Perspectives on Various Issues of Interest

Russia-Ukraine Crisis and the Automotive Wiring Harness Supply Chain

Modern vehicle is much more of a digital device than a mechanical one. Whether it is engine control systems, driver assistance systems or media centers, electronic technology is omnipresent. The advancement towards the "connected car" and autonomous driving is only accelerating this trend. In this increasing presence of electronic systems in a car, the wire harness is one of the key backbone that integrates various digital components, links digital components with  mechanical and structural components, and ensures that the onboard electronic systems get the required power supply. It is also critical for enhancing efficiency and ensuring vehicle safety.

In a typical car, the cables forming the wiring harness stretch more than 3 miles in length and Ukraine is a key supplier in the supply chain for this essential backbone. Leoni AG, a global supplier of wiring harness, has sites covering more than 65,000 miles in the Lviv region in Ukraine. The company employs more than 7,000 people in Ukraine and the cable assemblies made in Ukraine are supplied to LEONI plants in Poland, Slovakia, Hungary, Czech Republic, Germany, Spain, Portugal, Italy, Belgium, the UK, the USA and Austria. These plants in turn supply the wiring harnesses to car manufacturers such as Opel, Porsche, Volkswagen, Audi and Lamborghini. 

Fujikuru, a Japanese company that make wiring harness, also has sites in Ukraine and supplies cables to car manufacturers such as Volkswagen, Porsche, Audi, and the Czech Republic’s Skoda. Sumitomo Electric Bordnetze with 60:40 split in terms of shareholding between Sumitomo Electric Industries and Sumitomo Wiring Systems has facility in Ternopil, Ukraine. Nexans, headquartered in France, is another such company with sites in Ukraine. Along with these companies other suppliers such as Germany's Forschner, Kromberg & Schubert, Prettl, SEBN and Japan's Yazaki have built up wire harness production sector in Ukraine. In fact, Ukraine supplies nearly 7% of all imports of wire harnesses in the European Union. These wire harness manufacturing sites are among about 22 automotive companies that have invested more than $600 million in 38 plants and employing over 60,000 Ukrainians.

The western part of Ukraine bordering Poland was a relatively safe haven in the conflict until now. However, today's missile strike in the Lviv region has upended the situation. This morning (18th March) several missiles had struck an aircraft repair plant at the airport complex in Lviv, destroying the buildings. 

While several manufacturers preempted the situation due to rising hostilities and had moved high volume production of parts for vehicles out of the Ukrainian plants to other locations, it wasn't an easy transition. The factory space, machinery, tooling, workers and financing requirements are going to add a fair amount of lead time to be up and running. Automakers will have to find short and medium term solutions. As of this writing, the Volkswagen Group was trying to boost production of wire harnesses in neighboring locations in Europe and North Africa such as Romania, Hungary, Tunisia and Morocco, but also in farther locations such as Mexico and China.

Data: CRU

S&P Global Mobility downgraded its 2022 and 2023 global light vehicle production forecast to to 81.6 million for 2022 and 88.5 million units for 2023. These figures are 2.6 million units lower for both years than previous year. The European forecasts are expected to be 1.7 million units lower with almost 50% of the figure resulting due to part shortages of chips and wire harnesses. The remaining 50% would be due to reduced demand from Russia and Ukraine. European automakers such as Volkswagen, Porsche, BMW, Audi, Mercedes-Benz have suspended production at some of their plants. Since Ukrainian wire harnesses constitute almost 45% of imports in German and Poland, German automakers are particularly going to be affected due to this crisis and the profit margins are going to witness a squeeze. 

This is a reversal of the trend that we were seeing in January and February. According to LMC Automotive, the selling rate in Germany had improved slightly in February to 2.7 mn units/year from 2.6 mn units/year previously. Similar trends were visible in other European markets. However, although LMC anticipates the 2022 annualized selling rate to improve over the course of 2022, it will grow at a slower rate than forecasted last month due to the current conflict. This is due to supply disruption, inflationary pressure and lowering of consumer confidence. 

