The conflict in Ukraine once again exposes the fragility of the world’s economy and the automotive supply chains. The damaging war and severe sanctions against Russia are already having a serious effect on energy prices, raw materials and agricultural goods. On top comes the disruption of the automotive supply chain due to logistical challenges and production stops related to operations on the West Ukrainian border.

As a result, S&P Global Mobility (formerly the automotive team at IHS Markit) has downgraded its 2022 and 2023 global light vehicle production forecast in the latest update by 2.6 million units for both years, to 81.6 million for 2022 and 88.5 million units for 2023.

In 2022, 1.7 million units are cut from Europe alone, which broadly includes just under 1 million units from lost demand in Russia and Ukraine. The remainder is split between 1) worsening semiconductor supply issues, and 2) loss of Ukraine-sourced wiring harnesses and other components, both of which will impact production in other markets. In addition, the complete loss of Russian palladium is a tail risk with the potential to become the industry’s biggest supply constraint.

The outlook for North America light vehicle production was reduced by 480,000 units and by 549,000 units for 2022 and 2023, respectively. Amid the backdrop of the Russia/Ukraine conflict, the March 2022 forecast update for North America reflects broad-based reductions spanning virtually every automaker amid the potential for the conflict and subsequent sanctions to impact the production of semiconductors in the second half of 2022. Further, lingering supply chain, labor and logistics challenges remain material concerns.

"With the March forecast release, we removed 2.6 million units from our 2022 and 2023 outlook, but the downside risk is enormous. Our worst case contingency shows possible reductions up to 4 million units for this and next year," said Mark Fulthorpe, Executive Director for global production forecasting. S&P Global Mobility.

In total, nearly 25 million units were removed from the S&P Global Mobility light vehicle production forecast between now and 2030.

Pent-up demand reduced by roughly one third

Pre-Ukraine invasion on February 24, the global auto industry had spent more than a year under capacity-constrained conditions, with estimated pent up consumer demand of up to 10 million units (or 12%) above this year’s achievable production, based on S&P Global Mobility forecasts. The sudden loss of economic confidence (via high oil and raw material prices, weak equity markets, and tightening interest rates) is dampening demand, and could now reduce that shortfall by roughly one third – though significant pent-up demand remains.

Supply chain remains the constraining factor

While the macro concerns are significant, the supply chain (and not underlying consumer demand) will continue to set the upper limit for vehicle unit sales in the medium term. The key crunch points weighing on production levels post invasion fall into two broad categories: Semiconductor materials supply (specifically via Ukrainian neon and Russian palladium), and electrical wiring harness sourcing.

Specialist material outages could curtail semiconductor recovery

Semiconductor supply challenges are worsening on two fronts: First, via neon gas supply disruptions. Suppliers in Ukraine control nearly half of high purity neon supply to the semiconductor industry, where the element is used in lasers that etch patterns onto chips. Our primary research suggests immediate risks are low based on semiconductor makers holding sufficient gas (neon) inventory, but visibility is poor. The second challenge is availability of palladium, used in semiconductor plating and finishing. In an additional negative twist, China COVID-19 cases at a 2-year high are triggering quarantines and plant closures in northeastern manufacturing hubs, including Shenzhen and Changchun. All of the above raise the risk of losses from ‘stranded’ chips, i.e. semiconductors for which the ‘right’ car cannot be built due to other constraints.

Ukraine wiring harnesses difficult to substitute

According to S&P Global Mobility research, Ukraine-built wiring harnesses were likely destined for approximately 500,000 to 1 million vehicles pre-invasion. These harnesses comprise complex and manually constructed assemblies of cable. Although some dual sourcing arrangements exist, switching will be difficult due to already-constrained harness capacity in and around Europe. If the situation is not resolved soon, it is estimated that production relocations could take 3-10 months due to wait times on machinery and multi-month staff training times. Almost half (45%) of Ukraine-built wiring harnesses are normally exported to Germany and Poland, placing German carmakers at high exposure. On the plus side, once ramped up – lost production could be recovered quickly into late 2022 and beyond.

Palladium: Next potential challenge

While low probability as things stand, palladium has the potential to become the industry’s biggest supply constraint. Russia produces 40% of the world’s mined palladium according to United States Geological Survey. Around two thirds of palladium use is in vehicles, where it is the active element in catalytic converters for exhaust aftertreatment. If Russian palladium supply were suddenly interrupted (due to a western boycott, or Russia stopping supply), production of all vehicles using such sourcing (including hybrids) could potentially stop. Although platinum is an alternative element, it is similarly expensive and also largely Russia-originated. Substitution of any kind is a regulatory minefield since design changes require regulatory re-homologation, which can take months. However, at this time, S&P Global Mobility does not currently incorporate major palladium disruptions in its forecast.

About S&P Global Mobility

At S&P Global Mobility, we provide invaluable insights derived from unmatched automotive data, enabling our customers to anticipate change and make decisions with conviction. Our expertise helps them to optimize their businesses, reach the right consumers, and shape the future of mobility. We open the door to automotive innovation, revealing the buying patterns of today and helping customers plan for the emerging technologies of tomorrow.

S&P Global Mobility is a division of S&P Global (NYSE: SPGI). S&P Global is the world’s foremost provider of credit ratings, benchmarks, analytics and workflow solutions in the global capital, commodity and automotive markets. With every one of our offerings, we help many of the world’s leading organizations navigate the economic landscape so they can plan for tomorrow, today. For more information, visit www.spglobal.com/mobility.

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