A row with its suppliers has shaken VW as it struggles to deal with the costly aftermath of its emissions scandal, forcing it to halt production on one of its top-sellers. The crises may be connected, says Henrik Böhme.
Though causing little stir, VW made rare positive headlines this week, when German regulators approved its plan to re-equip about half of all its cars in Europe affected by Dieselgate. This means that, after a sluggish start, the Wolfburg-based carmaker is finally moving forward with making good in the aftermath of the scandal. Meanwhile in the US the first settlements are being reached, worth billions of dollars. There too, it's not pretty, but it's progress.
A painful blow
But it's also precarious, which was demonstrated this week when VW suppliers of seat covers and transmission cases stopped their deliveries. The company has had to plan for a week-long halt on production of its bread-and-butter vehicle, the Golf, and to shorten hours for around 20,000 workers in a number of plants.
The production halt could deal Volkswagen a painful blow. Despite all the doom and gloom, VW's bottom line has so far emerged from Dieselgate largely unscathed. The company as a whole, including subsidiaries like Audi and Porsche, has even booked over 1 percent growth in the first half of the year. But cars under the VW brand have taken a hit. Revenues from the Golf, Passat, Polo and company are down 2 percent.
One can only speculate about the causes of the dispute. But what's clear is that cost pressure is weighing on the carmaker. Its targets are brutal and intensified by its need to save, having put aside millions and millions to cover the fallout from Dieselgate. Perhaps seizing on the company's weakness, some suppliers see now as the time to add to the pressure with their own demands. But, one way or the other, no winner will emerge from this confrontation.
Volkswagen and its suppliers have a special and often strained relationship. In the 1990s, VW CEO Ferdinand Piëch poached GM's head purchaser José Ignacio López, a notorious cost-killer in the industry. López pushed down his new company's costs considerably, especially with its suppliers (who haven't forgotten). What resulted is what is known in the industry as the López effect: The cost reductions led to cheap and often faulty components. And the customer was often the one to pay for it, often with expensive repairs.
Efficient but vulnerable
Since then some things have surely changed. Nowadays quality management is high up on the VW agenda. But production continued to be pushed more and more in favor of efficiency. While deliveries used to arrive "just in time," now they arrive "just in sequence" - in precisely the right order. If just one supplier steps out of line, as we're seeing now with VW, the whole production can be brought to a stop.
The production halt at Europe's biggest carmaker is coming at the worst possible time. The positive headlines were but a breather. The lawsuits that have been piling will start to move forward in the fall. And the wave of suits in the US won't abate any time soon. There are still plenty of waters to calm before VW sails smoothly again.
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