Analysis
28 Feb 22

War’s impact on automotive will be limited in EU – but severe in Russia

With Russia’s invasion into Ukraine, European history has turned a page. What will this new chapter mean for the Automotive markets, both in Russia and the rest of Europe? 

As Yogi Berra once famously said, “it’s tough to make predictions, especially about the future.” Add the fluidity of an escalating military conflict, and the forecasting gets even tougher. 

Sunflower shortage

The outbreak of hostilities led to a surge in the price of oil, but other commodities were affected as well, creating surprising shortages and interruptions. 

It turns out, for example, that Russia and Ukraine together account for 80% of the world’s supply of sunflower oil. Ukraine also happens to be crucial for at least some parts necessary to produce Volkswagens in Germany, as the Wall Street Journal reports, temporarily halting production. 

In Japan, meanwhile, Toyota also temporarily suspended production due to a cyberattack on its plants – quite probably related to the Japanese government joining the West in sanctioning Russia. 

Possible scenarios

However, taking the one variable we do know – economic sanctions – automotive intelligence specialists Autovista drew up two possible scenarios. 

Sanctions banning companies to trade with or in Russia have become inevitable. They will hurt Russia economically, but also the countries who impose them, and the companies that must implement them. 

While there are already some impacts of the escalation being felt, such as an increase in the price of oil and energy, other issues will take more time to unfold. There are two possible scenarios, and each has a differing influence on the automotive market.

#1: Russia withdraws

Following peace talks, a radical change of strategy or significant military losses, Russia withdraws from most of Ukraine, retreating to the previously occupied areas of Crimea, Donetsk and Luhansk. 

  • If the conflict is thus de-escalated, there will be no lasting impact on Europe’s new-car markets – with the exception of Russia. Assuming Russia remains under sanctions for a while longer, volume destined for that country can be redirected to the rest of Europe, somewhat alleviating the ongoing supply shortage. 
  • Slightly different story for the used-car market. Demand is expected to decrease slightly, especially in Eastern Europe. However, that should not last long, as weakened exchange rates bolster current residual values. 

#2: Russia occupies

Russia’s superior numbers win the day, and Moscow occupies Ukraine, possibly using a puppet government as proxy. 

This is the outcome with the most severe economic consequences, as it will lead to harsher and longer-lasting sanctions. These will have a severe effect on Russia, almost none on the United States (as it is not dependent on Russian energy), and more on Eastern Europe than on the West. Europe will need to be fast to reorient its energy needs away from Russia.

  • Due to the ongoing supply shortage, new-car markets will be less affected, especially in Western Europe. 
  • Several used-car markets will see a drop in demand, especially in Eastern Europe. This will be overcompensated by inflation and exchange rate pressure, which will cause residual values to remain stable, or even increase. In Western Europe, the increases in RVs expected for 2022-23 may be slightly lower than forecast, especially for ICEs.

And so, Autovista concludes, the resilience acquired by supply chains during and due to the Covid-19 disruptions could turn out to be valuable in the Ukraine crisis, however long or severe it may turn out to be. As a result, disruptions on both the new- and used-car markets in Europe may turn out to be smaller than one might fear. However, let’s keep Yogi Berra’s caveat in mind...

Severe impact

Meanwhile, what about the automotive market in Russia itself? Experts predict that sanctions will have a severe impact on Russia’s automotive industry – both in terms of sales and production.

In 2021, 1.67 million new cars and LCVs were sold on the Russian market, a slight increase over 2020, but still well below the peak of 2015, already partially the result of sanctions following Russia’s annexation of Crimea in 2014.

Best-selling brands in Russia last year were Hyundai-Kia (380,000 imported units) and AvtoVAZ-Lada (351,000 units, produced locally). To be noted: since 2017, AvtoVAZ has been controlled by Renault, and has been developing synergies with Dacia. 

34 production plants

Russia is home to 34 automotive production plants, many of whom churn out foreign-brand vehicles and components. 

  • Volkswagen produces the Tiguan, the Polo and the Skoda Rapid, and assembles the Audi Q7 and Q8 in a factory in Kaluga, near Moscow. In 2021, it produced 118,000 vehicles and 150,000 engines. Since 2007, VW invested over €1 billion in Kaluga and a similar amount in another plant in Nizhny Novgorod, operated jointly with local OEM Gaz. 
  • Stellantis has the capacity to produce 125,000 vehicles per year in its Kaluga plant, where it rolls out LCVs such as the Peugeot Expert, Opel Vivaro and Citroën Jumpy. 
  • Mercedes invested €250 million in 2019 in a plant where it plans to produce the E-Class and vehicles from its large SUV range. 
  • BMW has been assembling engines in Kaliningrad since 1999 with local OEM Avtotor.
  • Ford had built a plant near St Petersburg in 2001, but chose to disengage from Russia in 2019, no longer even maintaining an official distribution network for its cars – only present on the LCV market via its partnership with local brand Sollers. 

Several plants have already suspended production due to sanctions-related supply chain issues. Foreign manufacturers will certainly disengage in accordance with the sanction conditions. Both the production and sale of vehicles in Russia are likely to nosedive, but since Russia was relatively unconnected to the rest of Europe – with limited export of new vehicles and limited import of used ones – this in itself is not likely to have a major impact on the automotive markets in the rest of Europe. 

Image: Ladas being assembled at the AvtoVAZ plant in Togliatti, Russia. (Credit: Shutterstock).
 

Authored by: Frank Jacobs