WASHINGTON — The Russian invasion of Ukraine is wreaking havoc on the global automotive industry as parts suppliers shut down and fuel prices soar, snarling supply chains that the pandemic has already strained.
Automobile manufacturers had struggled since the early days of the COVID-19 outbreak when factories closed their doors to protect workers and, more recently, as deadly variants of the virus shuttered plants overseas where crucial semiconductors get produced.
As a result, automotive workers have faced lengthy layoffs. Car prices have skyrocketed as far fewer new vehicles have rolled off assembly lines, limiting supply and leaving dealerships with little inventory.
Now, as the Russian attack wears on, parts typically produced in Ukraine are in shorter supply, and critical materials for other components, including semiconductors, could become scarcer, too, experts warn. And with energy-rich Russia facing sanctions and bans from Western countries, fuel costs have also sharply risen, adding to vehicle production costs and turning more consumers toward electric cars.
Both U.S. and overseas car companies, including Ford, Renault, and Toyota, have shut down their operations in Russia in response to the country’s military assault on neighboring Ukraine. “As part of the global community, Ford is deeply concerned about the invasion of Ukraine and the resultant threats to peace and stability,” Ford said, according to the Detroit News. “The situation has compelled us to reassess our operations in Russia.” Several companies, such as General Motors, have also halted car exports to Russia.
The assault is the latest in a series of significant events in recent years that have disrupted major industries and supply chains across the globe and contributed to record-high inflation levels in the United States, causing shortages and leaving consumers to pay more than ever for goods and services.
The most recent data from the Commerce Department show that the public spent $649.8 billion on retail and food services in January — the highest since the department started calculating the figures in 1992. Sales at vehicle and parts dealers contributed to that, surging 5.7% in January and more than 11% over the last year. The price of new vehicles is up more than 12% annually, according to the Labor Department, while the cost of used cars and trucks has skyrocketed by 40.5%.
The Russian invasion, which President Vladimir Putin initiated on Feb. 24, shows no sign of stopping anytime soon, with top U.S. intelligence officials this week painting Putin as “angry and frustrated” as the Ukrainian people mount fierce resistance against a much larger invading force. CIA Director William Burns said the Russian leader is “likely to double down,” leading to “an ugly next few weeks.”
Though the military conflict has yet to cause significant headaches in the North American auto industry, it risks doing so as the battle wears on and has already contributed to record-high fuel prices. But the war has already begun to affect the European automotive industry outside Russia, which relies more heavily on parts and materials from Ukraine and Russia, said Ravi Anupindi, an expert in supply chain management at the University of Michigan’s Ross School of Business.
In written comments to the Washington Examiner, Anupindi, a professor of technology and operations, said: “Auto production in Europe will reduce, potentially affecting exports to [the] U.S. Also imports of auto parts from Europe (e.g., Germany is the largest auto parts exporting nation) could be affected.”
BMW and Volkswagen recently announced factory shutdowns in Germany in response to parts shortages — particularly, car cables and wire harnesses produced in Ukraine.
“It is difficult to provide a reliable outlook due to the highly dynamic situation. But one thing is clear: There will be further disruption of vehicle production in Germany,” said VDA, a German carmaker group, according to Reuters.
Shortages of vital chemical elements typically sourced from Ukraine and Russia could also stall production, VDA reportedly said, pointing to neon gas, which is used to make semiconductors, as well as nickel, which is used in car batteries and other components.
Kevin Mak, a principal analyst of the electronic auto parts market at Strategy Analytics in the United Kingdom, said nickel prices “will increase, given that the largest producer of high-grade nickel, Norilsk of Russia, would face trade sanctions.”
“Nickel is used in battery cathodes, as well as coatings or alloys for rustproofing parts, such as axles, car bodies, driveshafts, exhausts, gears, and wheels,” Mak wrote in a recent blog post on how the war will affect the automotive industry. “However, alternative metals and battery chemistries are also being used or sought after.”
Mak said another raw material, platinum, which is used to manufacture catalytic converters in cars, could see its prices rise as well, “given that Russia is the second-largest producer of the metal.”
As for neon, Mak said the gas “is used in laser etching for semiconductors” and that prices could swell “as production at Ukrainian company Cryoin is disrupted.” But Mak said another company in the Netherlands, Cyner, “is an alternative source for neon.”
Anupindi, the University of Michigan expert, also pointed to other sources of neon, saying the “semiconductor industry has built up inventory to ride this for some time,” delaying the impact of closures in Eastern Europe — at least in the short term.
This year, Congress has also sought to boost semiconductor manufacturing in the U.S. with billions in funding and incentives. Still, the legislation has yet to reach the president’s desk because of unreconciled differences between the House and Senate versions of the bill.
A spokesperson for Michigan Sen. Gary Peters, a Democrat who helped secure the semiconductor provisions in the legislation, said in an email that the “pandemic demonstrated that our supply chains are not resilient and over-reliant on foreign production.” Peters, whose state is a major force in North American automotive manufacturing, “will continue working to pass a final competitiveness bill that includes his provisions for mature semiconductor technologies,” the spokesperson said.
Experts such as Mak and Anupindi also warned that higher fuel prices caused in part by new bans on Russia’s vast energy sector risk indirectly affecting the industry by making vehicle production more costly at a time when consumers are already paying sky-high prices for new cars. “To the extent that higher energy prices raises costs overall, cost of production may go up,” Anupindi said. “If [the] conflict continues, the impacts due to higher energy prices will sustain.”
As the war stretches on, experts say the risks to the auto industry will rise, as will costs for car buyers and car drivers, in North America.
“There’s no question. It’s going to ripple. It’s just going to be really dependent on obviously how long this goes on,” Jeff Schuster, a Detroit-based automotive expert, told CNBC. “The sanctions and trade impact play a big role in that.”
“This does have global implications in terms of adding to inflationary pressure, pricing pressure, and ultimately dealing another blow to the consumer,” Schuster said.
With new punitive measures against the massive Russian energy sector, fuel prices have spiked worldwide — including in the U.S., where the price of gas hit a record-high average of $4.17 per gallon on March 8. Experts say this could lead to a more remarkable shift in the automotive market toward greener options.
“Energy prices, in general, will increase, making the drive for more fuel economy or for electrified vehicles even greater,” Mak wrote.
President Joe Biden acknowledged that by banning imports of Russian energy products, already high gas prices in the U.S. were likely to jump, but he said the U.S. “will not be part of subsidizing Putin’s war.” Biden also said he would do “everything [he] can to minimize Putin’s price hike here at home.”
The Federal Reserve is expected to raise interest rates this month for the first time since 2018 to curb inflation more broadly. Anupindi said high gas prices “may nudge people away from gas-power vehicles,” but he added that electric vehicles are more expensive and “higher interest rates may dampen demand overall.”
