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Winter is Coming: The auto industry faces significant risk exposure from the looming European energy crunch

By Calum MacRae, Director, Supply Chain & Technology,
S&P Global Mobility

With energy prices in Europe skyrocketing, placing business
bottom lines in triage mode, a harsh winter could place certain
automotive sectors at risk of being unable to keep their production
lines running.

The combined black swan events of the COVID-19 pandemic and the
Russian invasion of Ukraine have already stretched the automotive
supply line – especially in regard to semiconductors. Now, some
OEMs and suppliers with energy-intensive manufacturing processes
may face extensive pressure in terms of energy costs in the coming

As a result, potential manufacturing losses from Europe-based
OEM final-assembly plants could reach more than 1 million units per
quarter, starting in the fourth quarter of 2022 through the
entirety of 2023, according to forecasts by S&P Global Mobility
and S&P Commodity Insights.

Starting in the fourth quarter of 2022 through 2023, quarterly
production from Europe-based auto manufacturing plants was forecast
to be in the 4-4.5-million-unit range per quarter – predicting
moderate growth. However, with potential utility restrictions, that
OEM output could be reduced to as low as 2.75-3 million units per

As seen with past regional events – Ukraine-sourced neon
shortages hampering semiconductor deliveries, and the 2011 Japan
earthquake and tsunami crippling supplies for microcontrollers,
mass-airflow sensors, and Xirallic paint pigments – losing one
crucial piece in the global supply chain can bring the automotive
manufacturing industry to a crunching halt.

The consensus forecasts for a cold, wet European La Niña winter,
combined with energy shortages, could have a similar effect. The
recent leaks in the subsea Russian pipelines to Europe adds to risk
and the likelihood that our model is directionally correct.

S&P Global Mobility is forecasting significant supply chain
disruption from November through spring. We also anticipate
disruption of the traditional just-in-time supply model due to some
suppliers implementing a schedule of working fractional-months on a
24/7 setup – which can be more energy-efficient than traditional
weekly shifts due to the latter’s higher start-up and shut-down
energy costs.

We consider mandatory energy rationing to be the basis for a
pessimistic scenario for the region’s auto producers and suppliers.
For an industry already struggling with low inventories of vehicles
in dealer showrooms, an additional crisis could be incapacitating
on a global scale.

European suppliers send parts, components, and modules to OEMs
around the world – thus impacting all automakers, not just regional
ones. And U.S. retail customers could also suffer, as EU/UK
manufacturing plants are currently exporting about 7,000 units per
month to American shores – but shipped 213,750 vehicles in the
entirety of 2019, according to Global Trade Atlas.

“If you look through the supply chain – particularly where
there’s any metallic structure forming through pressing, welding or
extrusion – there’s a tremendous amount of energy involved,” said
Edwin Pope, Principal Analyst, Materials & Lightweighting at
S&P Global Mobility. “Total energy usage in these companies
could be up to one-and-a-half times what we’re seeing in vehicle
assembly today. Anecdotally, we’re hearing that some of this
manufacturing capacity is becoming so uneconomic that companies are
simply shutting up shop.”

Before the energy crisis, gas and electric costs were a
relatively inconsequential component of a vehicle’s bill of
materials, typically less than €50 per vehicle. Now with cost
increases ranging from €687 to €773 per vehicle, energy costs
compound an already perilous position for the sector – given the
impact raw material price increases have already had on the nascent
electric vehicle value chains. Both serve to undermine margins in a
market where cost increases will be difficult to pass on to
customers already facing food and energy inflation.

Across the European Union, energy constraints could result in
nations or regions enacting emergency policies to counter this
threat. OEMs also have a certain level of countervailing power with
the regional utility companies and via governmental lobbying

“However, the pressure on the automotive supply chain will be
intense, especially the more one moves upstream from vehicle
manufacturing,” Pope said. “Upstream supplier parts production
constraints could impact OEM volumes. As a result, we see a risk of
OEMs halting shipments of completed vehicles due to shortages of
single components, which are not necessarily coupled to
country-level energy policies.”

How countries will be able to react
S&P Global Mobility has modeled the impact of the looming
energy crunch on 11 European countries – each a significant vehicle
production location – to assess which countries’ automotive
segments are best positioned to withstand the severe energy
headwinds this winter.

The model borrows from macroeconomic aggregate demand frameworks
in assessing consumption, investment, and government expenditure to
which an assessment of energy mix and gas storage is added. Based
on a quantitative assessment of available information, six
dimensions are scored on a relative basis between 1 and 5, with 5
being the best score.

