Ukraine: Impact on the European truck sector

The unfolding situation in Ukraine has given rise to questions concerning the likely impact on the automotive industry, including the Medium and Heavy Truck sector. The Ukrainian market and auto sector will, no doubt, bear the brunt but effects are also likely to be felt elsewhere in the region.  

Some of the variables that are likely to be immediately affected are critically relevant to truck demand across the region.

Downside risks:

• Oil and gas prices: Gas futures surged on 24 February (the day Russian troops moved into Ukraine), signalling increased risk to already tight supplies, especially in countries whose energy supply is highly dependent on Russia. Rising oil and gas prices will put further upward pressure on inflation, hitting the consumer side of the economy via the impact on real incomes. From a Heavy Truck perspective, rising TCO (total cost of ownership) puts downward pressure on demand.
• Trade disruption: Russia’s position as a major supplier of energy, minerals and other raw materials, means further risk of disruption to already strained supply chains, leading to negative consequences for manufacturing and industrial output, a key driver of freight demand. Air, road, and rail freight flows are already affected and are exacerbating shortages in automotive manufacturing in some locations. 
• Investment: The combination of impending sanctions, inflation and oil prices has sent the rouble – and European investor confidence – plummeting, just as Covid worries were starting to recede. A collapse in investment – as happened across the CIS region in 2015 – would deal a sharp blow to capital goods such as trucks.
• Drivers: The European driver shortage is intensifying, with transport firms based in Poland and Lithuania employing tens of thousands of Ukrainian drivers, many of whom are expected to prioritise supporting their families or take up arms in defence of their country. 

Certain other factors may boost Heavy Truck demand, at least temporarily. Although Western economies are not (yet) war economies in the strict sense, huge sums of money have been pledged by governments in recent days. 

Upside risks:

• Public investment: Western governments have announced massive defence budgets. In an unprecedented move, the new German Chancellor, Olaf Scholz, has pledged additional military investment amounting to EUR 100bn in 2022 in Germany alone. This will act as a significant stimulus to the military industrial sector. Heavy Truck demand is likely to benefit from the boost to military hardware manufacturing. 
• Construction: Investment in construction also tends to rise during times of war as supply lines are extended and fortified to aid the logistical effort, and damaged or destroyed infrastructure needs to be repaired or replaced. As after natural disasters, construction vehicle demand tends to rise temporarily as a result. 

Heavy vehicle demand is, thus, being pulled in different directions by different short-term factors. 

Much will now depend on whether the invasion of Ukraine will be followed by a swift occupation and installation of a Moscow-oriented regime, or whether the conflict will become a prolonged war of attrition extending for months or even years. The situation is still very much in flux and predictions are difficult. 

History:

A comparison with 2014/2015 (Maidan Revolution and subsequent Russian annexation of Crimean Peninsula) throws some light on how markets have reacted in the past: 

• The Ukrainian economy nosedived, with exports, imports, industrial production and investment all falling in the double digits – the latter by 24% in 2014, followed by further steep falls in 2015. Truck output continued to grow through 2014, plateauing in 2015 and then falling drastically (-49%) in 2016 before a recovery got underway from 2017. 
• In Russia and allied Belarus, meanwhile, industrial production initially increased in 2014, before receding in 2015. Although both countries experienced recessions as sanctions hit, the declines were less severe than in Ukraine. There was a bounce in truck output in both countries in early 2014, but it was short-lived and not sufficient to reverse the slide in output that had been ongoing since 2012.

Affected OEMs:

• AvtoKrAZ is the only complete cycle manufacturer of HD trucks in Ukraine. Its line-up includes 33 base models of two-, three- and four-axle conventional and cabover trucks. The KrAZ plant, based in Kremenchug, is estimated to have a capacity of around 1,500 units pa (data has not been published since 2018, coinciding with Ukraine’s gradual withdrawal from the CIS). Output is expected to be decimated in 2022, with an uncertain outlook beyond the immediate crisis. 
• Russian OEMs: Overall Russian truck output in 2021 rose to its highest level since 2017. Production and sales of Heavy Trucks rose robustly in December, which was attributed to a number of active construction projects and high replacement demand resulting from an ageing parc. 
• Western OEMs with Russian assembly operations: As of 28 February, Daimler Truck has suspended cooperation with KamAZ, whilst Volvo Trucks has halted all production and sales in Russia. 

Outlook:

The outlook for the Ukrainian Heavy Truck sector and market has worsened dramatically and forecasts have been slashed; however, in the wider regional context, it is a small market. Belarus, as well as other bordering states (the Baltic states, Poland) are likely to feel some effects. Russian truck demand and output by domestic OEMs may receive a boost in the short term, though the medium and longer term will be constrained by a difficult economic outlook. Western OEMs continue to face supply-side constraints. 

Different markets are likely to react differently, depending on the level and nature of their involvement in the crisis; and the Heavy Truck sector as a whole is likely to react differently than the Light Vehicle sector, due to its responsiveness to the demands of the industrial sector.