German car companies cut production in March, will the situation in Ukraine reshape the European automotive industry chain?

Following the covid-19 pandemic and the lack of "core" problems, the stalemate situation in Ukraine is becoming another key factor in disrupting the European automotive industry chain.

According to market research firm LMC Automotive, German automakers expect to cut production by about 150,000 vehicles in March. Among them, Germany's three major auto giants have been the most affected: Volkswagen has shut down 12 factories, BMW has shut down two factories in Germany, and Daimler is slowing down work at its assembly plants.

Cui Dongshu, secretary general of the Association, said in an interview with the first financial reporter that the situation in Ukraine is constantly fermenting, and European car manufacturers have been hit the most seriously, which has led to a shortage of parts made in Ukraine, forcing some factories in many parts of Europe to stop production, making car companies more concerned about "supply chain security" rather than "price" when managing the supply chain. At the same time, the situation in Ukraine may affect the global industrial chain pattern, and the automotive industry will also face a huge regional industrial chain reshaping phenomenon.

Why are German car companies cutting production?

European automakers say one part of the decline in production is the closure of factories in Russia. Since the fermentation of the situation in Ukraine, Mercedes-Benz, BMW and Daimler have successively withdrawn from the Russian market and stopped exporting cars to Russia. After being named and criticized by Ukrainian President Zelenskiy, Renault also had to shut down his factory in Russia.

According to the German Association of the Automotive Industry, German car companies and suppliers currently have about 49 production sites in Russia and Ukraine. BMW data shows that in 2021, the company produced a total of 12,000 cars at its Plant in Kaliningrad, Russia. Renault said 8 percent of its revenue comes from cars made in Russia.

European automakers also said the shutdown of parts factories was another way that the situation in Ukraine was disrupting its supply chain, and they now had difficulty getting parts from Ukrainian suppliers.

Ukrainian parts plants supply wiring harnesses mainly to automakers. A wiring harness is a suite of wires, connectors, and terminals that connect automotive components. They contain complex and manually constructed cable assemblies for laying automotive cables up to several miles in length. Without them, cars cannot be built.

Leoni, the world's largest manufacturer of cables and harnesses from Germany, has shut down its factory in Ukraine. In addition, the business of parts companies such as Forschner and Prettl has also been affected.

According to Wells Fargo, there are 17 factories with production chains in Ukraine, second only to Romania and Morocco. According to data from market research firm S&PGlobal Mobility, before the situation in Ukraine fermented, Ukrainian-made wire harnesses could be used for about 500,000 to 1 million cars. S&P data estimates that 45% of Ukrainian-made harnesses are exported to Germany and Poland.

Wells Fargo auto analyst Colin Langan said in a note that if the situation in Ukraine continues to ferment, the closure of the Ukrainian wire harness plant in the first two quarters of this year could lead to a 700,000 reduction in car production. While component makers such as Leoni plan to double wire harness production in some regions outside Ukraine, these adjustments could take at least two to three months.

In addition to the shortage of wire harness supplies, the situation in Ukraine threatens the supply and export of raw materials from Russia and Ukraine. Among them, minerals such as nickel, palladium and neon have a greater impact on automobile companies. Nickel is a key component of electric vehicle batteries; palladium is used to make catalysts used in automobiles to reduce harmful gas emissions; and neon gas is an indispensable inert gas in chip production.

According to the data of un Comtrade, the total export volume of palladium, nickel and copper between Russia and Ukraine accounts for 45%, 42% and 37% of the European market. According to data provided by market research firm Trend Force, Ukraine supplies nearly 70% of the world's high-purity neon gas. At present, the LME copper and nickel are quoted at 10,500 US dollars / ton and 33,500 US dollars / ton respectively.

In addition, poor shipping is also another factor affecting the production capacity of European auto companies. Oleg Solodukhov, a partner at the Ukrainian shipping consultancy The Charterers, said the situation in Ukraine had increased freight costs at Black Sea ports by $3 to $5 per tonne, including voyage charter insurance premiums of up to 50 cents per tonne.

Will the automotive industry chain be reshaped?

Supply chains are constantly disrupted, forcing European automakers to think about how to make changes. Volkswagen said it would rearrange its strategy for obtaining components and raw materials and shorten its supply chain. At the same time, the company is also maintaining close contact with first- and second-tier suppliers.

"The chip crisis has made us aware that we have to be involved in the entire supply chain, and the current situation has made us aware of the urgency of this issue." Murat Aksel, Head of Purchasing at Volkswagen, said: "We will prioritize how to guarantee uninterrupted delivery of parts rather than competitive pricing. In addition, we can also accept dual procurement of certain parts, which may change the practice of the automotive industry for many years – that is, single procurement of parts and immediate procurement. ”

Not only in the traditional automotive sector, but also in the field of electric vehicle manufacturers are stepping up to ensure the safety of local supply chains. At present, more and more car manufacturers are building gigafactories in Europe to produce batteries. Northvolt and Volvo, Europe's largest lithium battery companies, recently announced that they will invest in a new gigafactory in Gothenburg. At the same time, Northvolt has also signed orders with BMW and Volkswagen, and Volkswagen intends to build a gigafactory in Germany with Northvolt.

Cui Dongshu believes that the continuous disruption of the supply chain of European auto companies will put supply chain security issues above price factors. To a certain extent, this will have the potential to reshape the supply chain and trade structure of automobile companies, which may increase the production cost of automobiles, and will also make the automobile industry chain shorter and more concentrated.

From the perspective of labor costs, data from the German Minimum Wage Commission shows that in 2022, the statutory minimum wage in Germany will rise to 10.45 euros / hour. In September 2020, The Parliament of Ukraine raised the country's minimum wage to 28.31 hryvnia (about 0.87 euros) per hour.

Axel also admits: "We still want competitive prices, but my priority is to ensure supply." We can't make cars without components, and zero production means zero revenue. ”

Joachim Damasky, managing director and production expert of the German Association of The Automotive Industry, said that if the situation in Ukraine continues to stalemate, it will not only reshape the industrial chain of European auto companies, but also hit intra-European trade, which will cause a negative blow to Europe. According to the World Bank, cross-border exchanges of goods and services account for 86 percent of the EU's gross domestic product, compared with just 23 percent in the United States.