Conflict in Ukraine disrupts fragile supply chain recovery

Energy and air costs rise, inflation is up... and Russia 'likely turn to Chinese vendors' says analyst

The pandemic revived the fortunes of PC makers but now another crisis, the gut-wrenching invasion of Ukraine by Russia, threatens to disrupt the supply chain in Western Europe and beyond.

Trang Pham, an analyst at tech market analyst Canalys, points out the conflict that started a fortnight ago is already being felt by the industry.

"In just a few days, the prices of energy and commodities have skyrocketed, and the supply chain has become even more vulnerable. These are issues that could fuel inflation and limit growth for Western Europe and the world," she said.

Mainland Europe is dependent on Russian oil – representing roughly a third of total crude oil imports or 4.5 million barrels a day. Oil prices surged 30 percent since 24 February when Russia sent troops into Ukraine. The cost of a barrel is trading at $114 at the time of writing – after a bumpy few days. Natural gas prices have soared 62 per cent in that time.

In February inflation in the Eurozone was already up 5.8 per cent year-on-year before the cost of energy went skyward, Pham highlights. Households are already feeling the squeeze, meaning the domino effect of lower discretionary spending.

Market's still hypersensitive to supply chain disruption

Alongside this, the cost of logistics has risen steeply since COVID-19 darkened the world, with air freight rates between Hong Kong and North America, for example, jumping almost $13 per kilogram since the pandemic began. PC makers have competed with each other for air freight space and with vaccines being transported, something both HP and Dell noted in late 2020.

Pham says the sanctions inflicted on Russia pertaining to air space bans will also contribute to even higher costs. "[D]ue to airspace bans, airlines will likely shift the increasing cost of flying cargo between Europe and Asia to consumers, putting additional pressure on the supply chain and pushing material costs even higher."

Semiconductor shortages were forecast to ease in 2022, at least according to some, "but that now seems unlikely to happen as Ukraine supplies more than half the world's neon gas, vital for semiconductor production," said Pham.

Some chip vendors are braced for raw materials shortages should the war between Russia and Ukraine become protracted.

The PC market has witnessed stellar growth since the pandemic, soaring in 2020 and again in 2021 as people worked, learned and entertained themselves at home, yet the market is "still hypersensitive to supply chain disruption," says Pham.

"The PC industry could soon feel the direct impact of rising costs and longer lead times, and any vendor that can supply will win the market. On the demand side, consumers will also struggle with rising inflation and have less to spend," she adds.

In Russia, a bunch of vendors including Apple, Dell and HP have already halted new shipments to the country. This may help to ease some demand in the West, said Pham but shipments into Russia equate to just 2 percent of volumes for Apple, Lenovo and HP.

A new dynamic will emerge, she predicts: "Russia will likely turn to Chinese vendors to bypass Western sanctions."

She adds that vendors such as Lenovo, Acer and Asus, which have "ambitions in Western markets, will find themselves in a delicate position regarding their responses to the Ukraine conflict."

The Register has asked Lenovo, Acer and Asus to comment. ®

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