Russia-Ukraine Conflict Further Complicates Global Supply Chain

Russian businesses are under sanctions and the conflict has cut off Ukrainian exports, resulting in global shortages and surging prices. Russia was the third-largest manufacturer of light vehicles in the European market, after Germany and Spain (LMC), which along with crude petroleum and natural gas has had a significant impact on Western countries. Ukraine has traditionally supported multiple wiring harness suppliers, especially needed for Battery Electric Vehicles (BEVs). Raw materials include iron, steel, mining, and chemical products.  

Russia’s economy is projected to decline by 10% this year with future impact expected. Ukraine is projected to fall by twice that based on current intelligence, impacted by massive damage to infrastructure. This reverberates into many other countries from the supply of oil to the flow of trade, which remits to central Asian countries and links to financial systems. There are shifts in the supply of oil to Western countries and the related impact across the globe to transportation costs and routes used to move goods from China through Russian rail into Europe. Continued reshoring and near-shoring as well as further adoption of Electric Vehicles (EVs) are expected to move even faster than during the height of the pandemic.  

Russia and Ukraine are key exporters of important agricultural commodities, impacting less developed countries highly dependent on imported food products. According to the United Nations, both countries account for over 25% of global trade of wheat, 30% of barely exports, and 60% of sunflower oil exports. Russia is a leading exporter of fertilizers, which could impact global crop yields and increase food prices. European countries are particularly vulnerable to crude oil and natural gas shortages due to a reliance on supply from Russia. Energy prices have seen rapid and substantial increases. As energy is required to manufacture feed ingredients, increasing energy costs will drive up food prices further.

Semiconductor supply challenges are deteriorating as access to key materials required is impacted. Russia produces around 40% of the world’s mined palladium, used for semiconductor plating and finishing, and in vehicle catalytic converters. The price of palladium increased about 80% since the conflict started. Ukrainian firms control around 50% of high purity neon supply to the semiconductor industry.

The Russia-Ukraine conflict is also worsening existing challenges for the transportation industry from fuel costs to vehicle manufacturing. Ukraine-built wiring harnesses have been halted. Around 45% are exported to Poland and Germany, with German Original Equipment Manufacturers (OEMs), like Volkswagen and BMW, the most impacted. While there is some dual-sourcing, switching to new suppliers will be difficult as there is already restricted capacity. Relocating production could take anywhere from three to ten months. Since the start of the conflict, LMC Automotive cut its light vehicle sales forecast for Europe by two million units per year across the next two years.

The conflict in Ukraine has reinforced the need yet again for organizations to create more resilient supply chains and ensure risk management frameworks are in place. With supply of many vital raw materials cut off, European companies must look to expand their supplier network to secure additional inventory and capacity, rather than relying on a single source. Equally, the COVID-19 pandemic had already reinforced reshoring, or ‘nearshoring’, as an effective strategy to minimize the impacts of supply chain disruption. The conflict in Ukraine will likely accelerate this movement again across the West.

Visibility is a core element of a resilient supply chain. Companies may look to employ Artificial Intelligence (AI)/Machine Learning (ML) technology to provide proactive alerts and insights to identify high risk levels in the supply chain and supplier network. Additionally, changes in the mix and routes of transport modalities with more efficient routing and capacity optimization will be needed to address fuel costs.

Testing supply chains through scenario planning and stress tests are critical, along with integrated, End-to-End software across the supply chain to proactively address needed changes in timing, costs, suppliers, and inventory are table stakes. Expect continued stress on the supply chain for the foreseeable future and consolidation to follow.