The Russian invasion of Ukraine and the related economic sanctions represent a threat to a scenario of mild recovery of global light-vehicle production in 2022.   The economic consequences of the war in Ukraine are adding to ongoing supply-side risks related to the shortage of semiconductors, which intensified for the global auto industry in the second half of 2021. We now see a material threat to our previous base case for moderate growth in sales and production this year and have revised our estimates downward. We project global sales will decline by up to 2% in 2022 on last year (compared to our projection in October last year of a sales rise of between 4% and 6% for 2022; see table 1). Russia and Ukraine accounted for approximately only 2% of global light-vehicle sales and production in 2021, and therefore represent a negligible direct impact. But the indirect consequences will likely be more pronounced for the European region and could well spread to other markets in the event of a prolonged conflict. Global supply-chain disruption and inflation due to raw-material scarcity are critical risks for the auto industry. Europe-based original equipment manufacturers (OEMs) have idled production at a variety of plants, and visibility on a normalization of operations remains low. Specifically, disruption of supply of critical automotive parts from the region, including wire harness manufacturing in Ukraine, potential shortages for materials such as palladium, and price hikes for steel, copper, aluminum, and nickel pose key risks to the industry for 2022.

We believe light-vehicle production could struggle to surpass pre-pandemic levels even in 2023 in the face of low visibility on improvements in supply chains.   In addition, the recent earthquake in Japan and suspended output at Renesas' semiconductor plants also pose incremental downside risks to our previous assumption of a more balanced supply-demand dynamic for chips by mid-2023. We expect supply disruption to ease gradually, but at the same time we believe that the rising cost of living, particularly in Europe but also in the U.S., will dent pent-up demand.

China appears to be relatively shielded from inflation, but slowing economic growth could weigh on consumer spending on big-ticket items.   Our new forecasts therefore also incorporate some downside demand risks as of 2023 due to vehicle affordability concerns from the weaker macroeconomic environment, with rising inflation and the potential for negative real wages in some markets (for further details see "Global Macro Update: Preliminary Forecasts Reflecting The Russia-Ukraine Conflict," published March 8, 2022, on RatingsDirect.)

Energy supply disruptions or price shocks could also have ramifications for global auto production and demand.   The Russia-Ukraine crisis could have material implications for the European market due to its external reliance on raw materials, gas, and oil. It is not only triggering unprecedented spikes in raw materials and energy prices, but will lead to prolonged uncertainty over how the European Commission will execute on its Repower EU strategy for ending Europe's dependence on Russian gas. Based on very preliminary estimates, this would create a shortage of energy in the short term, leading to rationing, with widespread implications for production of durable and nondurable goods. For some auto suppliers, Russian energy providers support operations in key European locations. Auto suppliers will need to replace these providers in a situation of supply deficits and high transportation costs.

We see some short-term credit implications for global auto producers and suppliers.  As global inventories remain at record lows, automakers are committed to executing on very healthy order books from the end of 2021, with lead times that have never been longer. Market conditions in the auto industry will continue to be dominated by supply issues this year. This suggests OEMS will seize the opportunity to rebuild inventories that were largely depleted over the past two years, but also manage production with the aim of maintaining healthy pricing. Still, the combined impact of marginally higher production volumes in 2022 and higher pricing may not fully offset cost inflation, in our view. As a result, we expect to see pressure on margins and cash flow generation over the next two years. In this market environment, auto suppliers will continue to struggle to pass on input-cost increases beyond contractual arrangements with automakers. Pressure on contracts could even surge over time because we expect OEMS to try to transfer some of the higher costs of electrification to their supplier base to protect margin dilution as volumes increase. Furthermore, auto suppliers will have to adapt to new trends, such as direct sourcing of commoditized parts like semiconductors and raw materials. They also face selective reduction of the addressable market for EV components as a result of the decision by OEMs to partially insource parts where they can achieve quick cost advantages or personalize parts to make them distinctive components. This trend might be temporary: we think it may reverse when OEMs can achieve cost reductions on batteries, the key component of electric vehicles (EV). The rating impact will, however, depend on the headroom built in to credit metrics. We expect auto manufacturers to have more comfortable rating headroom than auto suppliers, but any rating actions would occur selectively.

Table 1

Electrification Defies Downturn

For now, we do not believe increased pricing pressure will lead to any meaningful change to our base-case for electrification globally. Regulation drives energy transition in the auto industry. It is possible there might be softer momentum for EVs in 2022 and 2023 because of rocketing prices for nickel and other materials specific to batteries that can't be hedged, such as lithium. According to figures from the database EV-Volumes.com, in the first two months in 2022, passenger electric vehicle sales (BEV and PHEV) grew 94% on the same period of 2021 in the most relevant 15 global markets, while total passenger car sales' growth was flat.

In Europe (Europe 10) EV sales expanded by 35% versus a decline of 4.3% for passenger cars. EVs now represent 20.7% of the light-vehicle fleet, and we project they will make up more than 30% in 2025. The sales momentum of new energy vehicles (NEV) in China remains solid, supported by ongoing government stimulus and increasing customer acceptance. The China Association of Automobile Manufacturers reported that NEV sales increased by 155% year on year in the first two months of 2022 and accounted for nearly 18% of total auto sales. The price surge in key nonferrous metals, such as lithium, has led to battery price hikes of 20%-30% in China in the past five months. This has been gradually passed on to consumers, with certain EV producers raising EV prices multiple times since the start of this year. Nevertheless, major producers' EV orders remained healthy despite rising gasoline prices and increasing EV product competitiveness.

In the U.S., the combined market share of EV and PHEV touched 5.5% in the first two months of 2022 compared to 2.9% for the same period of 2021. This positive momentum appears consistent with our prior base case that they will exceed 15% of the market by 2025.

Table 2

Related Research

• Industry Top Trends 2022: Autos, Jan. 25, 2022
• Global Macro Update: Preliminary Forecasts Reflecting The Russia-Ukraine Conflict, March 8, 2022