The War in Ukraine is Battering an Already Shaky Car Industry

 

In writing this two-part article, we’re not trivialising the unspeakable human tragedy that continues to unfold in the Ukraine. Obviously, there are far more important things than used car prices or the availability of Skoda Enyaqs. It’s just that we’re not equipped to deal with that bigger and more important picture. Writing about cars and driving, we can only focus on how this truly global event impacts our area of interest.

So with that said, let’s start with an overview of how the Ukraine war is battering the car industry.

The European car industry’s triple whammy

If you want a deeper dive into the car industry’s woes, we recommend you check out Neil Winton’s article in Forbes, which we’ve gratefully drawn upon for many of the statistics.

Over the last couple of years, the European car industry has been bashed from pillar to post. First, the global pandemic decimated both production and demand, something we covered at the time. In fact, 2020 saw car sales plummeting by a horrifying 25%. Following hot on Covid’s heels was the semi-conductor crisis, in which the motor industry had to compete with surging demand in other sectors. Once again, car production was scaled back, with some factories running reduced schedules or temporarily closing.

2022 was supposed to be the year for recovery. Analysis from LMC Automotive had predicted an 8.6% growth, then slightly downgraded this to 8.3% because of lingering supply chain worries. And then, on February 24th, Putin’s war machine rolled into Ukraine. Now the forecast for 2022 is just 0.4% growth. That may not sound so bad, until you consider that the current sales forecast is for 10.63 million cars sold, compared to 14.29 million in 2019.

So all in all, the last three years have been a triple whammy for European manufacturers. And that’s on top of the massive market shake-ups from electrification and new European emissions standards and restrictions.

In global terms, the war will hit the European car industry hardest, with North America taking a distant second. Overall, the global impact may be less than you might think. For example, research from one group of analysts predicts that global light vehicle will fall by just  2.6 million units over 2022 to 2023 — a piddling 1.5%.

In fact, some nations’ car industries will likely benefit from the war. It’s not difficult to guess which ones.

Europe’s loss, China’s gain?

As European manufacturers stop exporting to Russia, or manufacturing within the country, Chinese automakers may step in. India may also benefit.

Before the conflict, Chinese cars were already gaining ground in Russia. Chery saw their Russian sales rocket up by 250% in 2021, with Haval increasing by 125% and Geely up by 59%.

At the moment, there seems little chance of China joining the EU and North America in sanctioning exports to Russia, leaving the market wide open for Chinese brands to move in. Having said that, it’s possible that as the Russian economy contracts, few will have enough spare cash to buy any sort of new car, European or otherwise.

Note: Geely now claims that its Russian operations have more-or-less stopped for the moment, though without further explanation.

Will withdrawing from Russia hit the big brands?

As we’ll see in Part Two, the Ukraine war damages the car industry in multiple ways, creating supply chain problems, closed factories, increased costs and reduced demand. But there’s also the loss of their direct sales to the Russian market.

Russia is a substantial source of revenue for European manufacturers. According to Autocar:

[Russia is] the eighth-largest automotive market in the world. Some 1,666,780 cars were sold in the country last year – more than in Canada, France or the UK.

On March 12th,  a round of sanctions banned the export to Russia of EU-made vehicles costing over $50,000. That still leaves an awful lot of vehicles which could be sold. Nevertheless, most manufacturers have decided to reduce or stop their Russian exports. We’ll leave you to decide whether that’s a moral decision by manufacturers or a fear of public pressure — or maybe it’s both.

If you want an exhaustive list of who’s stopped selling what, head on over to Autonews or Autocar, but our take-home points were:

  • BMW, Ford, Honda, Jaguar Land Rover, Aston Martin, Ferrari, General Motors, Suzuki, the VW Group and Volvo have  all – as far as we can tell – suspended sales to Russia.
  • Some manufacturers would have been forced to do so anyway by the March sanctions (given that sub-$50,000 Ferraris and Astons are thin on the ground).
  • The impact varies greatly from one brand to another. For example, Russia accounted for less than 1% of Aston Martin’s sales. On the other hand, Russia is the second-largest market for Skoda, accounting for around 90,000 vehicles a year.
  • Overall, however, the loss of direct sales to Russia will be dwarfed by other effects of the war.

Grand Theft Auto

Those brands with a big manufacturing presence in Russia will have additional losses, as most have decided to slow down or stop building vehicles within the country. BMW, for example, has stopped production at its Kalingrad factory, which produces around 21,000 cars annually.

The real risk is that the Russian state expropriates their facilities. As Bloomberg reports:

Russia outlined proposed measures to take temporary control of departing companies where foreign ownership exceeds 25%. If adopted, Russian courts could freeze the assets, giving the companies the option of restoring operations or selling their stake.

Given the Kremlin’s previous record on valuing companies, we can expect some fire-sale prices.In Mercedes-Benz’s case, for example, that could leave a $2.2 billion-sized hole in their assets. And they are far from the only company facing the same choice.

Next time…

In Part Two, we’ll take a look at the Ukraine war’s affect on supply, demand and how that could impact car prices.  See you next time.

The Welsh VW Specialist blog covers a wide range of automotive topics, from the contentious to the light-hearted. We are an independent garage specialising (as the name suggests!) in all the VW group marques, including Audi, Volkswagen, Skoda and SEAT. Welsh VW Specialists provide services, repairs and MOTs, delivering a main dealer level of care at affordable prices. To book your vehicle in, or for any enquiries, get in touch.