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VW Halts German Production Over Unprecented Fight With Supplier

Aug 20, 2016, 9:49 AM
News ID: 1797
VW Halts German Production Over Unprecented Fight With Supplier

EghtesadOnline: Volkswagen AG factories in Germany are grinding to a halt after a supplier took the unprecedented step of cutting off the automaker as the two battle in court and engage in a public war of words about who’s to blame for the impasse.

VW stopped Passat production on Thursday and will halt assembly of its best-selling Golf on Monday if the conflict isn’t resolved, said people familiar with the matter, who asked not to be identified. VW has officially said the factories producing those models face slowdowns, as do plants that build chassis, the basic underpinnings of vehicles. The supplier has essentially called the automaker a bully, prompting VW’s top labor boss to respond that he’s “furious” and the leader of its home state to say “coercive measures” by a court may be needed to end the conflict, reports Bloomberg.

The production holdup threatens to reduce Volkswagen’s earnings by as much as 40 million euros ($45 million) a week -- according to Christian Ludwig, an analyst at Bankhaus Lampe -- at a time when the carmaker is trying to boost sagging profit at its namesake brand by lowering annual spending by 1 billion euros. The conflict centers on a contract that VW signed with the supplier, then later canceled. The parts maker, which builds seat and transmission parts, says it wants the auto manufacturer to pay for the plant alterations it made to provide the services.

“This is the most extreme case of escalation between a supplier and a carmaker that I’ve heard of,” said Stefan Bratzel, a director at the Center of Automotive Management in Bergisch-Gladbach, Germany. “There have been court cases in the past, but not a supplier stopping deliveries during series production.”

Shares Fall

Volkswagen shares fell 1.5 percent to a two-week low of 119.90 euros at the close in Frankfurt. The stock has declined 10 percent this year, valuing Europe’s biggest carmaker at 62.4 billion euros.

Prevent Group’s Car Trim seat-component division and ES Automobilguss transmission-parts unit suspended deliveries after Volkswagen rejected discussions to reimburse the supplier when the new contract was dropped, the parts manufacturer said in a statement. The canceled order involved a 500 million-euro deal with Car Trim that was scheduled to start next year, said a person briefed on the supplier’s business, who asked not to be named discussing the legal case.

A German court last week ordered the suppliers to resume deliveries, and an appeal in one of the cases has been set for Aug. 31. VW in the meantime has asked the court to fine the suppliers and allow the automaker to go to their factories and load up the parts on its own, the court in Braunschweig said in a statement. The parts makers have until next week to respond, and the court will decide then on VW’s request, according to the release.

Christoph Adomat, a VW spokesman, didn’t respond to phone calls and e-mails Friday seeking comment.

Exploitation Claim

“VW’s treatment of suppliers is in no way acceptable and can leave every small provider in ruins,” Alexander Gerstung, an ES Automobilguss executive, said in the supplier’s statement. ES Automobilguss said VW was trying to “exploit” its dominant market position to squeeze suppliers.

Prevent Group is led by Bosnian businessman Nijaz Hastor, who through his Halog GmbH and Cascade International Investment GmbH holding companies has accumulated stock this year in German vehicle-seat manufacturer Grammer AG to become its biggest owner with a 15.2 percent stake.

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. VW is under pressure to reduce costs as it grapples with lawsuits and regulatory investigations after disclosing last September that 11 million diesel-powered cars were equipped with software designed to cheat on emissions tests. It has set aside 18 billion euros to cover worldwide costs related to the scandal.

Stephan Weil, the prime minister of the German state of Lower Saxony, told reporters that the suppliers must resume deliveries “very quickly” and that “an amicable settlement would be preferable, but if that isn’t possible, coercive measures will surely have to be applied,” citing judicial remedies available in such disputes. The state is Volkswagen’s second-biggest voting shareholder, and Weil sits on its supervisory board.

The factory in Emden that builds the mid-sized Passat sedan and wagon has a daily production capacity of 1,250 cars, while Wolfsburg, which makes the Golf as well as the Tiguan sport utility vehicle and Touran minivan, can produce 3,800. About 80 percent of the 9,000 employees at Emden are on shortened work hours, VW said this week. The automaker assembles chassis in Zwickau and Braunschweig.

The suppliers’ move is a “rotten, infuriating game,” Bernd Osterloh, VW’s top labor representative and also a member of its supervisory board, said in an interview with the Bild newspaper. “When businesses put burdens on the backs of the employees, it’s reckless and asocial, and must be stopped.”