How the war in Ukraine will affect the global supply chains of major industries
Putin’s war on Ukraine threatens to plunge already strained global supply chains into total chaos. Having just about staggered through the Covid-19 pandemic, the improvement in supply chain operations has ended before it even had a chance to begin. Although Ukraine’s global imports and exports only amount to around 0.3% each, while Russia’s export share is 1.9% and its import share is 1.4%, they are crucial oil, gas and grains exporters, as ING analyzed. The war in Ukraine will push fragile supply chains to the brink and cause longer term disruption and supply shortages for many industries. Here, we take a look at how the five major industries automotive, chemical, aviation, consumer electronics and construction could be – or are already being – impacted by the crisis.
The automotive industry
According to experts, Russia’s invasion of Ukraine could reduce global production of new cars and trucks by millions of units this year. In the short term, local Russian production is likely to feel the greatest impact as companies suspend operations. However, the longer the conflict continues, the more likely it is to have a ripple effect across the entire automotive industry, exacerbating rising inflation and forcing already record vehicle prices even higher. “There’s no question. It’s going to ripple. It’s just going to be really dependent on obviously how long this goes on,” said Jeff Schuster, president of global forecasting and the Americas at LMC Automotive in an interview with CNBC. “The sanctions and trade impact play a big role in that.”
The invasion is already creating new supply problems for parts such as wire harnesses, which act as a vehicle’s wiring system. These are among the first components to be installed in a new vehicle, and their absence brings assembly lines to a grinding halt. The war is also expected to further escalate existing supply limitations of parts such as catalytic converters and semiconductor chips that use materials and gases from the region. IHS Markit expects the global impact this year to be about 3.5 million fewer vehicles due to semiconductor chip constraints. The war has already interrupted production at some BMW, VW, Porsche and Mercedes-Benz sites due to disruptions in the supply of components from Ukraine, and has forced companies to stop shipping to Russia or to temporarily suspend operations there. Ferrari, for example, has said it is suspending the production of vehicles for the Russian market until further notice. Volkswagen Group CEO, Herbert Diess, has cautioned that a protracted war in Ukraine risks being “very much worse” for the European economy than the pandemic and may lead to massive price increases, energy scarcity and inflation. According to Stephanie Brinley, an automotive analyst at IHS Markit, it is far too soon to know just how chaotic global supply chains will become. “We have no visibility,” she said.
The chemical industry
After the invasion of Ukraine, governments were quick to impose economic sanctions on Russia. Germany, for example, halted certification of Nord Stream 2, a pipeline under the Baltic Sea meant to carry natural gas from Russia to Germany. Meanwhile, the EU, which is heavily dependent on Russian gas (it accounts for 40% of its total gas consumption) is also discussing how to cut dependence by 80% this year. Moreover, in addition to governmental measures, many companies have been acting on their own initiative.
Leading oil and gas firms from around the world including BP, ExxonMobil, and Shell have vowed to cease or sell their operations in Russia. BP was the first major industry player to announce its exit (20% shareholding) from energy giant Rosneft. Shell quickly followed suit, stating that it intended to quit its joint ventures with Russian energy company Gazprom and all related entities. “These societal challenges highlight the dilemma between putting pressure on the Russian government over its atrocities in Ukraine and ensuring stable, secure energy supplies across Europe,” Ben van Beurden, chief executive of Shell, said in a statement. And this is most likely just the beginning. As oil and gas are essential to many supply chains, disruptions to such vital resources will have wide-ranging economic repercussions.
The aviation industry
Both Airbus and Boeing, Russia’s main suppliers of commercial aircraft, have withdrawn support from Russia’s aviation industry in light of the crisis in Ukraine. Currently, three quarters of passenger and cargo jets in Russian service are from Boeing or Airbus, which supply more than 600 aircraft between them. Boeing said it was suspending all parts, maintenance and technical support for planes in Russia, with Airbus following shortly afterwards. US aviation giant Boeing announced that it had shut down “major operations” in Moscow and also temporarily closed its office in the Ukrainian capital of Kyiv.
