The fighting in Ukraine has forced the closure of small but important industry suppliers, as well as the closure of plants far from the conflict zone, while sanctions and severed trade routes are impeding car and parts shipments to and from Russia, which was once viewed as a growth market.
European automakers such as Renault SA, which owns AvtoVAZ, the Russian company that manufactures the Lada brand, Volkswagen AG and its brands Audi, Skoda, and Porsche are among the hardest hit by the abrupt cessation of business in Russia and the lack of vital parts from Ukrainian suppliers.
VW announced Thursday that, "against the backdrop of Russia's attack on Ukraine and the resulting consequences," it would suspend vehicle production in Russia and exports to the country with immediate effect and until further notice.
"With the extensive disruption of business activities in Russia," the company said, "the executive board is reviewing the consequences of the overall situation during this period of great uncertainty and upheaval."
The ramifications aren't limited to Europe. By the middle of this week, nearly a dozen global automakers had ceased operations in Russia, with some permanently closing factories. Toyota Motor Corp. announced on Friday that it would close its St. Petersburg plant until further notice. Ford Motor Company has terminated its joint venture with Russia's Sollers OJSC and ceased sales to the country. Hyundai Motor Co. Ltd., one of Russia's largest automakers, shut down its St. Petersburg plant, saying it hoped to reopen in a week.
Following the shutdown of two factories in eastern Germany, Volkswagen has stated that production at its flagship plant in western Germany will soon be impacted due to missing parts from Ukraine. Manufacturers with Russian plants say the country's exclusion from the SWIFT international interbank payments system has exacerbated the strain on supply chains. The blockade of Russian airspace, as well as disruptions to shipping lanes, has reduced the flow of goods to a trickle.
The conflict is a new setback for a sector that was already dealing with widespread supply-chain disruptions as the Covid-19 pandemic began. Then there was a global semiconductor shortage, which slowed production—all while the industry was in the midst of a costly transition to electric vehicles, the industry's biggest transformation in well over a century. The new shock could now reverberate far beyond the sector, which is one of the largest industrial employers in much of the Western world.
According to analysts, the initial impact of the war on some automakers could reduce global vehicle production by 1.5 million vehicles this year. That is 2% fewer than the 84.2 million vehicles that IHS Markit predicted the industry would produce prior to the war.
According to Stephanie Brinley, an automotive analyst at IHS Markit, this is the most optimistic scenario.
"It could also reduce production by 3 million vehicles," she added, noting that it is far too early to predict how chaotic global supply chains will become. "We don't have any visibility," she explained.
Even before the Ukraine war, VW was struggling to keep assembly lines running at its main plant in Wolfsburg, Germany, due to various global shortages and trade route disruptions.
When the war in Ukraine broke out, dozens of auto parts manufacturers closed their factories in the country. Despite having a small car parts industry, Ukraine has become a major supplier of wiring harnesses, which are required to organize a car's wiring and connect its various components.
Leoni AG, Japan's Fujikura Ltd., Aptiv Plc, and Nexans SA are among the suppliers of such systems with plants in Ukraine. Work at these plants ceased almost immediately after Russia's invasion began, affecting VW's factories in both Eastern Europe and Germany.
VW shut down its Zwickau plant in eastern Germany this week, where it manufactures the ID.4 electric vehicle for European markets and export to the United States. In addition, the company stated that production in Wolfsburg would begin to sputter next week and end the following week due to a lack of parts.
Porsche, which is owned by Volkswagen, has halted production at its Leipzig plant, where it manufactures the Panamera sedan and the Macan sport-utility vehicle. Production at the plant could be disrupted, limiting Porsche's ability to deliver popular models to customers worldwide.
Bayerische Motoren Werke AG announced next week that it would halt production at its main plant in Dingolfing, where a spokesman said the company builds up to 1,600 cars per day, including its flagship 5-series, 7-series, and 8-series sedans. Due to missing parts, BMW will experience downtime at its Munich plant as well as its Mini plants in the Netherlands and the United Kingdom.
