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It’s been three months since Russia invaded Ukraine. How has the war impacted the supply chains of electronics manufacturers?

As the war in Ukraine draws on, the conflict is aggravating supply chain issues for the electronics industry–from raw materials to supplier risks to disrupted trade routes. 

Hindering access to vital raw materials

“The greatest risk facing global supply chains has shifted from the pandemic to the Russia-Ukraine military conflict and the geopolitical and economic uncertainties it has created,” Tim Uy, associate director at Moody’s Analytics and a member of the Economics Research group, wrote in a report.

Ukraine is a major supplier of raw material gases that are crucial to the production of semiconductors. It supplies 70% of the world’s semiconductor-grade neon, posing risks to electronics manufacturers and automotive companies. Ingas and Cryoin, two of Ukraine’s largest processors of neon, are headquartered in the besieged port cities of Ukraine: Cyroin in Odesa and Ingas in Mariupol. According to Reuters, both companies halted production in mid-March, putting an already beleaguered semiconductor industry at risk.

(Also read: From Automakers to Chip Makers: Will DIY Save the OEMs?)

Next to South Africa, Russia is one of the largest suppliers of freshly mined palladium, responsible for almost 40% of the world’s production. The key commercial use of this rare earth metal is in catalytic converters, which control the emissions from a vehicle’s exhaust system. Palladium is also used in electronics, dentistry, groundwater treatment, hydrogen purification, jewelry, and chemical applications.

Aside from palladium, Russia is one of the world’s largest producers of critical raw materials such as nickel, copper, and aluminum–all of which are critical to building supplies, automotive manufacturing, and the production of batteries. Days after Russia invaded Ukraine, aluminum prices reached record highs. 

Russia is also the third-largest producer of oil worldwide after the United States and Saudi Arabia. According to the International Energy Agency (IEA), around 60% of Russia’s oil exports go to Europe. The skyrocketing prices of oil and gas will increase the cost of manufacturing processes and product transport.

“We anticipate an extended period of geopolitical tensions and elevated risk premiums across all underlying commodities following Russia’s invasion of Ukraine. Russia has a far-reaching impact across global commodity markets, and the unfolding conflict has vast implications, not least higher prices,” Natasha Kaneva, an analyst at JPMorgan, told the Financial Times.

(Also read: Challenges and Changes for Global Supply Chains)

Aggravating supply chain challenges

Thousands of companies based in the United States and Europe do business with suppliers in Russia and Ukraine. Interos, a supply chain risk management and operational resilience technology company, breaks down the different supplier relationships being threatened by the war in Ukraine:

• Over 3,000 U.S. and European firms have at least one direct or tier-1 supplier in Russia
• More than 450 U.S. firms and 200 European firms have tier-1 suppliers in Ukraine

When tier-2 and tier-3 suppliers are taken into consideration, the interconnectedness of today’s global economy–and corresponding risk exposure– becomes even clearer:

• More than 15,100 U.S. firms and 8,200 European firms have tier-2 suppliers in Ukraine
• Over 190,000 U.S. firms and 109,000 European firms have tier-3 suppliers in Russia or Ukraine

(Also read: The Virtual Battlefield: Tech and Ukraine)

Disrupting crucial trade routes

Border closures, travel bans, and nationwide lockdowns triggered by the COVID-19 pandemic severely disrupted global transport. Logistics constraints because of the war in Ukraine are further aggravating supply chains.

Airspace bans have sparked flight cancellations and expensive detours. Longer journeys mean increased fuel consumption and a lighter payload to carry more fuel. According to the International Air Transport Association (IATA), cargo volumes of European carriers decreased by 11.1% in March 2022, the weakest of all regions. The Within Europe market fell significantly, down 19.7% month on month. Limited air capacity is also causing air freight rates to spike.

“Air cargo markets mirror global economic developments. In March 2022, the trading environment took a turn for the worse. The combination of war in Ukraine and the spread of the Omicron variant in Asia have led to rising energy costs, exacerbated supply chain disruptions, and fed inflationary pressure,” shared Willie Walsh, Director General of the IATA.

(Also read: Taking Flight: Autonomous Cargo Aircraft)

Major ports in Ukraine were closed due to heavy fighting and the Russian naval blockade. “This has created a heavy buildup of vessels waiting to get through the Kerch Strait,” Dylan Alperin, head of professional services at supply chain software platform Keelvar, told CNBC. “With 70% of Ukraine’s exports distributed via ship, the congestion is worsening by the hour.”

Land-based supply routes between Europe and China pass through Russia and Central Asia, with a daily average of 78 freight trains reaching 174 cities in 23 European countries. This vital link in the global supply chain has also been severely disrupted by the war in Ukraine.

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