Volkswagen says the price of essential automotive parts has risen sharply due to the coronavirus outbreak, placing additional strain on earnings because the trade enters deep recession.
The world’s largest carmaker, which started restarting manufacturing at its Wolfsburg headquarters final week, revealed elements makers working at a fraction of their capacities had been passing on elevated bills.
“Suppliers invested in manufacturing amenities for big volumes,” Stefan Sommer, VW’s board member for procurement, instructed the Monetary Occasions. “Now there are depreciations, whereas the overhead prices stay and so they can’t be lowered in a single day.”
Whereas cheaper uncooked supplies and record-low oil costs might offset a lot of the rise within the worth of parts, Mr Sommer stated the price of sourcing elements would “rise within the basic worth chain”.
Nonetheless, he added it was too early to inform if the full price of auto manufacturing can be completely larger.
Carmakers are unlikely to move on further prices to shoppers in a recession, forcing producers to soak up them, whilst they haemorrhage money due to manufacturing unit closures and collapsing gross sales.
The UK on Tuesday announced gross sales in April fell 97 per cent, with comparable declines in Spain and Italy. A mere 4,321 automobiles had been registered in April within the UK, the bottom month-to-month quantity since 1946, based on figures from the Society of Motor Producers and Merchants. The earlier April, 161,064 autos had been offered.
Carmakers reminiscent of Volkswagen depend on hundreds of particular person suppliers, which frequently make bespoke elements to order which can be delivered to manufacturing traces on a decent schedule.
In recent times, producers have boosted earnings partially by extracting reductions from contractors, however Mr Sommer stated suppliers had been telling VW they might “now not supply worth reductions”.
“Everybody must bear the identical prices, not solely our suppliers, but in addition VW itself,” the previous engineer stated.
“If we proceed to see decrease volumes, elements will probably be dearer.”
VW’s German vegetation depend on 6,500 particular person elements from inside Europe alone, and the corporate has expressed concern about gaps within the provide chain, if smaller contractors are unable to outlive the disaster.
Final week, VW’s German rival Daimler additionally cautioned that whereas its provide chain had proved “remarkably strong” through the Covid-19 outbreak, it may very well be the “calm earlier than the storm”.
“Many of those firms have strong enterprise fashions, however they simply don’t have the liquidity to deal with an extended shutdown,” stated chief govt Ola Kallenius.
That warning got here because the world’s largest automotive elements provider, Bosch, stated the trade was going through an enormous auto recession that may eclipse the downturn it confronted following the 2008 monetary disaster.
On Tuesday, German automotive executives are scheduled to satisfy Angela Merkel’s administration in Berlin, and focus on the introduction of a scrappage scheme to spice up demand.
Any such scheme is prone to give attention to subsidies for low-emission automobiles, particularly electrical autos, reminiscent of VW’s flagship ID. 3, whose most-expensive part, lithium-ion batteries, might additionally rise in price.
Nonetheless, “the trade can not but take into consideration the elevated price of parts for electrical autos”, Mr Sommer stated.
“First, we should give attention to the attractiveness of such automobiles, and the incentives to purchase them.”
Regardless of VW’s present challenges Mr Sommer, a former govt at German auto suppliers Continental and ZF, additionally dismissed solutions that the group can be compelled to revamp its provide chain within the wake of the coronavirus pandemic.
Whereas VW has enlarged its procurement groups, constructing another provide chain can be “too complicated” at this stage, he stated, as no person can predict “how or the place the following pandemic will happen”.
Further reporting by Peter Campbell