Skoda, a VW-owned Czech automaker, sold 90,400 vehicles in Russia last year, the company's second-largest market after Germany. The Czech automaker manufactures vehicles at VW's multi-brand factories in Nizhny Novgorod and Kaluga, where production has been halted.
Skoda also announced the suspension of operations at a plant in Solomonovo, Ukraine, where its partner Eurocar assembles Skoda models for the Ukrainian market, including the Superb, Kodiaq, Karoq, and Fabia.
Because of a shortage of local parts, the carmaker has reduced production of its all-electric Enyaq hatchback at its main plant in Mlada Boleslav, Czech Republic.
Suppliers who have closed their Ukrainian factories said they were constantly assessing the situation to determine whether and when they could resume production. Meanwhile, they have been attempting to compensate for the lost Ukraine output by shifting production to other locations.
Leoni shut down its factories in Stryji and Kolomyja at the start of the fighting after hearing explosions from Russian rockets nearby, according to a spokesman. Leoni stated that it was weighing the feasibility of shifting production from Ukraine plants to existing factories in neighboring countries such as Romania or existing plants in northern Africa.
Aptiv, a Dublin-based auto supplier specializing in electronics, manufactures electrical systems in western Ukraine for Western European automakers. Aptiv began moving some higher-volume production out of Ukraine as tensions rose prior to the invasion, company executives said on Feb. 24.
"Just to be better positioned to manage disruption," Aptiv's chief financial officer Joseph Massaro explained. "Let's wait and see what happens."
In Russia, where sanctions have made doing business for Western firms nearly impossible, automakers are running out of parts and are closing factories and suspending imports.
Toyota Motor Corp. announced on Wednesday that it will suspend production in Russia beginning Friday until further notice, citing a lack of available parts. Toyota's St. Petersburg plant produces up to 80,000 vehicles per year, including the Camry sedan and RAV4. According to the company, the majority of the vehicles are sold in Russia, but a small number are exported to Kazakhstan, Armenia, and Belarus.
Toyota also stated that it would no longer sell imported vehicles in Russia. In addition to vehicles manufactured in the country and vehicles imported from outside Russia. According to a Toyota spokesman, the company sells approximately 120,000 vehicles in Russia each year.
Mercedes-Benz Group AG, Hyundai, Ford, Renault, and BMW have all shut down Russian operations.
Investors have lost faith in companies that are heavily exposed to Russia.
According to Citi research, prior to the war, Renault's Russian business accounted for approximately 8% of its earnings before interest and taxes. Renault shares have dropped 30% since an earnings call on Feb. 18, during which investors questioned the company about Russia and Ukraine. One investor inquired about the impact on Renault if "geopolitics tightened up a bit."
Renault's chief financial officer, Clotilde Delbos, stated that the financial risk was carried by AvtoVAZ, not Renault, because the Russian company's debt and financing were local, with no support from Renault.
"They are completely self-sufficient, even though they are in debt, particularly AvtoVAZ," she explained. "However, it is entirely local."
The French automaker has three plants in Russia: one in Moscow, another in Togliatti, and a third in Izhevsk, 700 miles east of Moscow. According to a Renault spokeswoman, the company shut down the Moscow plant on February 28 and plans to keep it closed until after March 5 "due to some logistics issues."
Chinese automakers have also made inroads into Russia, and they are concerned about the impact of the war on their operations. Great Wall Motors Co. established a plant in Russia in 2019 and more than doubled its sales there last year. Chery Automobile Co., which plans to more than triple its Russia sales in 2021, has stated that it is looking for a local partner in Russia to produce electric vehicles.
According to the China Passenger Car Association, Russia was the third-largest export destination for Chinese automobiles last year, trailing only Chile and Saudi Arabia.
"The Russia-Ukraine conflict poses a significant risk to China's auto industry," the association's secretary-general, Cui Dongshu, wrote on his WeChat account on Sunday. Mr. Cui warned Chinese auto exporters to brace themselves for the risks of a weakening ruble.