In-article:

The Ukraine War and the Consequences: Is the German Auto Industry Collapsing?

The Ukraine War and the Aftermath
Is the German auto industry collapsing?

By Helmut Becker

Structural change, coronavirus pandemic, semiconductor shortage: The German automotive industry is coping with these crises with flying colors, and the corporations are making record profits in 2021. But the war in Ukraine hits the industry to the core. The problem is simple, but not solvable in the short term.

Chancellor Olaf Scholz characterized Russia’s attack on Ukraine as a “turning point”. Europe was forced to resist: EU member states, with unusual unanimity, imposed drastic sanctions on companies and individuals in Russia, severely cutting off the country from international trade and financial flows. However, oil and gas imports from Russia have so far been largely ignored in view of the supply situation, especially in this country. A further tightening of sanctions, possibly a unilateral stop of Russian energy supplies to Germany, as well as a prolongation of the war. The consequences for the German economy and above all for the domestic automotive industry would be catastrophic.

Because the situation in the German auto industry is already serious, very serious. The risk situation has changed substantially. An end to free world trade with all the harmful effects on an industry so heavily dependent on exports was already announced at the time of US President Donald Trump with all the harassment, trade embargoes and special tariffs. But the German key industry was done with that. There was time and space for orderly and controllable site measures.

But this time the threat has a different quality: If you put aside the PR press releases from the manufacturers about record profits in 2021 and gigantic investment programs and listen to the “corridor radio” in the corporate headquarters, a completely different picture emerges. Never in the post-war period – not even during the oil crises and Sunday driving bans – was the entire industry, across the entire value chain, so close to collective collapse as it is now.

The crux with the wiring harnesses

The cause is a material shortage of unprecedented proportions – the focus is on cable harnesses from the Ukraine – and in some cases also a lack of rare raw materials such as the noble gas neon. The latter gap may still seem somehow bridgeable, but the progressive interruption in the supply of wiring harnesses is leading to a unique threat to the entire automotive value chain in this country. The growth forecasts for the entire economy have already been drastically reduced.

Wiring harnesses from the Ukraine are currently indispensable for German car production. The situation is much more explosive than in the previous year, when increasing delivery bottlenecks from Asia for the strategically important memory chips also temporarily led to production interruptions up to temporary plant closures and short-time work. But those were just delivery bottlenecks, not total delivery failures, as is currently the case with cable harnesses from the Ukraine. This imminent total failure affects the substance of the industry, because wiring harnesses are not standard goods, but manufacturer and model-specific, tailor-made according to customer requirements. Furthermore, wiring harnesses cannot be retrofitted: If they are not available, cars cannot be built and the entire value chain comes to a standstill.

And learned something again

According to surveys, no German manufacturer is open to alternative procurement sources in the short term. Even if cable harnesses could be manufactured outside of the Ukraine, the capacities would not be sufficient – short-term increases are absolutely impossible.

According to reports, the German car industry as a whole gets 80 percent of its wiring harnesses from the Ukraine, and some manufacturers even get 100 percent. The reason: In recent years, the entire cable harness production has been withdrawn from North Africa and relocated to the Ukraine because of the low hourly wages of around two euros on average. A short-term regional relocation is excluded. And long term? “In the long run we’re all dead,” as Maynard Keynes used to say.

If deliveries from the Ukraine come to a complete standstill within the next few weeks, production in the German car factories will come to a standstill along the entire value chain. The consequences for growth and employment are not foreseeable.

In addition, there are problems in the logistics and transport industry. The war in Ukraine is causing delivery problems across Europe. Around 100,000 Ukrainian truck drivers were on the road in European goods traffic before the invasion of Russia. Seven percent of all German trucks alone were driven by Ukrainian drivers. This not only puts the supply of parts to the auto industry at risk, but the entire supply of Germany. A quick end to the war is urgently needed not only for ethical and humanitarian reasons. Otherwise, the entire German auto industry is threatened with an emergency stop.

But the delivery debacle can also bring something good – the realization that risk awareness and risk assessment, as well as thinking in precautionary categories when making management and logistics decisions, should again be given greater priority. The motto “Electricity comes from the socket and in the course of globalization parts are always and everywhere available without any problems at the lowest costs” has had its day!

source site-32