The effect the energy crisis could have on a country’s economic
performance and societal wellbeing can also be connected to a
country’s industrial footprint. The most energy intensive
industrial sectors are aviation and shipping, but their energy
consumption is tied almost exclusively to oil, where price
increases have not been of the magnitude seen in gas and
electricity. Industrial sectors that see high usage of gas and
electricity include chemicals and metallic products, both of which
are intrinsically tied to automotive manufacturing.

Individual countries’ policy responses in addressing energy
imbalances will also impact comparative economic performance. Such
policies will determine how a country’s energy mix impacts the
comparative advantage of vehicle build locations in Europe.

That impact is shown by some counterintuitive results in the
S&P Global Mobility analysis. Germany has relied on Russia for
its gas supplies and is phasing out nuclear power, both of which
would seem to place that nation in a precarious energy situation.
However, Germany benefits from its government’s famous fiscal
rectitude, which gives it relatively more budgetary headroom to
ride out the energy storm. Further, the country benefits from a
relatively low reliance on electricity generation derived from gas
and from being in a decent position from a gas storage

The model also reveals how crucial government intervention in
household and industry support has been for the UK. In the past few
weeks, the UK government has announced measures adding up to some
GBP200 billion for consumers and industry – accounting for nearly
7% of the country’s GDP and more than double the level of its
nearest rival Italy. Without such support, the UK would be near the
bottom of the table, in a position similar to that of Italy – which
suffers doubly owing to its debt and budget deficit position as
well as its low energy self-sufficiency and reliance on gas power
for electricity generation.

The chart also brings into focus the relative position of a
country’s macroeconomic position vis-à-vis energy and macroeconomic
policies. Italy is one of the more vulnerable economies, and this
weakness will be further compounded by the relative cost
disadvantage its manufacturing base faces.

Not all countries will be impacted equally by the energy market
imbalances roiling markets in Europe. That said, it is clear that
an era of abundant, and cheap, energy is over – and this has
shocked policymakers into varying degrees of response.

The impact of energy prices
Since first quarter 2020, energy prices in Europe have soared.
According to S&P Global Mobility data for four key markets –
Italy, Germany, France and the UK – gas prices have increased by an
average of 2,183%, a factor of nearly 23. The wholesale electricity
price increased by an average of 1,230% or a factor of more than

The impact of the surge in prices is shown starkly in the
subsequent chart. Applying energy prices from the start of 2020 and
comparing with the current situation permits a view of the
additional cost that has been borne by OEMs. The subsequent chart
shows the gas and electricity cost increase for a typical reference
vehicle across France, Germany, and Italy.

For high-energy intensity sectors like automotive manufacturing,
S&P Global Mobility has developed a methodology, leveraging
proprietary data assets, to estimate the impact on vehicle
manufacturing’s bottom line due to escalating energy costs.

To allow for an apples-to-apples comparison in examining typical
energy usage in each stage of final assembly, the single reference
vehicle used was a Volkswagen Golf MKVIII, tipping the scales at a
shade under 1,370 kg, and considering local energy mix.

There are some caveats to this methodology. Carmakers sometimes
source their energy with different mixes than the country where
they operate, while we assume identical energy sourcing in our
model. Automakers also tend to lock gas and electricity prices with
utilities and use different financial instruments to reduce their
exposure – to the point they often end up reporting significant
windfalls from these hedging bets, as seen recently with the likes
of Volkswagen and Daimler. In our model, we assume they are paying
wholesale spot prices.

Ominous signs for the supplier tiers
Despite these warning signs, some OEMs protect their supplier base
by indexing the price of key commodities monthly for their
suppliers, which means that some suppliers are not locked into
contracts at an inelastic price point through the length of the
contract. However, this practice is not completely widespread.

“As you go further upstream, the sheltering the OEM provides
becomes less,” Pope said. “Additionally, smaller companies in Tiers
2 and 3 of the supply chain are likely to neither have the
resources nor the operational sophistication required for hedging
instruments, forward contracts and the like.”

The situation Europe faces may be only transient. Much will
depend on how the Russia-Ukraine conflict unfolds. However, a
longer-term transformation of the energy picture could result in
structural consequences for the industry. This would see production
schedules, manufacturing footprints and sourcing strategies being
discarded and replaced with a shift to locations where the energy
cost burden is least. While Europe faces a winter of discontent
now, more disruption could follow. This will bring fundamental
upheaval to the region’s auto sector and beyond.

In the way that labor cost used to be a key determinant of
manufacturing location, energy mix and self-sufficiency could
become key elements of future sourcing decisions.

This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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