Is Europe Prepared for the Winter?

Six months into the Russian invasion of Ukraine the attack continues to impact millions worldwide. The conflict has disrupted global markets causing shortages and sharp price increases for key commodities such as food and fuels. 

Europe has been especially impacted by the energy supply chain disruptions. Gas prices have risen around 200% in local currency in Europe due to Russian fossil fuel export limitations.

Extreme heat and drought conditions are magnifying Europe’s already stressed economy and risks, disrupting crop yields, energy production as well as the trade channels. 

Drought conditions across Europe have also depleted rivers and waterways limiting hydropower generation and cooling systems of power plants, forcing several countries to have rolling blackouts to keep up with the power consumption demands. 

A growing number of countries and companies across Europe have been facing intermittent blackouts due to disruptions in the energy supply chain exposing the continent and business vulnerabilities, causing alarm as Europe is bracing for a possible energy crunch this winter.

A brief background …

Since the beginning of the conflict, the U.S. and EU leaders condemned Russia for its actions and asked Russia to cease their military engagements, respect Ukraine’s independence and withdraw their troops. 

In response to continued military aggression, the U.S. and EU imposed sanctions against Russia with the goal to destabilize their economy by isolating them from the global financial system and markets. 

The EU has been working since on plans to decouple their energy and commodity dependance from Russia. Chancellor Olaf Scholz announced in February that Germany has suspended certification of Nord Stream 2, the controversial $11 billion new gas pipeline set to increase supply from Russia to Germany through the North Sea, bypassing Ukraine.

Thousands of businesses have also criticized Russia for their aggression and since began to cut ties or have ceased operation in Russia. In February, British energy firm BP announced that it will exit its holdings in Rosneft, the Russian oil giant. Similar announcements followed by Shell, ExxonMobil, Apple, Google, Microsoft, Ford, and dozens of other Western companies announcing that they are leaving or suspending Russian operations. 

EU’s sanctions on Russia …

The first major package of EU sanctions began in February removing Russian banks from the SWIFT system and restricting Russian access to the EU financial markets. 

The rolling sanctions have expanded and became tougher since. Restrictions have been placed on investment, trade and travel for key businessmen, associates of the Kremlin and President Putin, freezing their assets an limiting their financial viability. 

A few other key sanctions include:

• Import bans on key goods such as iron, steel, coal, and other products such as wood, cement, fertilizers, seafood, and liquor. 
• Export bans of goods especially high-tech exports which contribute to Russia’s defense and security industry. These include exports of jet fuel, quantum computers, semiconductors, and other technology products and services.
• Russian air carriers being banned from flying in EU airspace and restrictions on Russian vessels from accessing EU ports and well as Russian vehicles being banned from using EU roads. 
  

Russian response to sanctions …

Russia is one of the world’s largest exporters of oil and other commodities. Europe is especially dependent on oil and gas from Russia. In response to the sanctions, Russia retaliated and banned various key exports, commodities, and raw material to “unfriendly” nations. 

Additionally, President Vladimir Putin demanded that "unfriendly" nations in Europe pay for gas in rubles or else have their supplies cut. Poland, Bulgaria, and Finland are among those who have refused to do so, and Russia has cut off their supplies. 

Russia has also blocked transactions with 31 foreign energy companies, including ex-subsidiaries of Gazprom in the EU, as well as firms in the US and Singapore.

In June, Russia put more pressure on European countries by significantly reducing the flows of gas through the Nord Stream which is the single largest gas pipeline between Russia and Europe. And in July they halted the flow stating it was due to planned maintenance creating additional concerns within European countries. 

EU’s energy dependencies on Russia …

The Russian invasion of Ukraine has altered the global oil and gas trade creating a global energy crisis triggered by countries which rely on Russian oil and gas via pipeline. 

In 2021, the European Union imported 155 billion cubic meters of natural gas from Russia, accounting for around 45% of EU gas imports and close to 40% of its total gas consumption. 

Since the second half of 2021, there has been sharp hikes in energy prices in the EU and other countries in the world. The price of fuels has further risen because of Russia's aggression against Ukraine, which has also led to concerns related to the security of energy supply in the EU.

Adding to the concerns is the impact of global warming. This summer temperatures have been soaring across the northern hemisphere including the U.S. and Europe. As winter is approaching there is much concern that the extreme climate trend will continue, and we will see extreme cold weather throughout the winter months. 

Weather is the leading driver of energy consumption, and many countries are struggling with the increased demand on energy consumption. 

The EU and IEA have been working on plans to create energy independence in Europe. In anticipation of potential gas shortages and power disruptions, EU countries are working to shore up their gas reserves and have agreed to voluntarily cut their gas usage by 15% from August 2022 to March 2023 if needed. 

EU’s energy independence plan …

Just a week after the Russian invasion started, the IEA released a “10-Point Plan to Reduce the European Union’s Reliance on Russian Natural Gas”. The plan stressed accelerating the deployment of solar and wind power, ramping up energy efficiency measures in homes and businesses, maximizing the use of existing low emissions energy sources such as renewables and nuclear and looking for alternate suppliers for their fuel and gas.

In July, the IEA announced that Europe could reduce its imports of Russian natural gas by more than one-third within a year through a combination of measures that would be consistent with the European Green Deal and support energy security and affordability. 

