#Automotive Finance

Russia-Ukraine war: The impact on European car sales

May 17, 2022 - 3 min read
Also Available in : Français
James Powell, Head of Global Automotive Strategy at Sopra Banking Software

At the beginning of 2022, there was a general sense of optimism that the European car market would return to growth, following a difficult few years, which included the pandemic and its subsequent effects, as well as a global microchip shortage last year.

However, 2022 has proven to be another challenging year for many industries, including automotive. The tragic and ongoing war in Ukraine is creating a raft of problems for organizations across Europe, and it’s having a big impact on new car sales. 

Record-high inflation

Against the backdrop of the war, Europe’s new car markets, which had shown some much-needed increase in activity, with supply chains getting to grips with the semiconductor shortage that had affected supply badly, contracted in February.

Across the European Union, new car registrations shrank by -6.7%, with 719,465 units sold across the EU. It was the weakest February performance in volume terms since records began. The four key markets in the region posted mixed results. Italy and France recorded double-digit losses (-22.6% and -13.0%, respectively), while Spain and Germany saw growth (+6.6% and +3.2%, respectively).

With long delays to order most new cars becoming the standard over the last 18 months, the concern is that things may worsen due to the rapidly accelerating cost of living. Across Europe, inflation hit a new record high of 7.5% in the year to March – the biggest increase since the euro was launched more than two decades ago.

A dent in customer confidence

Rising inflation and the ongoing war are likely to dent consumer confidence. And this is true across most industries and sectors – not just automotive. Research conducted by the European Commission shows that consumer confidence could reach its lowest point in two years, with Western European countries hit the hardest.

This will also affect levels of disposable income, and therefore how much people are willing to spend on big-ticket items, such as new cars. We’re already seeing anecdotal reports from car dealerships that there is a “footfall decrease.” Whether this decrease continues or exasperates remains to be seen, but it is troubling for new car sales for 2022.

Furthermore. these same factors that are affecting customer confidence will also hit beleaguered automotive supply chains. Another hit on delivery times seems inevitable, as does the potential for price rises.

This combination of factors could create a perfect storm, preventing the sale of new cars for the foreseeable future.

Economic sanctions and manufacturers

Economic sanctions have seen a whole host of manufacturers – including Ford, BMW, Mitsubishi, Mazda, Toyota, Hyundai, Nissan and Mercedes – suspending vehicle production in Russia. However, it is the reported cutting of output by a host of manufacturers around the world as component shortages arise that points to the latest global challenge that has been created.

Car makers’ inability to import raw materials from Russia impacts car production. Gas, oil and metals, including aluminum, palladium and nickel, –a crucial component in electric-vehicle batteries – are just some of the items that manufacturers are now unable to import from Russia.

Prices for these and other raw materials have shot up, and the reality is that this will be passed on in the form of higher new car costs in the months ahead.

Short-term gains. Long-term problems

Despite the potential trends for inflation, rising fuel, energy and ultimately vehicle prices, new car sales look set to gain ground in the short-term because of the long-standing orders already in place.

However, all the factors mentioned in this article will eventually catch up with the market, and we will likely see a drop in new car sales in the long-term.

Manufacturers and dealers alike will hope for a quick resolution to these issues, as 2022 got off to a promising start, but is fast becoming another challenging year for the automotive industry.