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VW's German Production Grinding to Halt Over Spat With Supplier

Aug. 19, 2016
Supplier's dispute with Volkwagen jeopardizes production and highlights the degree to which a parts-maker can disrupt output as automakers rely increasingly on suppliers.

Four Volkswagen AG (IW1000/7) factories in Germany are beginning to grind to a halt over a legal dispute with a supplier of seat and gearbox parts, adding disruptions just as the automaker tries to cut costs and resolve a diesel-emissions scandal that’s led to record fines.

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 two factories producing those models face slowdowns, as do two plants that build chassis, the basic underpinnings of vehicles. A VW spokesman wasn’t immediately available to comment.

The dispute threatens to reduce earnings by up to 40 million euros ($45 million) a week -- according to Christian Ludwig, an analyst at Bankhaus Lampe -- at a time when VW is trying to boost sagging profit at its namesake brand by lowering annual spending by 1 billion euros. Two Prevent Group-owned suppliers providing transmission and seat parts have halted deliveries in a dispute about future development and supply projects.

“Obviously, the longer this goes on the worse it’s going to get,” Ludwig said. “The degree of the impact will also depend on whether they can limit this to the Volkswagen brand.”

Legal Battle

A German court last week ordered the suppliers to begin delivering parts again, which the parts makers are refusing to do. 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 their 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.

The shares dropped 2.1% to 119.20 euros and were down 1.5% as of 1:29 p.m. in Frankfurt trading. The stock has declined 10% this year, valuing Europe’s biggest carmaker at 62.4 billion euros.

The factory that builds the Passat in Emden has a daily production capacity of 1,250 cars, while Wolfsburg can build 3,800 vehicles. About 80% of the 9,000 employees at Emden are on shortened work hours, VW said this week. The automaker assembles the chassis in Zwickau and Braunschweig.

Workers Impacted

“We really hope this situation can be resolved soon with a solution for the problems with supplier Prevent,” Hartwig Erb, who heads the IG Metall union in Wolfsburg, said in a statement. “Such disputes shouldn’t be to the detriment of workers. The supplier isn’t just hurting VW employees but also its own workers.”

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 already bogged down in legal disputes and regulatory investigations related to its disclosure 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.

The decision by the suppliers to stop deliveries is incomprehensible and a heavy burden for Volkswagen and its employees, Lower Saxony Economy Minister Olaf Lies told state parliament on Thursday. Lower Saxony is VW’s second-largest shareholder, and Lies is a member of the automaker’s supervisory board.

By Elisabeth Behrmann and Tom Lavell

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