Volkswagen halted production of its best-selling Golf hatchback yesterday as the fallout widened from an unprecedented legal spat with a supplier, which refused to deliver seat and transmission components amid a contract dispute.
The shutdown, which started with the Passat sedan on Thursday, is now set to impact about 10% of Volkswagen’s German workforce, the automaker said in a statement. As many as 27,700 workers across six factories could be sent home amid a shortage of parts supplied by subsidiaries of Bosnian-based Prevent Group. Golf production is set to be halted until at least Saturday.
“We are really surprised that the fight is escalating to a level where production is severely impacted,” Sascha Gommel, an analyst at Commerzbank, said in a note. “The dispute is coming during an inconvenient time for VW,” with its reputation still marred by the emissions-cheating scandal.
The feud risks adding to Volkswagen’s woes and undermining efforts to lift sagging sales and profit at its namesake brand. While production stops at auto factories can generally be made up by subsequently increasing output, Commerzbank estimated that a stoppage of Golf and Passat production could cost as much as €70mn ($79mn) a week. According to Prevent, Volkswagen was seeking to pass on the costs of the crisis by squeezing suppliers, and the company was forced to take a stand to secure its survival.
Talks with Prevent’s Car Trim seat-component division and ES Automobilguss transmission-parts unit restarted yesterday after the companies suspended deliveries when Volkswagen refused to reimburse the suppliers after dropping a contract. The parts makers had demanded €58mn in compensation, German newspaper Sueddeutsche Zeitung reported on Sunday. Prevent refused to abide by a court ruling to resume parts deliveries.
“Volkswagen continues its efforts to reach agreement with the suppliers,” the German carmaker said in the statement. “Given that further developments are not foreseeable, Volkswagen is making arrangements for various flexibilisation measures extending as far as short-time work,” which involves the government compensating employees for some of their lost wages. Prevent Group is led by Bosnian businessman Nijaz Hastor, who has sought to bolster his activities in the German auto industry. Through his Halog and Cascade International Investment holding companies, Hastor has accumulated a 15.2% stake in German vehicle-seat manufacturer Grammer.
The order cancelled by VW involved a €500mn deal with Car Trim that was scheduled to start next year, a person familiar with the matter said last week. The parts maker said it wants the auto manufacturer to pay for the plant alterations it made to provide the services.
The conflict highlights the degree to which a parts maker can disrupt output as automakers rely increasingly on suppliers to produce a large portion of their vehicles while squeezing them to cut prices. Volkswagen, like most automakers, works on a just-in-time manufacturing principle, meaning its parts are delivered directly to the assembly line without being stored in a warehouse first. While that lowers costs, it also means that when there’s a disruption from a supplier, it quickly ripples through the production chain.
“At least the negotiators are at the table again,” Olaf Lies, a Volkswagen supervisory board member and economy minister of the state of Lower Saxony, where the carmaker is based, said yesterday on DeutschlandRadio. “It will not only be about the question of the current contract, which has now been rescinded, but it will probably also be about the question of how the next months and years will look.”