Volkswagen‘s financial crisis highlights the need to outsource some of the parts operations it has stubbornly held on to. VW plans to eliminate 5,000 jobs as part of the ForMotion cost-cutting plan intended to stop the erosion of profits. But one of the first places CEO Bernd Pischetsrieder should look is the company’s in-house supplier operations.
Volkswagen has one of the highest levels of vertical integration of any car company in the world. It has recently made major investments in operations such as seating assembly, exhausts and gearboxes for the new Golf platform generation – all in operations in Lower Saxony. Volkswagen’s older Emden (Passat) and Wolfsburg (Golf/Touran) plants have high levels of integration. Volkswagen has argued that its in-house operations give it a competitive advantage because the group has some of the best in-house economies of scale of any carmaker in Europe.
The other carmakers can’t all be wrong.
But while Volkswagen has stood still its competitors have disposed of their operations to leading first tier suppliers. Chairman Ferdinand Piech reputedly didn’t want to merge Volkswagen’s steering operations with Mercedes-Benz Lenkungen because he didn’t want to give Mercedes-Benz the benefit of Volkswagen’s volumes. Now MB Lenkungen is merged with the steering system operations of ThyssenKrupp, and has the potential to achieve much better economies of scale.
Why does Volkswagen still make seats at Sitech, its 2,000-employee strong operation? Why does it assemble exhausts systems, front ends and door modules in-house? Sure, the company has skills and sunk capital. But at some point it must make sense to reassess, particularly when capital is short. If virtually every other car company has outsourced these operations, Volkswagen has a prima facie case to answer to its shareholders on why it still pours its scarce capital into these non-core operations.