Posted at 11:45 a.m.
The dispute has highlighted the risks of doing business in authoritarian countries – not just Russia, but also China – raising questions about the auto industry’s growing reliance on the Chinese market.
China’s support for Russia has further complicated Beijing’s relationship with the United States and Europe, already at loggerheads over trade. In Berlin, the dispute has bolstered members of the new coalition government who say Europe, especially Germany and its car industry, has become too dependent on trade with China.
Produce locally
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 trade. Analysts say the war will force all companies to consider their exposure to an increasingly hostile political climate. After trade wars and the pandemic have exposed the great vulnerability of global supply chains, the conflict will heighten the pressure companies face to produce closer to home and reduce the risk of unrest in a remote area from throwing their activities into chaos.
The longer-term implications of this war are that we will see a more rapid de-globalisation and a more fundamental abandonment of the – especially German – doctrine that economic interests often come before foreign or security policy interests.
Carsten Brzeski, economist at Dutch bank ING
“As a result, China may become less important as an export market for European automakers. “, he adds in an email.
PHOTO MARTIN CHAMBERLAND, THE PRESS
China is becoming one of the most crucial markets for car manufacturers.
China has become the world’s largest and fastest-growing auto market, as well as a crucial source of profits for most major automakers and suppliers, including U.S. companies like General Motors and Tesla. Volkswagen sells more than half of the cars it builds in China, and the country accounts for about a third of BMW and Mercedes-Benz sales. China has also become a crucial source of refined lithium needed for electric car batteries, as well as a major manufacturer of these batteries.
German automakers once saw Russia as a promising growth market, too, a member of the revered BRIC countries, which also include Brazil, India and China. But more than three decades after the opening of the market by the end of the cold war, Russia represents less than 2% of the sales of German automakers. (The other two BRIC countries, Brazil and India, have also never lived up to the growth hopes of Western automakers.)
German automakers all but abandoned Russia days after President Vladimir Putin sent his tanks to Ukraine. They had little to lose in a market heading into a deep recession that will surely impact new car sales in the country for months, if not years.
Volkswagen halted production at its two plants in Russia and suspended exports of all vehicles to the country indefinitely, citing a “significant disruption in business activities”. Mercedes-Benz and BMW took similar action, announcing the halting of their production in Russia – which was already limited – and their exports to the country.
The largest foreign automaker in Russia is the Renault-Nissan-Mitsubishi alliance, which sold more than half a million vehicles there last year as part of a joint venture with Russian automaker AvtoVAZ. Renault, whose shares fell 17% last week, did not respond to a request for comment on its plans for Russia.
Ukraine, an essential link
The most immediate problem facing European automakers is how to get production back to normal after the Russian invasion cut off the supply of wiring systems made in western Ukraine. Supply chains were already strained by shortages of semiconductors and other parts.
Ukraine had become a prime location for the manufacture of these systems, which connect electronic components such as taillights or in-car entertainment systems. Assembly is largely done by hand, requiring a large number of skilled workers. Ukraine was attractive because labor is relatively cheap and the labor force is well educated. Ukraine is also close to European car factories. Western Ukraine, where automotive suppliers like Leoni are located, is a 12-hour drive from BMW plants in Bavaria.
A disturbing lesson of the war is that countries that seemed safe a few years ago may no longer be.
“Normally, Ukraine would have been considered a relatively stable investment location,” a healthy democracy open to foreign investment, Peter Wells, director of Cardiff University’s Automotive Industry Research Centre, told Reuters. Wales.
When fighting halted production at Ukrainian auto suppliers, the effect was almost immediate. No car can run without wiring systems, which are often custom designed for specific vehicles.
Wiring harnesses are among the first components installed in a new vehicle, and their absence cripples assembly lines.
A few days after Russian troops entered Ukraine, BMW closed several factories in Germany, Austria and Britain due to parts shortages. Volkswagen has suspended production at several facilities, including at its main German plant in Wolfsburg and at a plant in Zwickau that produces electric vehicles, including ID.4 SUVs, which are exported to the United States. Porsche, a unit of Volkswagen, has idled a plant in Leipzig that builds Cayenne sport utility vehicles. Mercedes-Benz said it had adjusted shifts at some sites, but all of its factories were operating.
War and sanctions could soon reduce Russia’s supply of raw materials needed by automakers, the German Automotive Industry Association has warned. These include palladium, used for car emissions equipment, and nickel, essential for electric car batteries. Ukraine is a major source of neon, a gas used for high-performance lasers which, in turn, are needed to produce rare semiconductors.
The fighting has also disrupted air freight, as well as rail traffic on the Trans-Siberian, which German automakers use to supply their factories in China.