The confrontation between Russia and the United States could drive up auto prices and shortages even further
BMW has put a halt to production at two of its German plants. Mercedes-Benz is slowing down production at its plants. Volkswagen is exploring other parts sources after announcing production halts.
It’s been more than a year since the global auto industry has been hit hard by a shortage of computer chips and other critical parts. This has cut production, slowed deliveries, and pushed new and used car prices out of reach for millions of people, who can’t afford them.
A new issue, Russia’s conflict with Ukraine, has now thrown up yet another stumbling block. Electrical wire made in Ukraine that is critical to the country’s survival is suddenly out of reach. Vehicle prices are projected to rise much further into next year, with buyer demand high, supplies tight, and the war producing further interruptions.
The impact of the war on the automobile industry has been felt initially in Europe. However, if Russian metal exports, ranging from palladium for catalytic converters to nickel for electric vehicle batteries, are halted, U.S. production will inevitably suffer.
To not be able to produce a car, you just need to miss one item, said Mark Wakefield, co-leader of Alix Partners’ global automotive unit. “Any bump on the path becomes either a production halt or an unanticipated cost rise.”
Since the epidemic broke out two years ago, automakers have been plagued by supply issues, which have resulted in factory closures and vehicle shortages. Following the recession, demand for cars far outstripped supply, which caused prices for new and used cars to rise much faster than the general rate of inflation.
According to Edmunds.com, the average price of a new automobile in the United States has risen 13% in the last year to $45,596. The average used price has risen even more, rising 29 percent to $29,646 in February.
Before the war, S& P Global anticipated that global automakers would produce 84 million vehicles this year and 91 million the following year. (By comparison, they built 94 million in 2018.)It now expects fewer than 82 million in 2022 and 88 million the following year.
S&P executive director Mark Fulthorpe is among the analysts who believe that new vehicle availability in North America and Europe will remain severely limited-and costs high-well beyond 2023. Buyers priced out of the new-vehicle market will increase demand for used cars, keeping prices high and prohibitively so for many families.
High inflation in other areas of the economy, such as food, gasoline, rent, and other essentials, will eventually render a large number of ordinary purchasers unable to purchase a new or used vehicle. Then there would be a drop in demand. Prices would eventually follow suit.
“It’s probably going to mean that people who have the inclination to acquire a new vehicle will be prepared to pay top dollar,” Fulthorpe said, “until inflationary pressures start to truly damage consumer and company capabilities.”
The closure of auto manufacturers in Russia is one factor contributing to the bleak outlook for manufacturing. Renault, one of the few automakers to continue manufacturing in Russia, said last week that it would stop doing so in Moscow.
The transformation of Ukraine into a besieged combat zone has harmed the country as well. According to Wells Fargo, Ukraine manufactures 10% to 15% of the critical wiring harnesses used in vehicle production across the European Union. Many car and component manufacturers have set up shop in Ukraine over the last decade to save money and be closer to European plants.
The wiring scarcity has slowed plants in Germany, Poland, the Czech Republic, and elsewhere, prompting S & P to cut its global auto production forecast for this year and next by 2.6 million vehicles. The shortages may affect German auto exports to the United States and other countries.
Wiring harnesses are bundles of wires and connectors that are model specific and cannot be purchased from another manufacturer.Despite the war, harness manufacturers such as Aptiv and Leoni have been able to reopen plants in Western Ukraine on a periodic basis.
If this is the case, Aptiv’s chief financial officer Joseph Massaro told a news conference that Ukraine isn’t open for “any kind of normal business.”
Aptiv, a Dublin-based company, is attempting to move production to Poland, Romania, Serbia, and even Morocco. However, because the procedure can take up to six weeks, some automakers may run out of parts during that time.
In the long run, “we’ll have to analyze if and when it makes sense to go back to Ukraine,” Massaro told analysts.
BMW is working with its Ukrainian suppliers to collaborate and cast a wider net for parts. Mercedes and Volkswagen are as well.
However, alternative supplies may be difficult to come by. Most component plants are nearly full, necessitating the construction of additional work space. Companies would have to hire more people and add work shifts over a period of months.
“Bringing a new workforce up to speed isn’t something that happens overnight,” Fulthorpe said.
According to Fulthorpe, the supply of resources from Ukraine and Russia will continue to tighten. Ukraine is the greatest exporter of neon, a gas used in lasers that etch circuits onto computer chips. Most chipmakers have a six-month supply, but they may run out later in the year. This would make the chip shortage even worse, which had already been slowing down manufacturing more than manufacturers had thought before the war.
Russia is also a major exporter of raw materials like platinum and palladium, which are used in pollution-controlling catalytic converters. Russia also produces 10% of the world’s nickel, which is used in electric vehicle batteries.
Russia’s mineral supplies have not yet been cut off. Recycling may be able to help alleviate the shortfall. Other countries may also boost their output. Metals are also being stockpiled by some firms.
However, Russia is a major producer of aluminum and a supplier of pig iron, which is used to make steel. According to Alix Partners, about 70% of U.S. pig iron imports come from Russia and Ukraine, forcing steelmakers to either move to Brazilian production or use alternate materials. Meanwhile, steel costs have soared from $900 per ton just a few weeks ago to $1,500 today.
Negotiations for a cease-fire in Ukraine have so far failed, and the fighting has continued. A fresh viral outbreak in China might also disrupt supplies. Analysts say they don’t know when parts, raw materials, and auto manufacturing will resume normal operations.
Even if a cease-fire agreement is reached, sanctions against Russian exports will stay in place until a definitive resolution is reached. Even then, supplies would not resume their normal flow. According to Fulthorpe, “further hangovers” are expected, due to disruptions in “widespread supply systems.”
Wakefield further stated that even if automakers resume full production, the process of producing enough vehicles will be lengthy due to high pent-up demand around the world.
When will the world be able to create enough automobiles and trucks to meet demand while keeping prices low?
Wakefield does not claim to be an expert.
He explained that “we’re in a rising-price environment with (production) constraints.” “That’s an unusual occurrence in the auto industry.”