New emissions standards to be introduced in Europe in the next few years could see numerous energy intensive manufacturing tasks transferred to cheaper production locations. Volkswagen is to study the possibility of moving some parts manufacturing to the Gulf, which would prove unpopular in Germany but nevertheless cost-effective in the long term.
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Volkswagen’s move comes partly as a response to new emissions trading standards aimed at restricting carbon output in a bid to curb pollution. Europe’s largest vehicle manufacturer is looking to outsource production of several components that require aluminium, rubber and plastic polymer parts to the United Arab Emirates.
Trade theory suggests that production of goods should shift to areas that can produce that good relatively cheaply. Countries that do not have a ‘comparative advantage’ in the production of a specific product over other countries should not therefore produce them. Volkswagen is seemingly adhering to this idea. Having foreseen a potentially dramatic increase in electricity prices due to the new emission trading standards, the company is looking for other areas in which to produce electricity-intensive parts.
The company already has a business relationship in Abu Dhabi after it bought the leasing company LeasePlan in a joint venture with the Abu Dhabi-based Mubadala Development Company. The key attraction of Abu Dhabi is firstly that it can produce electricity significantly cheaper than Germany, but secondly, Abu Dhabi is an area that is hungry for investment. This is largely motivated by the realisation that it needs to hedge against the future when its oil reserves evaporate, and the key way of achieving this is to attract capital investment into the region.
Whether electricity prices do increase significantly due to new trading standards or not, Volkswagen should still consider shifting production to lower cost regions. While this has political implications with regards to job losses in its domestic market, in the long run, the vehicle manufacturer is likely to gain far more than it loses provided it ensures rigorous quality control is maintained over the products being outsourced.
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