VW Stoppage Ends But Is This An Isolated Incident?
Supply Disruption Could Escalate As Price Pressure Intensifies.
“That leads us to wonder if this is the start of more disputes, not just at VW, but across the sector”
Volkswagen’s supplier dispute is over and production is returning to normal, but the short but crippling dispute has investors worried that VW’s logistics chain might be a threat to its future, and other big manufacturers too.
“If there is one lesson from the dispute, it is that VW has to restructure its shopping. If you find a case in which a world market leader with more than 600,000 employees makes itself dependent on a little 500-strong operation, all the rules of statistics suggest that more cases lie dormant in the box,” Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research (CAR) at the University of Duisburg-Essen said.
VW later acknowledged the potential problem and promised to act, but didn’t say how.
“We will of course look into questions such as multi-sourcing, single-sourcing. And we will look at our procurement contracts and try to optimize matters with all suppliers,” VW CEO Matthias Mueller Mueller told the Hamburg Business Journalists’ Club, according to Reuters.
“One could discuss at length who is to blame for the fact that this situation went belly up, but I will not discuss it any further,” Mueller said, referring to the dispute with Prevent Group.
VW’s production of Passats and Golfs in Germany was crippled by the dispute with Bosnian parts maker Prevent Group. Seat part maker CarTrim and gearbox component maker ESA, owned by Prevent, stopped sending parts for the Golf and Passat in early August. VW reportedly agreed to compensate Prevent for a cancelled contract and extend their partnership for another six years.
Experts say VW’s plan to cut spending by €1 billion a year is raising pressure on suppliers’ prices. VW’s trade union is coming under pressure to make concessions as the company seeks to raise profits to an acceptable level for its own brand, and pay the spiralling costs of dieselgate.
Citi Research analyst Michael Tyndall is also worried about the possible implications, after saying the dispute won’t have hurt profits much, if at all.
“More worrying to us is the nature of the dispute, from what we can see Prevent appeared to be set on a specific path to right the perceived wrongs of the past with regards to (manufacturers) and suppliers. That leads us to wonder if this is the start of more disputes, not just at VW, but across the sector,” Tyndall said.
Tyndall said currently suppliers are making more profit than manufacturers.
“According to consensus the global average EBITDA (net income with interest, taxes, depreciation and amortization added back) margin for suppliers is 13.4 per cent (14.4 per cent in Europe) versus 9.6 per cent for manufacturers (12.2 per cent in Europe). In terms of ROIC (return on invested capital), according to Worldscope, the comparison is 11.8 per cent for suppliers versus 4.1 per cent for manufacturers.”
“That being said, anecdotally suppliers are still under pressure with compensation for early contract terminations being hard to win. If we consider the changing nature of power-trains and the range reduction on the cars at BMW, FCA and VW it may be there are more disputes to come,” Tyndall said.
CAR’s Dudenhoeffer said it is time for VW to take action.
Dwarfs threaten Gullivers
“The supposed dwarfs can bring the Gullivers of the auto industry into distress,” Dudenhoeffer said.
“Lopez and his disciples have become obsolete,“ he said.
Jose Ignacio Lopez shook up the industry in the 1990s as head of GM Europe’s purchasing by dumping long-term contracts, and demanding ever-lower prices, improving quality and ever faster deliveries before decamping to VW.
“The challenge now is to identify risks and implement hedging strategies. This is considerably more than “multiple sourcing”, but multiple sourcing is a prerequisite. In banking, there are plenty of products to create portfolios so they are profitable and secure. (buying components) absorbs two-thirds of the turnover of carmakers. Errors in these processes can destroy a company. Obsolete warhorses of yesterday look only for price cuts,” Dudenhoeffer said.