Report highlights opportunities for electronics in Ukraine

Report highlights opportunities for electronics in Ukraine

Market news |
By Nick Flaherty

Despite the ongoing war, Ukraine has been and continues to be a home for several electronics sectors.

In addition to software and IT services, several companies from the electronics value chain have established research centres and manufacturing facilities in Ukraine, and several are in operation today, highlights a report by consultants McKinsey.

The analysis looks into the areas of the electronics value chain that are in high demand or have sourcing diversification needs, the typical investment location selection criteria for electronics players, and how Ukraine performs against these criteria.

Growing global demand for electronics means a need for additional manufacturing capacity. For European players, a post-war Ukraine may offer an opportunity not only to build that capacity, but also to support a resilient supply chain by focusing on a region that is close to European markets with a skilled, available, and committed workforce.

The invasion of Ukraine showed how the country has been a key supplier for wafer fab materials such as neon. Just to meet the 2030 demand for semiconductors from Europe alone, the equivalent of 37 additional front-end wafer fabs is needed, say the consultants, and to support such an expansion of these (often billion-dollar) centrepieces of the semiconductor value chain, adjacent value chain segments in the form of back-end facilities, tool and material supply, EMS service, etc. also need to keep up with the growth to unleash the overall industry expansion.

With typical investment sums much smaller than those required for fabs, these downstream segments can mark the focus areas for a country’ or region’s targeted expansion in the broader electronics industry, particularly automotive. Numerous suppliers operate production facilities in Ukraine or Russia, including Aptiv, Nexans and Sumitomo, while the manufacturer of vehicle wiring harnesses, Leoni, closed its two Ukrainian plants. 

Ukraine has the largest population (pre-war level around 41.2 million) and the largest available workforce (17.3 million) in the CEE region. The war has disrupted this workforce profoundly, including an unemployment rate that rose from around 10% to 35% in 2022, suggesting that a post-war Ukraine will likely have significant availability of highly motivated, skilled local talent.

 This same logic holds true for another aspect of workforce disruption: displacement. The war has led to approximately 4 to 5 million Ukrainians leaving the country, though more than 70% of whom plan to return after the end of the war. Another 6 to 7 million are internally displaced to the central and western parts of Ukraine, which are predominant locations for export-oriented electronics companies.

The analysis shows that the players and components along the back end of the value chain that already have an existing footprint in Ukraine – EMS/ODM, tier-one and tier-two suppliers, and R&D and engineering centres – could examine opportunities for expansion in the near term.

Ukraine, with its well-established presence of over 30 international tier-one and tier-two suppliers, presents promising expansion opportunities, particularly in the automotive sector.

With a steady growth rate of 3.2% CAGR, Ukraine’s automotive exports reached $1.6bn in 2021, primarily driven by wiring and harnesses, which constitute the largest export category at 90%. This focus on low-complexity, labour-intensive products presents an opportunity for optimization of the value chain to achieve leaner production, paired with streamlining transportation processes to yield significant benefits for automotive OEMs and supplier clusters.

As the automotive electronics (and software) market is expected to grow at 5.5% per year through 2030 – with notable growth in ECU/DCU, power electronics, battery cells and housings, and sensors, among other areas – Ukraine may prepare a mid-term shift in line with the coming changes.

The potential for Ukraine to expand its involvement in the manufacturing of more complex products, such as battery cells, power electronics, and sensors, by capitalizing on its existing suppliers’ ecosystem, warrants closer investigation. Ukraine possesses substantial reserves of graphite, aluminium, lithium, cobalt, and manganese, which can position the country favourably as the demand for electric vehicles continues to rise. This strategic move could allow Ukraine to tap into the opportunities presented by the growing automotive electronics market and further enhance its position in the industry.

The report is here

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