Russia’s invasion of the Ukraine, along with the immediate tragic consequences and diplomatic crises it is creating, will have long-lasting ripple effects, including further disruptions of the global supply chain. Indeed, if the lessening of the pandemic recently suggested signs of hope, we should now expect things to get worse for reasons beyond spiking oil and gas prices.
First, beginning five to eight years ago, many American and western European companies became concerned about China’s increasingly high labor costs and began to reevaluate where to source components. Seeking lower costs, some relocated their sourcing needs to countries in central Europe — Poland being a prime example.
However, Russia’s invasion will drastically reduce production of all kinds of products and components coming out Poland, Slovenia, Slovakia and elsewhere in the region for the foreseeable future. Economic sanctions on Russia itself, coupled with Ukraine’s disrupted industries, will cause significant delays on materials, as well. The negative impact on the supply chain is inevitable.
The war’s human impact matters, too. In less than a week, more than half of a million Ukrainians fled the nation (the true total is growing exponentially), from the Ukraine into bordering nations and throughout the European Union. This exodus in itself will disrupt the supply chains until after the conflict is resolved, however that resolution comes. For example, look to how long it took the former Western and Eastern Germanies (with the latter half of the population politically and economically disenfranchised) to unite into one country once again after the fall of the Soviet Union — more than 20 years.
Next, the interconnected nature of central Europe’s infrastructure, from roads to rivers and railways, will be subject to severe dislocations. Put simply, how will a company reliably move goods from here to there with a war in the region? Few goods or components in Europe are expensive or small enough to justify going by air, so railways and roads are the only realistic alternative.
Additionally, Russia may have the power to cut off supplies of gas and oil that are used to run factories not only in the Ukraine but throughout the region. Expect the Russians to exercise that advantage — no power, no production.
Finally, older and more traditional EU members (Germany, France and Italy, as well as “Brexit” U.K.), which are both manufacturers and consumers of components, will be equally impacted by the Russian invasion. They will be slowed in supplying their components to their customers and slower in placing orders for what they need to fit with “just-in-time” requirements.
Think, for example, of how larger European car manufacturers in places like Germany, Sweden and France will be affected. Automakers, who already troubled by a serious global microchip shortage, are like the canary in the coal mine. This invasion may be another shock to those companies, as Russia and Ukraine combine to produce 70% of the world’s neon, which is crucial to making semiconductors.
Longer term, the only potentially positive development, from a supply chain perspective, of this invasion will be an acceleration to onshoring manufacturing capabilities out of Europe and Asia back to the USMCA members (U.S., Mexico and Canada). This will, however, also give an impetus to companies to consider reshoring their sourcing needs to countries throughout Latin America.
The global supply chain has long been on the verge of collapse, but the pandemic and Russia’s latest actions are shattering links at a pace that is greatly harming the worldwide economic climate. Businesses, especially those in the U.S., must look to their own shores to withstand this upheaval.
