Russia is also shaking up the auto industry

Russia is also shaking up the auto industry

Decades of rapprochement are suddenly over: Western companies are cutting their ties to Russia as a result of the Russian attack on Ukraine. The auto industry is also affected by the political crisis.

The Volkswagen Group is right in the middle of it all, rather than just there. Insofar as he is the only German car manufacturer to operate a factory in Russia. This is located in Kaluga, 170 kilometers southwest of Moscow. From the company headquarters in Wolfsburg it is about a 22 hour drive or 2000 kilometers to Kaluga. The Volkswagen Tiguan and Polo as well as the ŠKODA Rapid are currently manufactured in the plant there. The Audi models Q7 and Q8 are also produced there on a semi-knocked-down (SKD) basis. 

There is also an engine production plant in Kaluga. The 1.6 liter EA211 petrol engine is manufactured there. In addition to the VW Polo and ŠKODA Rapid models produced in Kaluga, the engines are also used in the ŠKODA Octavia, ŠKODA Karoq and Volkswagen Taos manufactured jointly with GAZ in Nizhny Novgorod.

Volkswagen has invested more than 1 billion euros in the Kaluga plant. According to its own information, the group invested a total of 2.06 billion euros in Russia between 2006 and 2021. Concern is now growing all the more about the business operations of the Russian national company LLC Volkswagen Group Rus, which operates the plant in Kaluga.

The management of the VW Group around CEO Herbert Diess is now in a quandary. On the one hand, stopping production in Russia could send a signal of solidarity with Ukraine, but on the other hand, Diess is also committed to the well-being of his workforce in Kaluga, Russia, especially as CEO of a company in which employee representation traditionally enjoys strong influence.

Meanwhile, operations in Russia continue despite the war in Ukraine. When asked by “Business Insider”, a VW spokesman explained: “In Kaluga and Russia, business operations are currently running smoothly.” Regarding further developments, a valid assessment is simply not possible at the moment.

Of course, Central and Eastern Europe in general is an important sales market for the second largest car company in the world after Toyota. In 2021, all VW Group brands delivered almost 660,000 vehicles there.

Meanwhile - the globalization of supply chains sends its regards - the war in Ukraine is paralyzing car production at Volkswagen in Saxony, at least for a few days. In the plants in Zwickau and Dresden (VW produces its ID.3 electric car there), production has to be interrupted this week and several thousand employees have to be put on short-time work for a few days. The reason for this is the lack of material deliveries from Ukraine due to the border closure, including cable sets that are manufactured there. 

Speaking of cable harnesses: The Nuremberg-based auto supplier Leoni closed its two plants in Stryji and Kolomyja near Lviv in western Ukraine last week due to the Russian attack on the country. Around 7,000 employees produce cable harnesses (on-board electrical systems) for cars there. A spokesman said VW was a big customer of Leoni. Whether the production interruptions in Saxony are related to the production stop at Leoni has not (yet) been officially confirmed.

Since no wiring harnesses can currently be delivered from Ukraine, engine production at BMW Steyr will now also come to a standstill. 3,200 employees will be put on short-time work from Friday until May 31st. Like so many others, the plant is already suffering from the tense supply situation with semiconductors, and the Ukraine crisis has now made the situation even worse.  

Renault is also suffering from “interruptions in the supply of components,” as it is said. The French have promptly shut down their production in Moscow temporarily.

While the Russian business only accounts for a relatively small proportion of the German auto industry overall, Renault is comparatively heavily involved in Russia. According to Citibank estimates, the group makes around eight percent of its profits there. Renault also has a significant stake in Russia's largest carmaker Avtovaz, the maker of the Lada SUVs.

In 2021, around 1.67 million cars and light commercial vehicles were sold in Russia (in 2020 it was 1.60 million). This puts Russia in eighth place among the world's largest automobile markets, after South Korea and ahead of France and the UK. The manufacturer group with the highest sales in 2021 was Hyundai (including Kia) with around 380,000 vehicles. In second and third place were Avtovaz (Lada) with 351,000 and the Renault-Nissan-Mitsubishi Alliance with 212,000 vehicles. Volkswagen follows closely behind.

“In addition to the Hyundai Group, the expected economic sanctions will hit the Renault-Nissan-Mitsubishi cooperation as well as the Volkswagen Group the hardest,” says Stefan Bratzel, director of the “Center of Automotive Management” (CAM) in Bergisch-Gladbach, in a current analysis. However, since Russia's market relevance in relation to total sales for Volkswagen is only 2 percent, the negative direct sales effects can be assessed as moderate, similar to BMW and Mercedes-Benz. Renault-Nissan-Mitsubishi, on the other hand, is the most affected.

According to Bratzel, Russia has automobile production with a total of 34 production plants for cars, trucks, vans, buses and engines, which, however, mainly produce for its own domestic market.

Interestingly, Renault did not mention Russia's invasion of Ukraine and the subsequent Western sanctions against Russia when justifying the closure of the plant in Russia.

The world's largest truck manufacturer, Daimler Truck, acts completely differently. He has temporarily stopped all business activities in Russia because of the war in Ukraine.

“As a company, we stand for peaceful global cooperation and categorically reject any form of military force,” said a company spokesman in Stuttgart. The “Handelsblatt” had previously reported that Daimler Truck had stopped its cooperation with the Russian truck manufacturer Kamaz. Daimler supplies them with parts for civilian vehicles.

Like any other company, Daimler Truck also evaluates business relationships with Russian partners at all levels, said the spokesman. As he emphasizes, they never had anything to do with military vehicles from Kamaz anyway. The Russian market only accounts for around one percent of Daimler Truck's global sales.

According to German media reports, the Mercedes-Benz Group, formerly Daimler and former parent company of the Daimler truck division, is also said to be legally examining how it can divest itself of its 15 percent stake in Kamaz as quickly as possible.

Automotive supplier ZF Friedrichshafen has meanwhile stopped all deliveries to Russia due to the war in Ukraine. A spokesman in Friedrichshafen said the company is analyzing the implementation of international sanctions measures in a task force and has frozen all deliveries to Russia. This also applies to all deliveries to the ZF Kama joint venture. The Friedrichshafen-based group operates a joint venture with the Russian truck manufacturer Kamaz under this name. In terms of size, the Germans will be able to cope with the failures: in 2020, ZF generated sales in the single-digit million range with the joint venture. 

But it's not just Daimler Truck that is ceasing its business in Russia. The Swedish commercial vehicle manufacturer Volvo had previously announced that it would stop production in its Russian factory (which, like VW's, is also in Kaluga). In addition, Volvo has announced that it will no longer deliver new cars to Russia. The decision was made because of potential risks related to the trade of materials with Russia, including sanctions imposed by the EU and the US.

The Association of the German Automotive Industry (VDA) states that German car manufacturers and suppliers alone operate a total of 49 production sites in Ukraine and Russia. “The military attack by Russia on Ukraine has significant direct and indirect consequences for the automotive industry,” writes CAM expert Stefan Bratzel in his analysis of the market.

Although Russia and Ukraine only play a minor role as supplier locations for the global automotive industry, disruptions to the supply chain could still occur here too. “Due to the complex value creation networks of the automotive industry, suppliers of upstream production stages could be negatively affected, which could subsequently lead to bottlenecks in the supply of parts to European plants.” This is exactly what the industry, which is already suffering from supply bottlenecks for semiconductors, was missing.