Putin's war on Ukraine changes auto industry trade risk

I keep thinking back to that great scene in the classic TV series "The West Wing" in which Toby, the super-liberal speechwriter, riffs on how capitalism makes the world a better place.

"Free trade stops wars!" he ranted.

The point of what's sometimes called "capitalistic diplomacy" is that when a country's companies have factories and employees and customers in another country, whatever disagreements may arise, there are strong motivations not to blow up those factories and employees and customers.

And then there's Russia.

Vladimir Putin's invasion of Ukraine — reminiscent of the Soviet invasion of Hungary in 1956 or Hitler invading Poland in 1939 — is the sad exception that proves the rule.

Russia had been minimized as an automotive and economic power. General Motors largely pulled out in 2015, and Ford mostly did the same in 2019 — because it wasn't a very good market. Among global automakers, only Renault, Volkswagen and Stellantis have assembly operations there.

Workers in Ukraine make some wire harnesses, which is a notoriously labor-intensive, low-margin business that has migrated over the decades to the lowest-paying, least-developed economies of the world. But wire harnesses are at least as necessary as any other part of a vehicle. So when their production shuts down — well, all the customers have to soon shut down, too.

"The ripple effects are being felt now, and the cost impact is also going to be felt now and in the future" Mark Wakefield, global co-leader of the automotive and industrial practice at AlixPartners, told me last week on the "Daily Drive" podcast.

Neither Russia nor Ukraine is a big player in the global supply chain, "but as you and everyone knows, you can't make a car if you're missing the one part out of thousands," he said.

From an American perspective, Ukraine "doesn't even make the top 100" of sources for auto parts. But the war and ensuing sanctions on Russia will lead to higher prices for "aluminum and palladium, concerns on power and natural gas. These types of things certainly drive a longer-term concern and a longer-term risk-management approach that has to happen."

AlixPartners, a multi-industry consulting firm, has dozens of offices around the world — but not in Russia.

"At AlixPartners we've taken the stance that we're not going to serve the Russian government nor state-owned entities," Wakefield said. "And we have a very strong risk-management process for taking any client on to make sure it fits with our core values and reputation. And we find many of our clients are looking at those issues, too, and making a values-based decision" before turning to pragmatic matters such as alternative sourcing and other risk mitigation.

Disruptions abound: Political strife far short of war — such as a protest at a border crossing or new tariffs — and natural disasters and supply chain snags. There's just no avoiding some risk.

Wakefield uses a gambling analogy: "The wild betters always lose, and the people who are too tight also lose. So if you take this sort of study of risk, the winning outcome is not to avoid all risk. It's to manage it."

The rationale for international trade remains sound: Specialization tends to lower prices and raise wages. But the equation is never simple and always changing.