It is not clear how long it will take until airlines’ supplies of spare parts run out – it could be weeks or months. Airlines could keep operations running for longer by grounding some aircraft and using them for spare parts for the planes that are still flying although this is banned under the terms of the leases that cover commercial aircraft. As with most commercial aircraft today, the majority of Russian airlines’ planes are owned by leasing companies in the west. Most western leasing companies have already written to their Russian clients demanding the return of their planes. The Russian government has hit back by approving the first step towards allowing Russian airlines to register jets leased from western firms that leave the country because of the sanctions as their own property. As Richard Aboulafia, the managing director of AeroDynamic Advisory, told Al Jazeera, “Aviation sanctions are easy to enforce. Airlines can’t fly. They will have to completely redo their aircraft plans which, at the moment, are built on western technology.”
The consumer electronics industry
According to industry experts , the war in Ukraine is likely to have an impact on global energy markets with a spillover effect on semiconductor shortages and prices. Ukraine and Russia are top suppliers of neon gas, which is used in the lasers for chip manufacturing. Russia is also a major producer of palladium, a rare metal used in computer components, sensors and fuel cells. Dale Ford, chief analyst at the Electronic Components Industry Association, states “We cannot ignore what’s happening in Ukraine and Russia and the global implications that has for the [chip] supply chain.” In an online discussion sponsored by the Semiconductor Industry Association, he continued: “While Ukraine and Russia are not major producers or consumers of electronics, they do play a critical role in the energy space and raw materials prices. The challenge that creates is very significant for our industry. The indirect impact that will play out through the world’s financial systems and supply chains overall is very significant and cannot be ignored.”
Electronics manufacturers also need nickel to build batteries that power devices, and Russia supplies about 20% of the world’s high-grade nickel. With nickel exports under threat, this could result in higher prices on battery-powered products. Nickel prices have been soaring in recent weeks and experts predict that this will likely worsen. “It would not surprise me if companies say ‘Due to the conflict, we are raising prices,’” said Shawn DuBravac, chief economist at the IPC electronics manufacturing trade group. According to DuBravac, last year, the US imported about 45% of its rare gas supplies, including neon, from Russia and Ukraine. The rest of the supplies came from China, Germany and France. These countries could continue to provide supplies to the US if neon supplies from Russia and Ukraine are cut off. Other countries might also act by creating their own neon production plants.
The construction industry
Russia and Ukraine are key suppliers of metals, raw materials, chemical products and machinery. Approximately 10% of global copper reserves are under Russian control and Russia is also an important producer of nickel and platinum. Ukraine is one of Europe’s main producers of uranium, titanium, manganese, iron and mercury ores. If production of and access to these materials is impeded, prices will increase and markets will need to seek out other sources and alternative supply chains. Moreover, Russia supplies 30% of Europe’s oil and 40% of its natural gas. Materials used in construction containing petro-carbons or in energy-intensive manufacturing will be hit by increased inflation.
The higher price of oil and gas is also going to have an effect on the costs of production as well as the transportation of equipment, materials and project parts. Military action could restrict shipping in the Black Sea, a key transit point for dry bulk exports, and the closed airspaces over Europe and North America eliminate the possibility of expedited delivery of spare parts for emergency maintenance services.
Companies operating in the construction sector would be wise to improve visibility in their supply chains beyond their immediate suppliers. For instance, your immediate supplier could be a German firm supplied by another German firm, which is in turn supplied by a Russian or Ukrainian company. They could also consider diversifying their supply sources by finding different routes or suppliers, and preparing a risk response plan for any weak links in their supply chains.
It is well documented that the war in Ukraine affects the entire world: global supply chains, industries, companies, and individuals. But it is the people of Ukraine that have to endure the worst suffering. That is why we at scoutbee would like to offer our AI-powered supplier discovery FREE OF CHARGE to NGOs that are initially looking for suppliers capable of delivering food, personal care, and hygiene products to those impacted by the war. View our Support Ukraine page for more information on our initiative and how to make use of our offer.
Learn more about how multilocal sourcing and glocalization are key to establish proactive procurement and to prepare for and react to disruptive events.