Motor sector braces for impact of Ukraine War

Podcast Ep 108: Consumer demand for new and used cars remains strong but the war in Ukraine is likely to hit supply chains, warns Bank of Ireland head of Motor Sector Stephen Healy.

It is hard to think of a buoyant motor sector in Ireland without contrasting it with the poignancy of what is happening in Ukraine right now.

But one way or another the tragic events will catch up on the sector by adding more strain on a global motor market already struggling with supply chain issues.

“Russia is the world’s largest producer of palladium, a material used in the production of catalytic converters. Ukraine is a major producer of neon gas, which is used in the production of microchips”

Few realise that both Ukraine and Russia play a pivotal role in the supply of raw materials including precious metals and the impact of the war and sanctions will affect world supply of vehicles.

A resilient sector


The motor sector in Ireland is going from strength to strength in Ireland and the industry has shown remarkable resilience over the past two years. In February, Bank of Ireland head of Motor Sector Stephen Healy reported in his Motor Sector News that new vehicle sales were up 22% in 2021, but still down 10% compared to 2019.

“So there’s still a long way to go to recover to pre-pandemic levels,” he told the ThinkBusiness Podcast.

A stand-out feature of the market in February was how electric vehicles in Ireland have reached almost 20% of sales.

The strong momentum continued in March with Healy’s Motor Sector News for March reporting that new passenger car (PC) sales increased 40.7% year-on-year (y-o-y) to 12,935 units, while Light Commercial Vehicle (LCV) sales declined 32.2% y-o-y to 2,032 units and used imports declined 35.1% y-o-y to 3,793 units.

Healy explained that used cars are holding their value due to a shortage caused by fewer imports due to Brexit as well as Government taxation. “Fewer used cars are being traded into dealers and so less used cars are for sale on forecourts. Used imports fell 20% last year due to Brexit, down 44% from a peak in 2019 and again, that means less used cars available on the market.

“Nevertheless, consumer demand is strong for new cars and used cars. Deposit balances increased during Covid-19 and those with the means are buying new cars. But they are being faced with longer lead times as supply chains are impacted dur to Covid-19 and the worldwide semiconductor shortage.”

Semiconductors are key to the functioning of modern vehicles. Globally, car manufacturers have had to reduce production output as a result of semiconductor shortages exacerbated by the impact of the pandemic on manufacturing output.

“As a result dealer order books are fully loaded, buyers are waiting on cars to be built. This is leading to longer lead times for consumers here. However, Automotive News is reporting that there will be increased chip supply from Q2 onwards.”

War will create new supply chain problems

But just as the spectre of semiconductor shortages appear to abate, the war in Ukraine could create new supply chain issues that run the gamut of everything from semiconductors to precious parts.

“The sector forecasts a stronger H2 with a 10% increase on 2021. It has been through a tough couple of years; first Covid, then Brexit, then semiconductors, but now Ukraine,” Healy said.

And that war in Ukraine will have an impact despite the expected return to buoyancy. “Manufacturers have halted exports to Russia as well as production in Russia. The manufacturing and supply of wiring harnesses in Ukraine has been impacted.”

Manufacturers themselves will be impacted. According to Healy German manfuacturers produced 170,000 cars in Russia that were mainly destined for the German home market. Renault, he says, generates 12% of revenue from Russia, its second biggest market outside of France.

But Healy says the impact could be even deeper than people realise. “Russia is the world’s largest producer of palladium, a material used in the production of catalytic converters. Ukraine is a major producer of neon gas, which is used in the production of microchips. The war has the potential to damage the recovery in global semiconductor supply.

“If contained, it is possible that it might affect consumer behaviour here, potentially accelerating demand for fuel-efficient cars.”

This is happening already with 16% of new cars sold in Ireland being electric vehicles, which compares favourably to the 18% EU average. That said, with just 50,000 electric cars on Irish roads, it accounts for around just 2% of the overall fleet. So, there’s plenty of road to travel yet.

Healy said that consumer demand for these vehicles is continuing to accelerate and manufacturers are building electric vehicles and low emission petrol and diesel vehicles to meet strict EU emissions standards.

“Electric and hybrid vehicles accounted for 45% of all new cars sold in the first two months of 2022,” Healy said.

John Kennedy
Award-winning editor John Kennedy is one of Ireland's most experienced business and technology journalists.