I was employed by GAZ, the Russian commercial vehicle producer, fifteen years ago and the brief that I was given along with my boss, the late Martin Leach, was to build a CV business outside what was then described as the CIS (former Soviet Union).  The attitude at that time from the Russian political leadership appeared to be that they wanted the country to win on the global stage economically – to take advantage of their natural resources, high education and literacy levels, and compete on merit.  In my view they stood a good chance of succeeding, but then the situation changed, and previously free market approaches were replaced by a ‘Russia first’ policy, that over the years has taken on the militaristic tone that takes us to the situation in Ukraine today.  This is a disaster for the Ukrainian people, but also for the Russian people who have been deceived and let down.

Before the events of recent weeks, few people in Western Europe would have given a second thought to Ukraine, or even been able to position it on a map.  Now the country and the people fill our TV screens every night, and governments are dealing with the challenge of finding accommodation for the millions of refugees.  Even in the automotive industry, few people outside of the purchasing departments would have been able to assess the dependency we have on components and materials that are sourced in Ukraine or Russia.  A number of major component suppliers, including Leoni – a key wiring loom manufacturer – have operations in Ukraine, and factory closures there have resulted in VW Group having to suspend production of their electric models at the Zwickau plant, and warnings from Mercedes and Mini.  Leoni production is being transferred elsewhere so this disruption may be relatively temporary, but the long term issues will arise from the sanctions on Russia.

I am not aware of any component supplies that come from Russia, though supplies of Chinese components shipped by rail through Russia may need to be re-routed.  The challenges will relate to the energy supplies to western Europe, in particularly Germany, that may be affected and cannot easily be replaced, and the supplies of raw materials used directly by OEMs and their supply base.  We are highly dependent on Russia for palladium, and to a lesser extent for platinum and rhodium, all critical components for exhaust catalysts.  This is perhaps the greatest risk to vehicle production, although interruption of supplies of other raw materials such as aluminium, steel and nickel will also affect prices at least.

The most exposed OEM is probably Renault due to their 75% stake in Avtovaz.  This is particularly ironic, as they have led a remarkable turnaround of the business since first becoming involved in 2008.  Prior to that GAZ had been approached to potentially acquire the business, but even my Russian then-colleagues declared it as being too tough a job.  If Renault is forced into a fire sale or the Russian state nationalises the business at some artificially low valuation, it will be a sad end to one of the bright spots of Renault’s recent history.  Other OEMs have relatively low exposure to the Russian market through imports or a few local assembly plants, although Chinese brands will benefit from any disruption.  They grew their share rapidly to 9% in 2021 as western and other Asian brands have reduced their commitment to Russia, even prior to the invasion.

Considering the effect in European showrooms, it therefore seems likely that delivery delays will be experienced on a small number of models, specifically related to Ukrainian-sourced wiring looms.  The greater effect – in terms of volume impact, duration and price increases – will arise from the likely isolation of Russia.  I am old enough to remember when UK industry was forced onto a 3 day week by the miners’ strike in the 1970s, introduced to allow available power to be shared out across the country.  Moves of that magnitude would clearly have a much greater effect on availability than chip shortages, at least for those products sourced from countries which have a high dependency on Russian gas.

However, to put the whole situation back in context, significant economic damage to some OEMs, and their supplier and dealer partners, pales into insignificance when compared to lives being lost, people being displaced and property and infrastructure being destroyed in an unjustified invasion that has too many echoes of the 1930s.  We can only hope that we have a much faster and better resolution in the 2020s.