Auto Industry Supply Chain Crisis Predicted To Be ‘Temporary’: Neuberger Berman

A worker wears a protective mask at the Volkswagen assembly line after VW re-starts Europe's largest car factory after coronavirus shutdown in Wolfsburg, Germany, on April 27, 2020. (Swen Pfoertner/Pool via Reuters)

The auto industry’s ongoing supply chain disruption caused by Russia’s invasion of Ukraine is not likely to be a long-term problem according to investment managing firm Neuberger Berman.

“Although Russia and Ukraine together only represent 2.1 percent of global light vehicle sales, the impact for some European original equipment manufacturers has been disproportionately larger than for others. For example, 22 percent of Renault’s global unit sales, or 15 percent of its operating income, comes from AvtoVAZ in Russia while most other European OEMs (Original Equipment Manufacturers) have 1–2 percent of sales in Russia/Ukraine and proportionate operating income,” the company said in a blog post.

Russia accounts for 40 percent of the world’s output of mined palladium which is used in catalytic converters critical for manufacturing internal combustion engines. Ukraine makes up 70 percent of the world’s output of neon gas necessary for lasers used in manufacturing semiconductor chips.

Kyiv also contributes 7 percent of the wire harnesses that go into vehicles. Moreover, OEMs from Italy and Germany use natural gas for processes like heat treatment, curing paint, casting, etc. Around 40 percent of the European Union’s natural gas supply comes from Russia.

With the European car industry dependent to such an extent on Russia and Ukraine, it was inevitable that a war between the nations would adversely affect the sector. However, the crisis will only “temporarily” disrupt the supply chain, Neuberger Berman noted.

The industry is weathering the war and the resulting supply disruption in various ways. In Ukraine, wire harness factories are continuing operations at 30 percent to 70 percent capacity. In Eastern Europe, OEM’s are looking to secure alternate sources for palladium.

Countries in Europe are planning to cut down the import of natural gas from Russia. For instance, Italy has arranged to reduce Russian gas imports while increasing imports from Algeria. Chip manufacturers have also built up their inventories for neon gas to last several months.

Neuberger Berman is expecting the auto sector to recover in the second half of 2022 as long as the Russia-Ukraine conflict gets resolved in the near term. However, if the war gets prolonged, recovery might be delayed well into 2023, the firm warned.

Mark Fulthorpe, an executive director for S&P, expects prices of new vehicles in Europe and North America to remain high even next year while availability remains tight. To make matters worse, the higher prices of new vehicles will trigger an increase in demand for used vehicles, thereby driving up their prices as well, he predicts.

“Until inflationary pressures start to really erode consumer and business capabilities,” Fulthorpe said, “it’s probably going to mean that those who have the inclination to buy a new vehicle, they’ll be prepared to pay top dollar.”

S&P Global Mobility had predicted global auto output to be at 84 million vehicles in 2022 and 91 million in 2023. After the Russia-Ukraine war began, this was revised to 82 million and 88 million respectively.