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How Russia’s invasion of Ukraine could reshape trade, starting with cars

How Russia's invasion of Ukraine could reshape trade, starting with cars

The silent car assembly lines in Germany, Britain and Austria are more than another example of the fragility of supply chains. The shutdowns may foreshadow a fundamental reorganization of the global economy that Russia’s invasion of Ukraine will accelerate.

The dispute has underscored the risks of doing business in authoritarian countries – not just Russia but also China – raising questions about the auto industry’s growing dependence 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 odds over trade. In Berlin, the dispute has bolstered members of the new coalition government who argue that Europe – especially Germany and its car industry – has become too 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 trade. The war will force all companies to consider 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 companies now face to manufacture closer to home and reduce the risk of unrest in one place. far away from throwing their operations into chaos.

“The longer-term implications of this war are that we will see a more rapid de-globalization and a more fundamental departure from the – primarily German – doctrine that economic interests often trump foreign policy or security interests. security,” Carsten Brzeski, an economist at Dutch bank ING, said in an email. “As a result, China may become less important as an export market for European automakers.”

China has become the largest and fastest growing auto market in the world and a crucial source of profit for most major automakers and suppliers, including U.S. companies like General Motors and Tesla. Volkswagen sells more than half of the cars it makes 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 battery manufacturer.

German automakers once saw Russia as a promising growth market, also a member of the vaunted BRIC countries, which also included Brazil, India and China. But more than three decades after the market was opened up at the end of the Cold War, Russia accounts for less than 2% of German automakers’ sales. (The other two BRIC countries – Brazil and India – have also failed to quite meet the high growth expectations of Western automakers.)

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

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

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 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 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 workforce 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.

“Usually Ukraine would have been seen as a relatively stable investment location,” a healthy democracy open to foreign investment, said Peter Wells, director of Cardiff University’s Automotive Industry Research Centre. Wales.

When fighting halted production at Ukrainian auto suppliers, the effect was almost immediate. No car can run without wiring systems, which are often tailored 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.

Days after Russian troops passed through Ukraine, BMW closed several factories in Germany, Austria and Britain due to parts shortages. Volkswagen has suspended production at several sites, 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, has idled a plant in Leipzig that makes Cayenne sport utility vehicles. Mercedes-Benz said it had adjusted shifts at some locations, but all of its factories were operating.

The war and the sanctions could soon reduce the supply of Russian raw materials that car manufacturers need, the German Association of the Automotive Industry warned. These include palladium, used for car emission control 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 Railway, which German automakers use to supply factories in China.

Eventually, automakers will find ways to cope. They have a lot of recent practice dealing with logistical chaos because of the pandemic. Switching to alternative sources of wiring systems in other countries that produce them, such as Tunisia, will take two to four weeks, said Joachim Damasky, managing director of the German automotive industry association and an expert in production.

The biggest worry for many European companies, and not just automakers, is whether the war in Ukraine will have a crippling effect on international trade. If so, the consequences for Europe could be serious. Cross-border trade in goods and services accounts for 86% of the European Union’s gross domestic product, compared to just 23% of the US economy, according to World Bank figures.

Much depends on what China does, said Guntram Wolff, director of Bruegel, a research organization in Brussels. China should buy more Russian oil and coal if NATO members impose an embargo. Russian oil sales have already slowed sharply as many refiners, shippers and other companies flee the country. Chinese automakers are likely to move into the void left in the Russian auto market by the Germans.

But Mr. Wolff wondered how far China will want to follow Mr. Putin in a protracted confrontation with the United States and Europe. China is “very closely tied economically to the West”, he said. “I don’t know how far China can really go by giving blind support to Russia.”

For German automakers, and for some American companies like GM and Tesla which have also invested heavily in China, the question is almost existential. So far, none show the slightest sign of China’s withdrawal. They still hope that market forces, not geopolitics, will determine their fate. “Ultimately,” said Mr. Damasky of the German Automobile Association, “customers will decide.”