How does the war in Ukraine affect the car industry?
The situation is very unpleasant for everyone in the automotive industry. The impact is threefold. First of all, the transport to Russia is canceled. We supply AvtoVAZ to Russian plants via Renault-Nissan. The goods are sent directly. Last week, all shipments were canceled, which meant up to thirty million euros of turnover for us every year. The goods are already made, the material purchased and the people in the companies ready to work. We see another impact on cars. They stop production because they do not have parts from Ukraine but also from Russia. For example, cable harnesses are produced in Ukraine, which are not available today. We see impacts on Volkswagen, Daimler, Toyota and BMW, which are reducing production. In addition, airlines have made shipping to Russia more expensive and are unable to guarantee delivery time.
And the third impact?
Energy and fuels become more expensive. Already so expensive raw materials will become significantly more expensive. Ukraine is a superpower in the production of aluminum or steel, it also produces neon, which is needed for the production of chips. There are signals that there will be problems with that. These are almost unbearable extra costs for suppliers. The key will be whether companies can pass this on to their customers. However, the contracts are fixed and no one will tell you how it will affect the prices.
But experts agree that the conflict in Ukraine can last a long time. What are the consequences?
The longer the conflict lasts, the more crushing the impact will be on companies in the automotive industry, but also in construction, chemistry and the food industry. Panic has already occurred. We see it in prices. Therefore, companies have to deal with cost reduction. We also stop some lines because we cannot produce in stock. The employees are at home and we pay them a salary. Businesses face an awkward dilemma as to employment.
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The panic has already begun. The production lines are standing and the employees are at home, says Petr Novák from JTEKT • VIDEO Videohub
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Will you be fired?
It depends on the length of the conflict. Unemployment is low. Some manufacturers are already relocating cabling production from Ukraine to Europe. It may happen that the carmakers will start production again in the relatively short term. And then they and their suppliers would miss potentially laid off employees. Everyone has to consider what pays off for them.
Automakers have had a major pandemic in the last two years. How did you manage to deal with her?
A pandemic is a global problem. All you have to do is drop the only supplier in the chain, and the carmaker will feel it. It has been going on for two years and the situation is not improving. Yes, there were signals that the worst of the time with a lack of chips is over. Unfortunately, I have to say that we will stop production again. We are currently dealing with the cessation of one major concern in Europe. The impact will be huge, the outage will affect tens of thousands of cars.
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You maneuver in a much smaller space than the car manufacturers, on whose plans and production you fully depend. How is your position different?
The crisis has taught us to work more closely together. After all, carmakers have more power, more leverage (JTEKT belongs 25 percent to Toyota, the rest of the shares are traded on the Tokyo Stock Exchange, editor’s note). Suppliers are not so financially strong. The lower we go in the supply chain, the more cases where companies bleed financially. Some companies have already left the automotive industry completely, others have gone into insolvency. Recently, an unnamed company in the British Isles told us overnight that it could not produce at the given prices and is ending. It was better for us to buy the company. The plant continues to produce this. Or another example: our steel supplier goes into insolvency and has made our material more expensive by half. These are huge amounts.
So?
Excluding rising wages, our costs for materials, energy and other inputs in fifteen European plants increased by a hundred hundred million crowns. In general, companies must either pass these costs on to the customer or find cost-saving measures.
I assume that many smaller Czech suppliers cannot increase their prices either because they are not allowed by already concluded contracts or because they would become uncompetitive. But the costs swell. What with this?
Smaller family businesses may end up in insolvency. We have prospects of how the situation will develop in a quarter, a half, three quarters of a year. But they are not credible. If we don’t give them to smaller companies – tool shops, for example – they can’t calculate how many people they need and so on. This can endanger them.
How fast are prices rising in the automotive industry and in your country?
Prices have already risen by lower percentages. If I say that we have been able to pass on half of the mentioned extra costs in the order of hundreds of millions of crowns a year to our customers, I will still be optimistic. Suppliers like us today carry a heavy burden to keep things going. Contracts with customers usually state that it is possible to increase prices due to higher prices of materials once, at most twice a year. This complicates the situation. I have nothing against the final producers. But if we look at the results, we find that they have record profits that some corporations have never had in history, although yes, when production stops, it hurts the carmakers.
How do you substantiate this claim?
A recent EY study found that automakers have record margins. They adapt the production of specific model lines of cars according to which components they have enough. They produce cars with the highest margins. They are able to pass on the increase to end customers. This is due to the high demand for new cars. Suppliers must adapt. The profits made by the final producers are disproportionately high compared to where the supply network is located today. If some suppliers go bankrupt, this will result in additional costs for the entire chain. But no one will reimburse you. And that is why there is tension.
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The Czech National Bank is raising interest rates to curb rising inflation. And she is not alone. Do you welcome anti-inflationary efforts, or do you blame central bankers for making loans more expensive for companies and thus probably limiting investment opportunities?
Our corporate has loans in foreign currency. In Europe, money has not yet risen, but it can be expected that this will happen. This will be a problem for Czech companies with loans in Czech currency. The main problem is the koruna’s exchange rate. The automotive industry is export-oriented, with 90% of production exported. Exchange rate losses are huge. Businesses are calling for the adoption of the euro, that would be an advantage. He tries to compensate for the uncertainty either by hedging or by invoicing in euros – this is our case. We buy material or energy in euros and thus compensate for this uncertainty. For example, our Olomouc factory had an exchange rate impact of two million crowns in profit in January alone.
Should the Czechia strive to adopt the euro?
It would help stability and long-term plans. If we do not know what will happen in three or five years from the point of view of monetary policy, it could fundamentally affect strategic plans. That is why export-oriented companies are calling for the euro. The uncertainty is huge.
Back to inflation. Will it speed up the price of new cars?
Then there will be units of percent per year. There are three reasons, the first is the ever-increasing comfort in the cars. The second reason is also the growing security requirements. And the third category is the pressure to protect the environment. Emission limits force carmakers to invest. Cars then become more expensive. If uncertainty remains, there is room for further price increases. If the chains straighten, the reasons for the increase will weaken.
In the previous year and last year, the volume of production and sales of new cars in Europe dropped massively. The European Automobile Manufacturers Association is finally expecting an increase of eight percent to 10.5 million cars produced from this year. What year are you waiting for?
The numbers from the carmakers we supply in Europe look very good. We see a ten percent increase. He believes that production and sales are stabilizing. But the big question mark is whether the tension will subside. Then no ten percent would pay and we would end up like last year. Unfortunately, I cannot confirm that we see similar optimistic prospects.
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Petr Novak (45)
He has been working in the Japanese group JTEKT for almost fourteen years. He originally ran a factory in Olomouc producing car parts, which he later became president. As Director of the JTEKT Automotive Section for Europe, he is now responsible for control and drive systems. Nine production plants from the Czech Republic, Great Britain, Belgium and Morocco are reported to him. The turnover of its division, which manufactures electrical control systems and other parts, is about 1.5 billion euros.
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