These measures include:

• Introducing auction platforms to incentivize EU industrial gas users to reduce demand. 
• Finding alternate sourcing for gas and oil supplies.
• Increasing storage of gas supplies and regional coordination of gas storage levels and access.
• Minimizing gas use in the power sector. 
• Enhancing coordination among gas and electricity operators across Europe, including on peak-shaving mechanisms. 
• Reducing household electricity demand by setting cooling standards and controls. 
• Harmonizing emergency planning across the EU at the national and European level. 
• Maximizing power generation from existing low-emissions sources such as bioenergy and nuclear energy.
• Speeding up the replacement of gas boilers with heat pumps.
• Temporarily restricting consumer and business energy consumption.
• Temporarily restarting coal power production. 

The IEA further warns that if Russia decides to completely cut off gas supplies before Europe can get its storage levels up to 90%, the situation will be grave and challenging. Europe needs to be doing everything it can to reduce the risk of major gas shortages and rationing, especially during the coming winter.

Potential impact on the semiconductor and electronic manufacturing industry …

Semiconductor and electronic manufacturing are highly resource intensive processes which makes the industry vulnerably to countries energy supplies and their power grids. 

There are thousands of electronic and semiconductor manufacturing sites in 34 European countries. 80% of these sites are in 10 countries. 

These include manufacturing headquarters, final and module assemblies, IC packaging assemblies, fabrications, and factories. Germany, the U.K., and France are home to most of these sites. 

The product groups most at risk include Microcontrollers (MCUs), Memory, Power, Diodes, Resistors and Capacitors. 

Within Germany, companies such as Vishay, Microchip Technology, Nexperia, Infineon, Wurth, and SiTime have production facilities for resistors, capacitors, programmable oscillators, and power supply components. STMicroelectronics has fabrication facilities for MCUs in both France and Italy. Czechia and U.K. have resistor, connector, and other manufacturing fab locations. 

Other manufacturers with production facilities in Europe include, NXP Semiconductors N.V, Molex Incorporated, TT Electronics, Microchip Technology, Texas Instruments, Onsemi and Carl Ziess. 

Many businesses and countries have already taken measures to reduce their energy dependency on Russia but there is work that still needs to be done. 

It is important for businesses to take a closer look at their supply chain dependencies in order to take any necessary precautions regarding potential energy disruptions within Europe.

Business responses to the energy crisis …

Businesses have been aware of potential oil and gas disruptions and working on mitigation measures. For example, in a conference last month, several top executives said they were preparing for possible blackouts and discussed contingency plans, converting their gas boilers to oil to avoid disruption in the event any further reduction in Russian gas supplies and power outages.

Other companies such as Carl Zeiss, which supply ASML optical instruments for lithographic scanners used in the manufacture of most semiconductor components reported that they can switch their power generation from gas to petroleum products and that their production is not in jeopardy.

German chemicals major BASF may be forced to halt production at the world's biggest chemicals plant in Ludwigshafen. They estimate that their operations will continue, if the chemical complex continues to receive more than 50% of the maximum volume of their gas consumption, otherwise, the work of their complex will have to be stopped.

German companies including Mercedes-Benz and BMW have reported plans to reduce gas use in response to a government requests, but companies across the automotive, chemicals and engineering industries have expressed concerns that savings may be limited without production cuts.

Siltronic AG, for example, announced that it is working to cut its reliance on natural gas in Germany, as the threat of production halts rises amid decreased supply from Russia.

Würth Elektronik Circuit Board Technology, also announced in a statement to their customers last month, said that they have started switching from gas to alternative energy sources. However, should there be a complete discontinuation of natural gas supplies in the short term, it will have an enormous impact on their production capacity. 

Finding alternate energy sources is one step companies are taking to ensure continued operation, supplier dependencies and potential disruptions within their supplier value chain is another key factor that businesses should consider as part of their energy supply chain mitigation and resiliency plans.  

The CEO of Bosch, Stefan Hartung recently said that they are looking to replace their natural gas use with other types of energy due to fears of a possible halt to deliveries from Russia. 

"If gas supply were disrupted, this factory in Dresden would halt. We don't need much gas, but we can't go completely without it," 

He added that although only 25% of their gas usage goes towards production the company's suppliers and customers are more dependent, leaving them exposed to the fallout from an end to gas deliveries. 

In conclusion …

The Russian invasion of Ukraine has triggered an energy crisis in Europe which can potentially impact thousands of electronic manufacturers. 

Having a deep and comprehensive understanding of your manufacturing and supplier locations and dependencies to the level of raw material sourcing will help you take proactive measures in your procurement and production processes. 

Building strategies to navigate increased supply chain risks such as geo-political, and environmental volatilities are key to building a resilient supply chain. 

Additionally, having visibility into your supplier diversity will help you take measures such as multi-sourcing to reduce vulnerabilities within your electronic supply chain and building resiliency within your operational DNA. 

Sifting through magnitude of data and risk factors, then deciphering relevancy to your operations is time consuming and costly. Adding to the complexities is bridging internal and external data in one usable platform where multiple teams can collaborate and access the information they need.  

Digitizing your supply chain and utilizing tools that help bring visibility to your supply chain risks, increases business agility and operation success.