Russia's invasion of Ukraine could reduce global production of new cars and trucks by millions of units this year, according to experts.
Local Russian production is expected to feel the greatest near-term impact as companies suspend operations. But, officials say, the longer the war continues, the higher the risk of ripple effects across the automotive industry.
"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. "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. 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. The crisis could worsen rising inflation and propel already record-high vehicle prices even higher.
"This does have global implications in terms of adding to inflationary pressure, pricing pressure and ultimately dealing another blow to the consumer," Schuster said.
For U.S. consumers, the most immediate impact is higher gas prices. The national average for a gallon of gas hit $4.009 on Sunday, according to AAA — the highest since July 2008, not adjusted for inflation.
Vehicle production
Early forecasts for the reduction in vehicle output resulting from the conflict vary greatly given the fluidity of the situation.
Schuster said the impact could amount to millions of units of production in 2022. His firm has already adjusted its forecast to cut 700,000 units of European production, he said.
The European auto market will feel the effects far more quickly than the U.S. and other markets. European automakers such as Audi and Mercedes-Benz have said they plan to cut production output at plants due to parts disruptions out of Ukraine — specifically, wire harnesses.
"Wire harnesses are the most critical near-term bottleneck, in our view, already causing significant production interruption amongst all German OEMs," UBS analyst Patrick Hummel said Monday in an investor note. "We think significant downtimes in the next few weeks are likely, but limited to European production because wire harnesses are typically sourced regionally."
AutoForecast Solutions expects vehicle production this year in Russia and Ukraine to get cut in half as a result of the conflict, falling to around 800,000 units.
An early "pessimistic outlook" from research firm IHS Markit expects the global impact this year to be about 3.5 million fewer vehicles in connection with semiconductor chip constraints. Russia and Ukraine are critical sources of neon gas and palladium that are used to produce semiconductor chips.
However, Tim Urquhart, a European principal automotive analyst at IHS, noted the situation remains fluid. In December, IHS forecast global sales of 82.4 million vehicles in 2022, up 3.7% year over year.
Long-term impact
As sanctions grow and companies withdraw or suspend operations in Russia, the country's automotive operations face long-term risk.
Automakers and other industries are going to have to weigh the potential backlash of resuming operations against the potential earnings, according to experts.
"The key for companies is to provide a concrete justification as to why they're going back in," said Matt Gorman, a corporate communications advisor and Republican strategist. "They can't slink back in if we're still in the same spot and if Russians are still shelling Ukrainian civilians a month from now or two months from now."
For automakers, the choice may be easier than for others. Only a few automakers have notable operations in Russia. France-based Renault Group, which has a controlling stake in Russian automaker AvtoVAZ, accounts for 39.5% of the country's vehicle production, followed by South Korea-based Hyundai Group at 27.2%.
German automaker Volkswagen makes up a 12.2% share of the country's auto output, according to research firm IHS Markit. Japan's Toyota Motor makes up 5.5%. Other automakers follow at low single-digits.
"I don't think any sensible business person, any CEO ... would be looking to go back into it anytime soon," IHS' Urquhart said. "I just think it's very low priority to go back."
AutoForecast Solutions CEO Joe McCabe agrees, especially given the comparatively low earnings and operations for many automakers in the country.
"For a Western company to reinvest in Russia after this, I think once they make the exit it's going to be the first of many steps to be a long-term exit strategy out of Russia," he said.
The Russian vehicle market posted between 1.6 million and 1.75 million in annual unit sales over the last three years. That amounts to one-tenth the size of the U.S. market last year and represents about 2% of global vehicle sales in 2021.
— CNBC's Michael Bloom contributed to this report.
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