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Volkswagen says the cost of crucial car components has risen sharply due to the coronavirus outbreak, putting further pressure on earnings as the industry enters a deep recession.
The world’s largest automaker, which began restarting production at its Wolfsburg headquarters last week, revealed that parts makers, operating at a fraction of its capabilities, were spending their biggest expenses.
“Suppliers invested in high-volume manufacturing facilities,” Stefan Sommer, a member of VW’s procurement board, told the Financial Times. “Now there are depreciations, while overall costs remain and cannot be reduced overnight.”
While cheaper raw materials and record oil prices could offset much of the increase in component prices, Sommer said the cost of supplying parts “would increase in the classic value chain.”
However, he added that it was too early to know whether the total cost of car production would be permanently higher.
Automakers are unlikely to pass on additional costs to consumers in a recession, forcing automakers to absorb them, even when they experience a cash bleed due to factory closings and sales collapse.
On Tuesday, the UK will announce that April sales fell 97 percent, with similar declines in Spain and Italy.
Automakers like Volkswagen trust thousands of individual suppliers, who often manufacture custom parts for orders that are delivered to production lines on a tight schedule.
In recent years, manufacturers have increased profits in part by drawing discounts from contractors, but Sommer said suppliers told VW that they “could no longer offer price reductions.”
“Everyone will have to bear the same costs, not only our suppliers, but also VW itself,” said the former engineer.
“If we continue to see lower volumes, the pieces will be more expensive.”
VW’s Stefan Sommer said: “Everyone will have to pay the same costs, not only our suppliers, but also VW itself” © dpa / Alamy
Germany’s VW plants rely on 6,500 individual parts within Europe alone, and the company has voiced concern about supply chain gaps if smaller contractors cannot survive the crisis.
Last week, VW’s German rival Daimler also warned that while its supply chain had proven to be “remarkably robust” during the Covid-19 outbreak, it could be “calm before the storm.”
“Many of these companies have strong business models, but they just don’t have the liquidity to deal with a longer shutdown,” said CEO Ola Kallenius.
That warning came when the world’s largest auto parts supplier, Bosch, said the industry was facing a major auto recession that would overshadow the slowdown it faced after the 2008 financial crisis.
On Tuesday, German car executives are scheduled to meet with the Angela Merkel administration in Berlin and discuss the introduction of a scrapping scheme to boost demand.
Any such scheme is likely to focus on subsidies for low-emission cars, particularly electric vehicles, such as VW’s badge ID. 3, whose most expensive component, lithium-ion batteries, could also increase its cost.
However, “the industry still cannot think about the rising cost of electric vehicle components,” Sommer said.
“First, we must focus on the attractiveness of such cars and the incentives to buy them.”
Despite VW’s current challenges, Sommer, a former executive for German car suppliers Continental and ZF, also rejected suggestions that the group would be forced to renew its supply chain in the wake of the coronavirus pandemic.
While VW has expanded its procurement teams, building an alternative supply chain would be “too complex” at this stage, he said, since no one can predict “how or where the next pandemic will take place.”
Additional reporting by Peter Campbell
