Volkswagen Group is coping with emissions scandal that is expected to weigh on group’s financial performance. The company estimates that the emissions scandal will cost up to €40 billion. In order to prepare for the possible losses, Volkswagen plans cost cutting measures to mitigate expected costs. The measures are expected to include cuts in investment programmes, labour and supplier costs.
Volkswagen alone (excluding sales of other Volkswagen Group brands) was the largest company in the German automotive industry, accounting for 33% of the industry’s production value in 2014. Therefore, Volkswagen’s decision to cut spending might have broader effects on the German and European automotive industry.
Top 5 Companies in The German Automotive Industry (% Share of Total Production Value), 2014
Source: Euromonitor International from company reports
Impact on industry investment
In 2014, the German automotive industry spent €13.2 billion on investment, with a large share being generated by the industry’s leader, Volkswagen Group. In November 2014, Volkswagen planned to invest €85.6 billion globally through 2015-2019, mainly to upgrade existing models. However, now Volkswagen plans to halt upgrades of non-core models and plans to cut investment by €1 billion a year through 2015-2019.
Cuts to investment could have a wider impact on the German automotive industry’s performance. As of 2014, the majority of the industry’s investment was destined to expansion or modernisation of production facilities. It is very likely that Volkswagen will halt future expansion plans, thus negatively affecting industries such as machine tools, construction and architectural and engineering services.
Moreover, expected cuts in Volkswagen’s model range and delays in model overhauls will impact industries such as computers and related services, bearings, gears and driving elements, as well as electric motors. Providers of these products or services are often involved in knowledge-intensive new product development, thus Volkswagen’s cuts are likely to have an adverse effect on German suppliers and engineers.
Top 15 Investment Costs Of Automotive Industry In Germany, 2014
|Industry||Spending 2014, % of total|
|Lifting and handling equipment||10.8%|
|Non-domestic air conditioning, packaging and other general purpose machinery||8.2%|
|Architectural and engineering services||7.3%|
|Appliances for measuring, navigation and testing||5.5%|
|Machinery for rubber, plastics and paper||4.4%|
|Cutlery, hand tolls and general hardware||3.6%|
|Machinery for metallurgy||2.7%|
|Metal packaging, wire, other metal products||2.7%|
|Computer and related services||2.6%|
|Bearing, gears and driving elements||1.6%|
|Electric motors, generators and transformers||1.3%|
|Pumps, compressors, taps and valves||1.3%|
Source: Euromonitor International
Impact on industry suppliers
Intra-industry trade and labour costs are the main cost categories in the German automotive industry. Due to the emission scandal, Volkswagen Group has already announced that its employee remuneration policy might be re-evaluated, with possible downsizing of operations. As of 2014, the German automotive industry spent €120 billion on employee remuneration, with Volkswagen Group generating a significant share of this (Volkswagen Group employs an estimated 170,000 workers in Germany, out of a total of 721,000 employed in the German car industry).
In October 2015 Volkswagen announced its plans to extract €3 billion from suppliers in order to mitigate costs of the emissions scandal. This would primarily impact intra-industry trade, both in Germany and other European countries. As of 2014, the German automotive industry imported parts and accessories valued at €59.7 billion (or 51% of parts and accessories’ market value). Volkswagen’s trade partners are already preparing for expected losses. For example, the Italian Association of the Automotive Industry estimates that Italian suppliers will lose €1.5 billion as a direct result of Volkswagen’s scandal.
Other automotive component suppliers, such as electric equipment for engines and vehicles, are also likely to incur some losses. Such suppliers are likely to lose due to an expected price squeeze on components supplied and declining production volumes of Volkswagen, as a number of consumers are turning their back on the group’s products. Besides automotive suppliers, industries such as business management and consultancies could be adversely affected too, as Volkswagen plans significant cuts on marketing and promotion spending.
Top 15 Supplier Costs Of Automotive Industry In Germany, 2014
|Supplier||Spending 2014, % of total|
|Basic iron and steel||2.4%|
|Business and management consultancies||2.4%|
|Real estate activities||2.0%|
|Electrical equipment for engines and vehicles||1.9%|
|Metal Packaging, wire, other metal products||1.8%|
|Other business services||1.6%|
|Casting of metals||1.4%|
|Coating of metals and mechanical engineering||1.1%|
|Cargo handling, warehousing and travel agencies||1.1%|
|Production, collection and distribution of electricity||1.0%|
|Forming of metal and powder metallurgy||1.0%|
Source: Euromonitor International
Structural changes expected in the future
Besides current costs that Volkswagen is prepared to incur, some structural changes in the supply chain can be expected in the long term. Volkswagen diesel technology is currently under pressure and the company is now planning to invest more in electric vehicle technologies.
Volkswagen Group is now investing in standardised components for electric vehicle drivetrains, with an expected range of 500km. Volkswagen Group plans to launch up to 20 electric models by the end of this decade, and if successful, this would encourage other German competitors to follow.
Such strategy could help Volkswagen to mitigate losses from the emissions scandal and even extract something positive from the development of electric vehicles that have bright future prospects. It could also mean some structural changes in the German automotive industry’s supply chain, with suppliers of drivetrains, electric motors or batteries gaining larger share in the future. Such developments would boost demand for engineering services, as the industry will have to improve and integrate new drivetrains in motor vehicles.