VW stops production at six plans and 27,700 workers may be sent home

German car maker already staggering under emissions scandal pressure forced to stop building best-selling Golfs and Passats amid dispute over contracts.

Workers at the Volkswagen Golf factory in Wolfsburg, Germany, have been told to stop production of the vehicles amid a row between the company and a supplier. Sean Gallup / Getty

Volkswagen halted production of its best-selling Golf hatchback on Monday as the fallout widened from an unprecedented dispute with a supplier of seat and transmission components.

The shutdown, which started with the Passat sedan on Thursday, is now set to impact about 10 percent of Volkswagen’s German workforce, the automaker said in a statement. As many as 27,700 workers across six factories could be sent home amid a shortage of parts supplied by subsidiaries of Bosnian-based Prevent Group. Golf production is set to be halted until at least Saturday.

“We are really surprised that the fight is escalating to a level where production is severely impacted,” Sascha Gommel, an analyst at Commerzbank, said in a note. “The dispute is coming during an inconvenient time for VW,” with its reputation still marred by the emissions-cheating scandal.

The company has restarted talks with one supplier after the unprecedented dispute.

Negotiations with the supplier of seat and transmission parts will resume later today, a spokesman said. Prevent Group's Car Trim seat-component division and ES Automobilguss transmission-parts unit suspended deliveries when Volkswagen refused to reimburse the suppliers after dropping a contract. The parts makers had demanded compensation of €58 million (Dh240.5m), the German newspaper Sueddeutsche Zeitung reported on Sunday.

“At least the negotiators are at the table again today,” Olaf Lies, a Volkswagen supervisory board member and economy minister of the state of Lower Saxony, where the car maker is based, said on Monday. “It will not only be about the question of the current contract, which has now been rescinded, but it will probably also be about the question of how the next months and years will look.”

The production stop at VW’s site in Wolfsburg alone could cost as much as €100m a week, UBS analysts calculated. The threat to earnings comes as the car maker seeks to boost sagging profit at its namesake brand by lowering annual spending by €1 billion. The supplier last week said Volkswagen is shifting its problems to suppliers and “exploiting” its dominant position in the market.

The order cancelled by VW involved a €500m deal with Car Trim that was scheduled to start next year, a person familiar with the matter said. The parts maker said it wants the car manufacturer to pay for the plant alterations it made to provide the services.

The conflict highlights the degree to which a parts maker can disrupt output as car builders rely increasingly on suppliers to produce a large portion of their vehicles while squeezing them to cut prices. Volkswagen, like most car makers, works on a just-in-time manufacturing principle, meaning its parts are delivered directly to the assembly line without being stored in a warehouse first. While that lowers costs, it also means that when there is a disruption from a supplier, it quickly ripples through the production chain.

Volkswagen stock has declined 10 per cent this year, compared with a 1.9 per cent drop in Germany’s benchmark DAX Index.

VW is under pressure to reduce costs as it grapples with lawsuits and regulatory investigations after disclosing last September that 11 million diesel-powered cars were equipped with software designed to cheat on emissions tests. It has set aside €18bn to cover worldwide costs related to the scandal.

Volkswagen’s works council head Bernd Osterloh said on Friday that the suppliers are being “reckless and asocial” in their disregard for workers by stopping the deliveries. VW said workers producing the Passat will be on shortened work hours until Wednesday, while Golf production will be interrupted for a week, the spokesman said.

A German court has ordered the supplier to resume deliveries, and an appeal in one of the cases has been set for August 31.

VW in the meantime has asked the court to fine the supplier and let the car maker go to the factories and load up the parts on its own, the court in Braunschweig said last week. The parts maker has until this week to respond, and the court will decide then on VW’s request, according to the release.

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