Procurement risks and opportunities

Current trends in the automotive industry such as e-mobility and automated driving are resulting in an increased need for financing among suppliers. The Volkswagen Group’s procurement risk management system assesses suppliers before they are commissioned to perform projects. Among other things, the procurement function considers the risk of insufficient competition if it concentrates on a few financially strong suppliers when awarding contracts.

The positive economic trend in Europe, North America and China weakened over the course of the year. Moreover, shifts in demand from our customers and restrictions in the availability of model variants as a result of the WLTP test procedure posed a challenge to suppliers. These changed circumstances restricted suppliers’ financing opportunities, particularly in areas where alternative technologies are gaining importance. The procurement risk management system continuously and globally monitors the financial situation of our suppliers and takes targeted measures to avoid supply bottlenecks.

The number of crises and insolvencies among suppliers worldwide fell in 2018 in line with the global economic situation. Specialists in restructuring and supply reliability are coordinating the measures to be taken on a Group-wide basis to safeguard production in a timely and sustainable manner.

The current trends in the automotive industry will also affect the availability of special raw materials, which are principally used in electrified vehicles. The raw material and demand trend was continuously analyzed and assessed on an interdisciplinary basis over the reporting year to enable steps to be taken in a timely manner in the event of potential bottlenecks.

New bilateral and multilateral trade agreements, including those for steel, for the expected shift in the product mix from diesel to petrol engines and for short-term demand fluctuations relating to the WLTP test procedure, present challenges that must be tackled together with suppliers. As a result of the new trade agreement between the USA, Mexico and Canada, there is a risk of additional costs due to more expensive deliveries.

Quality problems may necessitate technical intervention involving a considerable financial outlay where costs cannot be passed on to the supplier or can only be passed on to a limited extent. It is not possible at present to rule out the possibility of a further increase in recalls of various models produced by different manufacturers in which certain airbags manufactured by Takata were installed. This could also affect Volkswagen Group models.

In addition to financial difficulties, supply risks may arise, for example, as a result of fires or accidents at suppliers. Supply risks are identified without delay in the procurement function through early warning systems and mitigated immediately by applying derived measures.

Additional measures were taken to safeguard supply and avert future assembly line stoppages caused by suspensions of deliveries.

Antitrust investigations into suppliers on grounds of price-fixing agreements are being monitored by Risk Management. The effects on Volkswagen are being systematically reviewed.