War in Russia could drive up auto prices and shortages even further

DETROIT

BMW has halted production at two German plants. Mercedes is slowing down work at its assembly plants. Volkswagen, warning of production stoppages, is looking for alternative sources for parts.

For more than a year, the global auto industry has grappled with a disastrous shortage of computer chips and other vital parts that has cut production, slowed deliveries and driven up prices for new and used cars outside reach of millions of consumers.

Now a new factor – Russia’s war against Ukraine – has created another obstacle. Critically important electrical wiring, made in Ukraine, is suddenly out of reach. With strong buyer demand, scarcity of materials and war causing further disruption, vehicle prices are expected to rise further over the next year.

The damage of the war to the automotive industry first appeared in Europe. But U.S. production will likely also end up suffering if Russian exports of metals — from palladium for catalytic converters to nickel for batteries for electric vehicles — are halted.

“You only have to miss a part and you can’t make a car,” said Mark Wakefield, co-head of the global automotive unit at consultancy Alix Partners. “Any bump in the road becomes either a production disruption or a largely unforeseen cost increase.”

Supply issues have plagued automakers since the pandemic hit two years ago, sometimes closing factories and causing vehicle shortages. The robust post-recession recovery has caused demand for autos to far outstrip supply – a mismatch that has sent new and used vehicle prices skyrocketing well above high headline inflation. .

In the United States, the average price of a new vehicle has risen 13% over the past year, to $45,596, according to Edmunds.com. Average used prices rose much more: they rose 29% to $29,646 in February.

Before the war, S&P Global Mobility predicted that global automakers would build 84 million vehicles this year and 91 million next year. (By comparison, they built 94 million in 2018.) Now it projects less than 82 million in 2022 and 88 million next year.

Mark Fulthorpe, executive director of S&P, is among analysts who believe the availability of new vehicles in North America and Europe will remain extremely tight – and prices high – through 2023. To compound the problem, buyers who are overpriced new-vehicle market will intensify the demand for used cars and also keep these prices high, which will be prohibitively expensive for many households.

Eventually, high economy-wide inflation—for food, gas, rent, and other necessities—will likely leave many ordinary buyers unable to afford a new vehicle or occasion. Demand would then decrease. And therefore, possibly, the prices.

“Until inflationary pressures start to really erode the capabilities of consumers and businesses,” Fulthorpe said, “it’s likely to mean those who fancy buying a new vehicle will be willing to pay top dollar.”

One of the factors behind the lower production outlook is the closure of car factories in Russia. Last week, French automaker Renault, one of the last automakers to continue building in Russia, announced it would suspend production in Moscow.

The transformation of Ukraine into a besieged war zone has also hurt. Wells Fargo estimates that 10-15% of the crucial wiring harnesses that power vehicle production in the vast European Union were made in Ukraine. Over the past decade, automakers and parts companies have invested in Ukrainian factories to contain costs and be closer to European factories.

The wiring shortage has slowed factories in Germany, Poland, the Czech Republic and elsewhere, leading S&P to cut its global auto production forecast by 2.6 million vehicles for this year and next. The shortages could reduce exports of German vehicles to the United States and elsewhere.

Wiring harnesses are wire harnesses and connectors unique to each model; they cannot be easily transferred to another parts manufacturer. Despite the war, harness makers like Aptiv and Leoni have managed to sporadically reopen factories in western Ukraine. Still, Joseph Massaro, Aptiv’s CFO, acknowledged that Ukraine “isn’t open to any type of normal business activity.”

Dublin-based Aptiv is trying to move production to Poland, Romania, Serbia and possibly Morocco. But the process will take up to six weeks, leaving some automakers short of parts during that time.

“In the long term,” Massaro told analysts, “we will have to assess if and when it makes sense to return to Ukraine.”

BMW is trying to coordinate with its Ukrainian suppliers and casting a wider net for parts. Just like Mercedes and Volkswagen.

Yet finding alternative supplies can be nearly impossible. Most parts factories are running near full capacity, so a new workspace would have to be built. Companies would need months to hire more people and add shifts.

“The training process for upgrading a new workforce – it’s not an overnight thing,” Fulthorpe said.

Fulthorpe said it expects a further tightening in the supply of materials from Ukraine and Russia. Ukraine is the world’s largest exporter of neon, a gas used in lasers that etch circuits onto computer chips. Most chipmakers have a six-month supply; later in the year, they might run out. This would aggravate the shortage of chips, which before the war was delaying production even more than automakers anticipated.

Similarly, Russia is a key supplier of raw materials such as platinum and palladium, used in emission catalytic converters. Russia also produces 10% of the world’s nickel, an essential ingredient in electric vehicle batteries.

Mineral supplies from Russia have not yet been interrupted. Recycling could help alleviate the shortage. Other countries can increase their production. And some manufacturers have stocked the metals.

But Russia is also a major producer of aluminum and a source of pig iron, used to make steel. According to Alix Partners, nearly 70% of US pig iron imports come from Russia and Ukraine. Steelmakers will therefore have to switch to Brazilian production or use alternative materials. Meanwhile, steel prices have soared from $900 a ton a few weeks ago to $1,500 today.

So far, negotiations for a ceasefire in Ukraine have come to nothing and fighting has raged. A new virus outbreak in China could also reduce parts supply. Industry analysts say they have no clear idea when parts, raw materials and auto production will flow normally.

Even if an agreement is negotiated to suspend the fighting, the sanctions against Russian exports will remain intact until a final agreement is reached. Even then, supplies would not begin to flow normally. Fulthorpe said there would be “further hangovers due to disruptions to widespread supply chains”.

Wakefield also noted that due to the intense pent-up demand for vehicles across the world, even if automakers restore full production, it will take a long time to build enough vehicles.

When could the world produce enough cars and trucks to meet demand and keep prices low?

Wakefield does not pretend to know.

“We are in a rising price environment, a constrained (production) environment,” he said. “It’s a strange thing for the auto industry.”

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Chan reported from London.