Volkswagen will review its supplier and procurement strategy to avoid another dispute such as the one that caused production slowdowns and stoppages at six of its 10 German factories this month, CEO Matthias Mueller said.
in Automotive News Europe, by Jan Schwartz and Edward Taylor | Reuters, 30-08-2016
VW will re-examine contracts that leave the group dependent on a single supplier after the dangers were highlighted by its damaging wrangle with Bosnian parts maker Prevent Group, Mueller said.
“We will of course look into questions such as multi-sourcing, single-sourcing,” he told reporters on Monday. “We will look at our procurement contracts and try to optimize matters with all suppliers.”
Carmakers generally seek to avoid over-dependence on any one supplier and seek to duplicate critical relationships even at slightly higher unit costs. But Car Trim and ES Automobilguss, two suppliers within privately held Prevent Group, exposed a vulnerability when they halted seat cover and gearbox parts deliveries, triggering stoppages at VW assembly plants.
VW last week agreed to give Prevent 13 million euros ($14.7 million) compensation to end a six-day standoff that halted Golf and Passat production in Germany, according to media reports.
Since the 2008 financial crisis, carmakers have outsourced more parts development and manufacturing to save cash and meet technological demands for electric vehicles, smartphone-compatible infotainment and autonomous driving.
That makes multiple sourcing harder to achieve. The Prevent dispute also underlines the dangers of relying on a single group for a range of components — another inevitability in today’s consolidating supplier industry.
Rising tensions
Tensions between carmakers and suppliers are on the rise as both struggle to defend profits amid slower growth in China and rising investment costs to meet stricter emissions rules. The need to invest in technology for electric vehicles, smartphone compatibility and autonomous driving features has forced a wave of consolidation among auto suppliers, narrowing the choice of available partners for carmakers.
Deals in the past three years include the $12.4 billion acquisition of TRW by Germany’s ZF; Magna’s purchase of Getrag for $1.9 billion; and Continental’s 1.5-billion-euro deal for Veyance Technologies. Fiat Chrysler is said to be exploring a sale of its auto parts unit Magneti Marelli.
VW’s relationship with Prevent soured after it commissioned Car Trim to develop new seat covers for high-end models including Porsches and then cancelled the 500 million euro ($558 million) deal in the aftermath of the diesel scandal, refusing to cover the 58 million euros its supplier had already invested.
Prevent retaliated by moving some of Car Trim’s financial claims against VW to Automobilguss, sole supplier of a key gearbox casing for VW’s top-selling Golf compact, said two sources with knowledge of the matter.
“One could discuss at length who’s to blame for the fact that this situation went belly up,” VW’s Mueller said, declining further comment.
Disputes like this one, resolved by a settlement last week, are unusual among suppliers to German automakers. Many, unlike Prevent, subscribe to a VDA industry code that aims to resolve conflicts without disruption.
VW insiders blame management changes at Prevent for the escalation, Handelsblatt newspaper reported. Nijaz Hastor, the family shareholder’s patriarch, recently handed effective control to his sons.
Seeking savings
The incident nevertheless highlights VW Group’s efforts to boost efficiency under Herbert Diess, hired from BMW to head the underperforming VW brand weeks before the September revelations that VW cheated U.S. diesel emissions tests.
In a June letter seen by Reuters, VW procurement chief Francisco Javier Garcia Sanz warned suppliers that he would seek new savings as the company faced “epochal change driven by new technologies and customer requirements.”
Parts makers’ average operating margins have risen to 13.4 percent based on earnings before interest, tax and depreciation, according to Citigroup. That compares with 9.6 percent for carmakers globally, and the competition for profit could intensify as sales growth slows in China, Europe and the United States.
“Arguably, suppliers are getting the better end of industry profits at present,” London-based Citibank analyst Michael Tyndall said in a recent note to investors.
Contract cancellations may become more widespread as carmakers including pare down vehicle line-ups and shift investments to electrified transmissions, Tyndall said. “It may be there are more disputes to come,” he said.