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VW’s Battle With Contractors Gets Unusually Messy

APTOPIX Germany Volkswagen EarnsAPTOPIX Germany Volkswagen Earns
From 'Just in Time' to 'Just Messed Up' in 11 quick months.Markus Schreiber — AP

The decision of the world’s largest automaker to take on a feisty Bosnian entrepreneur who supplies it parts is backfiring spectacularly.

Volkswagen AG (VLKAY) said Monday it had stopped, or partially stopped, work at six of its biggest assembly plants, affecting a total of 28,000 workers, due to a contract dispute with two component suppliers, ES-Automobil Guss GmbH and Car Trim GmbH (both ultimately controlled by the privately-held Prevent Group of Nijaz Hastor).

The two companies have been refusing to supply VW with transmission components and seat covers since Thursday, in protest of VW’s decision to cancel a major contract with the group two months ago.

It’s highly unusual for contractual disputes in consensus-obsessed Germany to play out so bitterly and publicly. The reason this one is doing so is, ultimately, a consequence of VW’s struggles since its diesel emission scandal exploded early a year ago.

“The way in which VW is treating its suppliers is in no way acceptable and can ruin any small company,” ES-Automobilguss chief operating officer Alexander Gerstung told Sueddeutsche Zeitung at the weekend.

“The suppliers are playing a filthy game with us,” Bernd Osterloh , head of VW’s Works Council, told the newspaper Bild Monday. “It makes me furious.”

When Matthias Müller took over as CEO in September, one of his first acts was to seek 1 billion euros (roughgly $1.12 billion) in cost savings. But VW is famously unionized, and the head of its powerful Works Council, Bernd Osterloh, was determined to stop any job losses.



“As long as I’m head of the Works Council, there’ll be no job cuts due to business issues. The core workforce is the core workforce,” Osterloh told Bild. “If anyone thinks they can cut that, then we’d have to cut the management too.”

Osterloh, who is also deputy chairman of the supervisory board, is often referred to as the single most powerful man at VW, even ahead of Müller. Management would have to look elsewhere for savings.Management would have to look elsewhere for savings.

For more on the VW emissions scandal, click here.

According to Manager Magazin, VW’s group head of purchasing, Francisco Javier Garcia Sanz, wrote to suppliers in June that the company “must be much more efficient in its purchasing costs…We want to achieve that through cooperation, but also with the necessary thoroughness.”

It soon became clear what VW meant by “necessary thoroughness.” At the end of June, according to Sueddeutsche Zeitung, VW canceled–by fax–a 500 million euro ($555 million) contract with Car Trim, citing alleged quality defects in leather seats delivered for the Touareg and the Porsche Cayenne.

The Prevent companies sued for 50 million euros in compensation for work they had already done on its facilities ahead of the contracted deliveries. VW refused to pay. So Prevent refused to deliver. And so to court they went.

As ever when VW is concerned, the game is being played out with one eye on the politicians who partly own the company. The balance of power in such contract disputes is normally with the automaker, due to its greater name recognition and its greater importance to the local tax base. But with public sympathy for VW badly damaged by the diesel scandal, Prevent has sensed that this would be a good moment to present itself as a plucky underdog unjustly bullied by a corporate giant. Olaf Lies, the economy minister for the state of Lower Saxony who is also a VW board member, said Monday that if the dispute drags on, “I can’t even think about the effects that this will have. It’s not at all clear how we will deal with that.”

According to Stefan Bratzel, a director of the Center of Automotive Management in Bergisch Gladbach near Cologne, it’s a high-risk strategy for Prevent. Bratzel told German public TV station ARD that it “could be committing hara kiri…it jeopardises further orders and it exposes itself to huge risks of compensation claims.”

A court in Braunschweig has already ordered Prevent to continue meeting its own contractual obligations. But VW’s plant stoppages are likely to last at least until the end of the week: Prevent’s appeal against VW’s injunction will take until Aug. 31, according to Automative News. In the meantime, VW has applied for permission to seize any relevant stockpiles with the help of court bailiffs.

Analysts estimate the cost to VW is likely to be in the tens of millions of euros. Bratzel said they could easily top 100 million euros if the dispute drags on.

But while VW may be acting the injured party, the temporary closures may not be entirely unwelcome. Sales of the Golf, usually its most popular model, were down 14% on the year in July in Germany, and down 9% in the year-to-date, a shocking drop for the local market leader. Across Europe, the damage to its image from Dieselgate has put the VW brand under pressure despite aggressive discounting. While overall EU car registrations were up 9% in the first half, VW brand sales were only up 0.8%. A pretext to cut output could be useful.

“We’ll survive because we make cool cars like the new Tiguan,” Osterloh told Bild. “But unfortunately hardly anyone is talking about our cars at the moment.”