VW production

One Supplier Isn't Nearly Enough

ARCHIV - Auszubildende arbeiten am 14.05.2013 in Anchieta (Sao Paulo, Brasilien) im Werk Volkswagen do Brasil an einem VW Golf. Foto: Soeren Stache/dpa (zu lni "Kein Verlass mehr auf die BRIC-Staaten - Autobauer suchen neue Märkte von morgen" vom 13.10.2014) +++(c) dpa - Bildfunk+++
Volkswagen could have avoided having to cut working hours by using more than one supplier.
  • Why it matters

    Why it matters

    • Carmakers usually rely on several suppliers for each part but to cut costs VW apparently failed to do so but is likely to change its strategy in the future.
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  • Facts

    Facts

    • VW’s supplier Prevent provides seat covers and gear components for VW’s Golf and Passat models but stopped doing so in protest at the terms of its agreement with the carmaker, forcing VW to interrupt production.
    • In addressing the diesel emissions scandal, VW has cut costs and expects its suppliers to help by lowering prices.
    • The just-in-time principle means that companies like Volkswagen rely on having products delivered to the assembly line precisely when they are needed, eliminating warehouses.
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    Audio

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Volkswagen has enough problems and the last thing Germany’s largest automaker needs is more conflict.

First the diesel scandal crippled large parts of the VW Group. Now a relatively small supplier has managed to shut down Golf production in Wolfsburg and Passat production in Emden after suspending deliveries.

Crisis has become a permanent state at the Wolfsburg-based automaker. Instead of focusing on VW’s long-term strategy and its transition to a mobility service provider and seller of electric cars, its management is forced to fight one fire after another.

But the fact that Prevent, a group of suppliers consisting of two subsidiaries, Car Trim and ES Guss, is forcing the giant Volkswagen Group to its knees by stopping the delivery of seat covers and gear components could have been avoided.

To put it another way, VW is partly to blame when a problem with a supplier has major consequences like a production shutdown.

Warehouses no longer exist; instead, suppliers ensure that their components reach the assembly line at the precise point when the carmaker needs them.

Of course, a firm like VW has to pay attention to costs, especially in its business relations with its suppliers – nowadays suppliers are responsible for more than 50 percent of a car.

The just-in-time principle has become the standard throughout the industry. Warehouses no longer exist; instead, suppliers ensure that their components reach the assembly line at the precise point when the carmaker needs them.

Regular price negotiations between auto producers and suppliers have become standard in the industry. Suppliers are compelled by their much larger customers to make binding commitments to reduce their prices by fixed percentages from year to year. No one challenges this principle, given the clear balance of power between big automakers and suppliers which tend to be smaller.

Another problem for suppliers, especially with Volkswagen, is the diesel scandal. The VW Group has created a reserve of about €18 billion ($20 billion) to cope with the emissions scandal. That means VW is cutting corners across the board, and the company of course expects its suppliers to help it overcome the emissions crisis by providing further discounts.

But in the current dispute between Volkswagen and the Prevent Group, the supplier unexpectedly turned the tables. It is surprising enough that a relatively small supplier has dared to attack its large customer and isn’t shying away from a serious conflict. But Prevent seems to be taking a clever approach. Prevent only bought the two suppliers, which are now refusing to continue making deliveries to VW, a few months ago. It seems abundantly clear that the supplier deliberately acquired companies with special significance for Volkswagen.

There’s one key error VW should not have made in this particular case: to rely on a single supplier for seat covers and gear components. A company that relies on a single partner becomes dependent on that partner. Diversification spells security and is in fact a hard and fast rule for an automaker. But an excessive focus on costs and efficiency apparently led VW to shoot itself in the foot.

The conflict should serve as a lesson to the entire automobile industry, namely that no manufacturer should rely on a single supplier. If Volkswagen had stuck to this principle, it could have avoided short-time work and production shutdowns, with all the attendant consequences for the company and its employees.

But it’s too late for that now and VW needs to get to grips with the current situation. The easiest approach for Volkswagen would be to compromise with the Prevent Group. Then the production shutdown could be lifted within a few days. A compromise is still possible, although Prevent will demand real concessions from Wolfsburg.

Now the VW leadership needs to bite the bullet if it hopes to move forward. Nevertheless, Volkswagen is unlikely to simply hurry to file away the current conflict. Rather it will need to think carefully about whether it wishes to continue working with this particular partner.

On the other hand, perhaps the supplier will achieve something brand new: If, by agreeing to resume deliveries, it can convince VW to commit to maintaining the business relationship for a longer period of time, despite the conflict. If that happens, the Prevent Group will have achieved a remarkable success in its negotiations, and the gamble will have paid off.

However, VW, for its part, will almost certainly no longer rely on a single supplier in the future.

 

Stefan Menzel covers the car industry for Handelsblatt focusing on Volkswagen. To contact the author: menzel@handelsblatt.com

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