The situation in Russia and Ukraine has escalated, the raw material "card neck", the automobile industry is very "core".

The situation in Russia and Ukraine has put the supply of cars and auto parts at risk. But as the situation between Russia and Ukraine escalates further, carmakers are likely to face new concerns: a global shortage of microchips.

Insufficient supply of neon and other raw materials may aggravate the chip crisis

Russia and Ukraine are both producers of key gases and raw materials needed for global semiconductor production. As raw materials become more and more difficult to obtain, the chain reaction of the situation in Russia and Ukraine is likely to exacerbate the microchip crisis. Neon is the key gas that drives lasers needed to drive semiconductor chips, while Ukraine is home to 70 per cent of the world's neon, according to TrendForce, a market research company.

Us chipmakers are "almost entirely" dependent on neon from Russia and Ukraine, according to Techcet, a market research firm. "it is difficult to find a substitute for neon, so chip manufacturers will look for an alternative source of neon as soon as possible." Carla Bailo, CEO of (Center for Automotive Research), an automotive research center, pointed out, "in the end, if the supply of semiconductors is insufficient, we will face a similar predicament as last year."

The shortage of semiconductors is the product of novel coronavirus's epidemic and the main cause of frequent manufacturing shutdowns in 2020 and 2021. It has hit the automobile industry and affected car retailers and consumers. AutoForecast Solutions (AFS), an auto market consultancy, estimates that global carmakers were forced to cut production by more than 10 million vehicles last year because of chip shortages, and another 656200 so far this year due to lack of cores. AFS expects carmakers to cut production of at least 1.3 million vehicles this year.

Dan Hearsch, general manager of automotive and industry at AlixPartners consultancy, said that the situation in Russia and Ukraine would not have an immediate impact on semiconductor production, and that major microchip companies had built up enough neon gas inventory for a few months. "they foresaw this," Hearsch said. "after the chip crisis of the past two years, they decided to hoard as much stock as possible."

But the longer the situation in Russia and Ukraine lasts, the more likely it is that companies will have a shortage of neon gas, thus hampering global semiconductor production. But before that, some in the auto industry expected the chip crisis to begin to ease in the second half of this year.

To make matters more complicated, Ukraine relies on Russia for neon production. Neon, a by-product of Russian steel manufacturing, is purified in Ukraine and then exported to most parts of the world, according to Techcet.

History shows that the price of neon is likely to rise sharply as supplies decline in Ukraine. According to the U.S. International Trade Commission (U.S. International Trade Commission)), neon prices rose 600% in 2014 before Crimea joined Russia (both Russia and Ukraine claimed the peninsula), mainly because chipmakers rely on a small number of Ukrainian companies.

But neon is not the only raw material at risk because of the situation in Russia and Ukraine. According to Techcet, about 1/3 of the world's palladium comes from Russia. Palladium is used in semiconductor manufacturing and is a key raw material for catalytic converters.

Hearsch also said that raw materials such as aluminium, nickel and pig iron from Russia, which supply many steel mills around the world, are also at risk. "in a globalised environment, all raw materials will be subject to a global chain reaction," he said, adding that the situation in Russia and Ukraine had had a significant impact on the global auto industry, especially in Europe.

Car production in Europe was quickly affected by transport disruptions and a shortage of parts, especially the wiring harness, a key component of the car's electrical system. Although Volkswagen, Audi, BMW and Porsche have been trying to secure wire harness supplies, their factories in Germany have been forced to stop production.

Hearsch said 24 auto parts suppliers have operations in Ukraine, many of which are wire harness. "most of the wire harness companies are in Ukraine." Harness inventories are usually kept at a low level, and suppliers in the region currently supply few harnesses to customers.

At the same time, many carmakers said they would suspend operations in Russia. Companies such as Ford, Honda, Toyota, Volkswagen, Aston Martin, Volvo, GM and Daimler trucks either stop exporting cars to Russia, or stop assembling cars in Russia, or both. "Ford is deeply concerned about the situation in Russia and Ukraine and the safety of the Ukrainian people," Ford CEO Jim Farley said on Twitter.

It is difficult for suppliers to transfer business, so it is necessary to strengthen the understanding of the supply chain.

After the escalation of the situation in Russia and Ukraine, auto parts suppliers with local operations have also been closely monitoring the situation. Ambofu said that before the situation between Russia and Ukraine escalated, the company had moved a large number of parts production out of Ukraine. Magna announced last week that it had suspended operations in Russia, including six factories, employing about 2500 people. "like most people in the international community, we remain deeply concerned about the situation in Ukraine," Magna spokesman Tracy Fuerst said in a statement.

With the US and Europe imposing economic sanctions on Russia, companies with Russian companies in the supply chain are also likely to be affected. It is reported that at present, some Russian banks have been shut out of (SWIFT), the international capital clearing system. SWIFT is a secure information system designed to ensure rapid cross-border payments and has become the main mechanism for international trade financing.

Homayune Ghaussi, a partner at Warner Norcross & Judd, said, "for clients with Russian or Russian-related companies in the supply chain, they are most worried about whether these companies can collect payments. Most of these companies rely on banks for their collection and payment business, and US banks may not be much affected, but I expect some of these banks to be linked to Russian banks. "

Hearsch said the situation in Russia and Ukraine could cause Eastern European companies to be seen as at risk in the near future. But he believes carmakers and parts suppliers are unlikely to move their supply chains out of eastern Europe to higher-cost western Europe. "it is difficult to transfer the business, and in addition, the business may face additional risks in the process of transfer."

Ghaussi said that the situation in Russia and Ukraine once again stressed the importance of enterprises to increase their understanding of the supply chain, which allows companies to estimate the possible risks. You may not have a direct relationship with the company affected by this, but a supplier in your supply chain may be affected by it.

Bailo said growing uncertainty over the past two years could force companies to re-examine their supply chains and risk management plans. "as far as the supply chain is concerned, there are some factors that disrupt the supply chain that did not exist before, including political risks and more frequent natural disasters," she stressed. "