VW Split

The Sum of the Parts

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Workers assemble an electric car at a VW factory in Dresden, Germany. Source: Reuters

Electric cars have a long list of components that are different from parts in cars with internal combustion engines, such as a need for batteries and electric motors and not needing transmissions. Facing a transition to more electric vehicles in the next decade, carmakers are preparing by spinning off their parts manufacturers, allowing them to move jobs out of high-wage locations like Europe.

Volkswagen is the latest company to get on the bandwagon for separating components manufacturing from its car business. A company spokesman confirmed Tuesday that a new division for vehicle components will be established with 80,000 employees working at 56 factories around the world. These factories will make parts for both combustion and electric vehicles, though not at the same sites.

The separation of the car parts business is just one of the steps VW CEO Matthias Müller is taking to revamp the company two years after a scandal about emissions testing cost the firm €30 billion in fines and lawsuit settlements. VW also is changing its relationship with car dealers, introducing online car shopping and reducing the number of showrooms in Europe.

“The spin-off should only be the first step. The competition is already there and VW is behind what other companies are doing.”

Arndt Ellinghorst, car analyst, Evercore

At present, each of VW’s divisions provides its own components, so Audi makes transmissions exclusively for Audi and Porsche does the same. The new idea is to have one unit that makes parts for all VW cars. The new business unit will be led by Thomas Schmall, who is currently head of supply at VW. It will be managed as a separate entity within VW, producing mainly engines and transmissions.

VW is playing catch-up with other carmakers that have already taken this plunge. General Motors spun off its Delphi parts business in 1999 and Ford sold its Visteon subsidiary a year later. Both firms have radically downsized as car parts manufacturing has become specialized. Denso, the parts business of Toyota, was spun off and became the second largest parts manufacturer in the world.

Fiat Chrysler CEO Sergio Marchionne announced last month that his firm would sell off its parts business, called Magneti Marelli, and list the company on the stock exchange next year, cutting the company’s debt substantially.

Volkswagen is being more conservative than its Italian rival, not even talking about bringing the division to the stock market, which some analysts believe is a mistake. “The spin-off should only be the first step,” said Arndt Ellinghorst, head of global automotive research at investment bank Evercore in London. “The competition is already there and VW is behind what other companies are doing.”

The main argument is that parts suppliers become more efficient when they are competing on the global market separately from the car producers they once served. But it’s also true that many components for electric cars will be made in Asia, and it may be easier for independent units to cut factories and jobs in Germany.

In most of the world, a significant percentage of car sales is now conducted on the internet, at least the first few steps. That’s why VW announced that it is setting up an online portal for Europeans to shop for cars. While only 2 percent of VW’s sales come over the internet, research firm Bain reckons that will rise to 25 percent in a few years. VW wants to own that business itself.

To prepare for this change, VW is slimming down the number of dealers it has. Most dealers make only 1 percent or even less profit on new car sales, earning the bulk of their revenue from services such as oil changes and selling parts. But electric cars have no oil, which could seriously undermine the economic case for dealerships, which are privately owned franchises.

VW is promising dealers to change requirements for dealerships, such as the number of employees required for sales, to give dealers more chance to innovate.

“We need to get together with our partners,” said VW sales director Jürgen Stackmann.

Stefan Menzel is one of Handelsblatt’s leading automotive reporters and Charles Wallace is an editor for Handelsblatt Global in New York. To contact the authors: menzel@handelsblatt.com and c.wallace@extern.handelsblatt.com

 

 

 

 

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