What the impact of Russia's war in Ukraine means for car companies

Car companies are losing production because of Russia’s invasion of Ukraine but are beginning to find new sources for the crucial wiring harnesses that the country specialises in. Vehicle production could be down as much as 15% in Europe in the first half of this year because of the war, bank Wells Fargo has estimated, further depressing output during the wider semiconductor shortage. BMW has said that production at its factories, including the Mini plant in Oxford, will return to normal this week after shutdowns caused by parts shortages, but the company also said in a statement that it expects continued supply restrictions linked to the war. Other car makers forced to slow production because of war-related shortages include Audi, Mercedes-Benz, Porsche, Skoda and Volkswagen. For Autocar Business webinars and podcasts, visit Autocar Business Insight Nissan said its production in the UK hasn’t been affected so far, while Jaguar Land Rover didn’t respond to our question. Ukraine has 17 factories that make wire harnesses, according to Wells Fargo, with key German supplier Leoni locating two big sites there. Harnesses are an assembly of electrical cables that act as the car’s central nervous system. While they themselves are not that high-tech, they are difficult to re-source and cannot be added into a car after production. Other key supplies for car makers coming from Ukraine include neon gas, needed to make chips, as well as the precious metal palladium, used in catalytic convertors. The country is also a key source of nickel ore, which is refined into cathode materials to make batteries for electric vehicles. In addition, the war is having an impact on UK exports. Key makers in the UK, including Jaguar Land Rover and Aston Martin, have stopped car shipments to Russia after issues with logistics and payment systems and the collapsing value of the Russian rouble made exports almost impossible. Aston Martin, for example, said the reason for its pause was the “operational impact” of the sanctions. Other firms such as Honda, Volkswagen and Volvo are also affected. Cars were the UK’s biggest export to Russia last year, figures from the Office for National Statistics show, meaning significant revenue is being lost from a market that had contributed healthy luxury sales. Meanwhile, British car retailing group Inchcape has said it is transferring ownership of its Russian dealers to a local operator, taking a £750 million hit in the process. Inchcape makes around 5% of its profit in Russia, selling cars for 11 brands including BMW, Jaguar, Land Rover, Mini and Rolls-Royce. The firm said its business in Russia was “no longer tenable” after international sanctions were imposed on the country. Its network of independently owned dealers are currently still operating but have had to push up prices on remaining stock by 30% to account for the fall in the rouble’s value. Russia was once hailed as Europe’s most promising car market, with sales expected to overtake Germany for the region's number-one spot. However, after hitting a record 2.8 million sales in 2008, the market has settled well below that. Last year, Russia bought 1.67 million cars, according to AEB figures, putting it just ahead of France at 1.66m and the UK at 1.65m. The biggest demand is for budget saloons and hatchbacks, but there’s also a strong market in premium vehicles. This helped push cars to become the UK’s biggest export to Russia last year, worth nearly £400m, according to figures from the Government’s Office for National Statistics (ONS). JLR sold 6909 cars in Russia last year, putting it just ahead of Porsche. The effect of the sanctions is likely to promote Chinese cars within Russia, which have steadily gained ground from sales of around 25,000 in 2011 to more than 100,000 last year. In January, two Chinese brands – Chery and Great Wall Motors-owned Haval – made the top 10 for the first time ever. Factories within Russia are also affected. Several manufacturers that build vehicles in the country have announced they are pausing production, with Volkswagen Group becoming the biggest yet so far to do so. It will halt production at its Kaluga facility as well as at contract manufacturing operations run by Gaz in Nizhny Novgorod, citing “the backdrop of the Russian attack”. It said that it was giving employees “short-time working benefits” while production was stopped. Others pausing production include BMW, Ford (which has a joint venture with Sollers making vans) and Mercedes-Benz. One of the worst-affected companies is the Renault Group, which has a majority stake in Avtovaz, owner of Lada and Russia’s biggest car maker. The French company relies on Russia for about 10% of its revenue, including 6.2% from Avtovaz. Since the invasion began, Avtovaz has paused and restarted production of Ladas and Renaults at its vast Togliatti plant in Russia but blamed a shortage of chips rather than the war or sanctions. Russian president Vladimir Putin has warned that Russia could nationalise assets of companies that halt operations in Russia.