Russia and Ukraine’s Influence on Global Supply

When the Russia-Ukraine conflict first began there was ample speculation about the ramifications for the global supply chain. The war that began in February is now approaching the eight-month mark, and the effects of the sanctions and production stoppages are being felt in numerous businesses around the world, including the semiconductor industry. The following areas have been feeling the most pressure from the ongoing situation.

Vital car components

Already suffering sourcing difficulties due to the chip shortage, the automotive industry took another unfortunate hit when 38 Ukrainian auto part plants were forced to shutter. These factories supplied electric and nonelectric components, which went to some of the largest automotive brands in the world. This list includes Mercedes, Ford, Skoda, Tesla, Volkswagen, BMW and Renault, as well as many companies in aeronautics industries.

One of the biggest shortages now impacting the automotive industry is wire harnesses, which relay information and electrical power in a vehicle. The possible long-lasting closure of the 17 Ukrainian harness production facilities could lead to a loss of up to 700,000 vehicles in Europe. Manufacturing of this part has historically relied on just-in-time production and inventory management systems, which means that when these plants closed, their customers had little to no stock on hand.

Some attempted to pivot by replicating the cable factories in countries near Ukraine, like Poland, Romania and Serbia, but it is a complicated process that takes time and significant funding. Meanwhile, Volkswagen, Mercedes-Benz and BMW factories had to pause production as they waited for new sources. These delays have already affected consumers, in the form of inflated prices and even more extensive lead times.

Cost of raw materials

When news of the war broke, the global supply of raw material was expected to suffer significantly. Ukrainian companies Ingas and Cryoin are responsible for nearly half the world’s neon production. Neon is essential for the lasers used in chipmaking, and the shutdown of these critical companies sent a ripple effect through the semiconductor industry, as manufacturers prepared to shore up supplies to weather the impending shortage.

Palladium, another important material, is a major component in catalytic converters, electric vehicle (EV) capacitors, sensor chips and certain types of computer memory. About 43% of global palladium production comes from Russia, which meant supply lines were critically restricted after Western countries and their allies ceased trade collaboration and leveled heavy sanctions against Russian companies and high-ranking individuals.

Russia is also the world’s third largest producer of aluminum and is among the four major exporters of vanadium oxide. The industrial applications for aluminum include its use in the power sector and general construction as well as in vehicles, airplanes and EV battery casing. A less often discussed material, vanadium is also used in airplanes, in addition to space vehicles and nuclear reactors. Prices of both substances have spiked, with aluminum reaching a 10-year high in February 2022.

Additionally, nickel reached an all-time high in the beginning of March 2022. Russia is the third biggest supplier of the material, which is essential for certain medical equipment, electronic devices, power generation and cathode material in electric vehicle batteries.

Availability of critical shipping corridors

In addition to highlighting the limitations of raw material resources, the war in Ukraine has further exposed weaknesses in the global supply chain. Significant trade routes between China and Europe have been disrupted, as some of the main corridors go through Russia, Belarus, and Poland before traveling to Germany, France, and additional European regions. These passages are significant lanes of trade for automotive and electronic supply, and customers worldwide have already seen lead times increase because of the interruption.

As the movement of electronics and components originating from China and other East Asian countries slows or stops, companies are reevaluating supply lines for alternatives. Transferring shipping methods to ocean freight is one option, but it is also an expensive and time-consuming process.

Moreover, congestion at ports around the globe has already been substantial. COVID-19 related shutdowns in Chinese ports meant operations functioned at partial capacity, which then triggered loading and unloading delays. This caused even further trickle-down effects, increasing costs for shipping containers that have already been suffering shortages.

Trucking and air freight served as alternatives to ocean freight, but fuel prices spiked exponentially in 2022. In June, jet fuel prices were up 128.1% compared to 2021, and since Russia is the biggest global oil exporter, those prices are likely to continue fluctuating as countries try to find other sources.

Sourcing Solutions

The ripple effects of this crisis will likely be felt for years to come, even once Russia and Ukraine’s economies have the chance to recover. It will be an extensive process, so manufacturers and their customers will need to creatively supplement supply and nurture partnerships to weather any resulting shortages and secure vital supply chains. As the semiconductor industry navigates this ongoing struggle, companies should consider rethinking and make sure to build a strong supplier network.