top of page
  • Writer's pictureThe San Juan Daily Star

Car industry woes show how global conflicts will reshape trade

A Volkswagen plant in Zwickau, Germany, in January. Within days of the start of the Russian invasion of Ukraine, the company suspended production at multiple locations in Europe.

By Jack Ewing

The auto assembly lines going quiet in Germany, Britain and Austria are more than just another example of how fragile supply chains have become. The shutdowns may foreshadow a fundamental reordering of the global economy that Russia’s invasion of Ukraine will accelerate.

The conflict has underlined the risks of doing business in authoritarian countries — not just Russia, but also China — raising questions about the growing dependence of the automobile industry on the Chinese market.

China’s support for Russia has further strained relations between Beijing and the United States and Europe, which were already at loggerheads over trade. In Berlin, the conflict has strengthened members of the new coalition government who argue that Europe — especially Germany and its car industry — has become overly dependent on trade with China.

Automakers, with their global reach, complex supply chains and millions of employees, are a prime example of how the war in Ukraine could reshape international commerce. The war will force all companies to reckon with their exposure to an increasingly hostile political climate, analysts say. After trade wars and the pandemic exposed the acute vulnerability of global supply chains, the conflict will add to the pressure that corporations now face to manufacture closer to home and reduce the risk that turmoil in a faraway place will throw their operations into chaos.

“The longer-term implications of this war are that we will see a faster de-globalization and a more fundamental move away from the — above all German — doctrine that economic interests often stand above foreign or security policy interests,” Carsten Brzeski, an economist at the Dutch bank ING, said in an email. “As a consequence, China could become less important as an export market for European carmakers.”

China has become the world’s largest and fastest-growing car market and a crucial source of profit for most large automakers and suppliers, including U.S. companies like General Motors and Tesla. Volkswagen sells more than half the cars it makes in China, and the country accounts for about one-third of sales for BMW and Mercedes-Benz. China has also become a crucial source of refined lithium required for electric car batteries, as well as a major manufacturer of the batteries.

German carmakers once viewed Russia as a promising growth market, too, a member of the vaunted BRIC countries, which also included Brazil, India and China. But more than three decades after the end of the Cold War opened up the market, Russia accounts for less than 2% of German carmaker sales. (The other two BRIC countries — Brazil and India — also never quite lived up to the lofty growth expectations of Western automakers.)

German automakers all but abandoned Russia days after President Vladimir Putin sent his tanks into Ukraine. They had little to lose in a market that is headed toward a deep recession that will surely decimate new car sales in the country for months or years.

Volkswagen halted production at its two facilities in Russia and suspended exports of all vehicles to the country indefinitely, citing the “extensive interruption of business activities.” Mercedes-Benz and BMW took similar steps, announcing that they would halt manufacturing in Russia — which was already limited — and exports to the country.

The biggest foreign carmaker in Russia is the Renault-Nissan-Mitsubishi Alliance, which sold more than half a million vehicles there last year in a joint venture with Russian carmaker Avtovaz. Renault, whose shares fell 17% last week, did not respond to a request for comment Friday on its plans for Russia.

The most immediate problem facing European carmakers is how to return production to normal after the Russian invasion cut off supplies of wiring systems made in western Ukraine. Supply chains were already severely strained by shortages of semiconductors and other parts.

Ukraine had become a popular place to manufacture the systems, which connect electronic components like taillights or entertainment systems inside cars. The assembly is done largely by hand, requiring large numbers of skilled workers. Ukraine was attractive because labor is relatively cheap and the workforce well-educated. Ukraine is also close to European car factories. Western Ukraine, where automotive suppliers like Leoni have operations, is a 12-hour drive from the BMW factories in Bavaria.

One unsettling lesson from the war is that countries that seemed safe a few years ago may not be any more.

“Usually, Ukraine would have been considered a relatively stable investment location,” a healthy democracy open to foreign investment, said Peter Wells, director of the Center for Automotive Industry Research at Cardiff University in Wales.

When fighting halted production at Ukrainian auto suppliers, the effect was almost immediate. No car can operate without wiring systems, which are often tailor-made to specific vehicles. So-called wiring harnesses are among the first components to be installed in a new vehicle, and their absence brings assembly lines to a standstill.

Within days after Russian troops crossed into Ukraine, BMW shut several factories in Germany, Austria and Britain because of parts shortages. Volkswagen suspended production at multiple locations, including its main German plant in Wolfsburg and a factory in Zwickau that produces electric vehicles, including ID.4 SUVs, which are exported to the United States. Porsche, a unit of Volkswagen, idled a factory in Leipzig that makes Cayenne sport-utility vehicles. Mercedes-Benz said it had adjusted shifts at some locations but all its factories were running.

War and sanctions could soon crimp supplies of raw materials from Russia that carmakers need, the German Association of the Automotive Industry warned. Those include palladium, used for anti-pollution equipment in cars, and nickel, essential for electric car batteries. Ukraine is a major source of neon, a gas used for high-performance lasers that, in turn, are required for production of scarce semiconductors.

The fighting has also interfered with airfreight, as well as rail traffic on the Trans-Siberian Railway, which German carmakers use to supply factories in China.

35 views0 comments

Recent Posts

See All
bottom of page