Source: LMC Automotive 

US auto industry will also not be immune to this supply disruption. According to S&P Global Mobility North America light-duty vehicle production will be reduced by 480,000 units in 2022 and by 549,000 units in 2023. According to the company there will be a shortage of nearly 25 million units of global light-duty vehicle production from its forecast between now and 2030.

Russia-Ukraine crisis and the resulting supply chain disruption - a reflection

Russia's invasion of Ukraine that began a week ago (on 24th February 2022) is setting in motion a set of dire conditions that supply chains are going to face in coming weeks and months. In this post, I reflect on the effect of the crisis on oil prices, energy prices, supplies for product manufacturing, service supplies, food supplies, and metals. 

The Brent Crude Oil Continuous Contract Price opened today at $107.34 and is ranging between $106.83-$113.94 at the time of this writing.

This crisis has taken the oil price above $104 for the first time since 2014. As the third-largest oil producer and second-largest oil exporter, Russia exerts power in the oil supply equation. Low levels of inventories, spare capacities, and stockpiling activities are putting upward pressure on the oil price. Addressing this would require sale from alternative sources such as the U.S. Shale, OPEC or Iran.

In addition to transportation costs due to increasing oil prices, transportation is also being affected due to the effect of the crisis on the estimated times of arrivals and pricing. Trade lines from China to North America are exploring various options to manage this crisis. The quantities transported from China to the EU increased in the first half of last year (at 336,500 TEUs, it was more than 44% higher as compared to 2020 and 99% higher than 2019) and this trend was continuing this year. However, these shipments that were transported by rail will now need to use alternative modes (ocean or even more expensive air). 

This can cause ocean freight rates to go up by two to three times (from $10,000 per container to more $30,000 per container) and the air freight spot rates and lead times to go up three to four times.

With Russia providing about 35% of the supplies of Europe, energy prices have started to witness an upward tick. Russia has already reduced the supply of natural gas and is potentially going to further reduce the exports as a retaliation to sanctions. Compounding this situation is the fact the almost 10% of the liquefied natural gas flows through pipelines from Ukraine to the European Union; these assets are at risk of being damaged due to the invasion. These rising energy prices will increase the operating costs of various entities in the supply chain, including manufacturing firms, distributors and retailers. Without alternative sources of supplies from places such as U.S. and Qatar, the costs of operations can become very high. The situation is also going to test Russia's ability to withstand the financial impact of reduced supplies to Europe.

There is also an expected impact on supply shortage since a large set of organizations (more than 2000 US firms and more than 1000 European firms) receive their supplies from first-tier suppliers that are located in Russia. Additionally, several companies (more than 450 US firms and more than 200 European firms) also have their first-tier suppliers operating out of Ukraine. Companies located in Russia and Ukraine are also prominently suppliers of services, including software and IT services (13%), consumer services (7%), and trading and distribution services (6%). On the product side, 4% of industrial machinery as well supplies such as oil, gas, steel and metal products are supplied from these two countries. Overall, as compared to other countries such as China, the overall trade impact due to tier-1 supplier disruptions may not be very high, but when tier-2 and tier-3 suppliers are added to the mix, the impact can be substantial since close to 200,000 firms in the US and more than 100,000 firms in Europe have upstream suppliers (tier-3) from these two countries.

Russia is the top wheat exporter, Ukraine is the top exported of rye, barley and is the third largest exported of corn. Given these trade situations, food supplies are expected to get disrupted in coming days.

On the metal commodity front, markets for copper, nickel, platinum and aluminum are expected to be squeezed due to the conflict.

Overall, the supply chain disruption caused by this crisis is just unraveling and will manifest fully in coming weeks and months. Organizations should take necessary steps to reduce the potential impact that the conflict might have on their businesses by proactively taking steps for continuity planning.