As if dieselgate wasn't enough to worry about, Volkswagen has become embroiled in a mutually damaging row with a supplier of seats and transmission components. The dispute has forced production cuts on the Golf and Passat lines.
The financial pain for VW should be relatively limited providing both parties see sense quickly. Commerzbank estimates a 50-70 million euro ($56 million-$79 million) hit to VW profit for each week of interrupted production. Not great, but easier to swallow than the $18.2 billion in diesel-related provisions booked in April.
It doubtless attests to the German auto giant's determination to slash costs at the VW brand, which has intensified as it tries to foot the bill for dieselgate. Still, it's rare for such small fry to commit hara-kiri by refusing to deliver parts to an important customer. As such, the David versus Goliath battle does hint at a broader power shift between carmakers and their supply chains.
This particular supplier, Prevent Group, isn't very high-tech but it's notable nonetheless about how it could so easily disrupt production. If even a humble seat trim provider can inflict such pain, imagine what a bigger supplier could do.
And that goes to the heart of something that's giving German autos execs, and their rivals elsewhere, a creeping feeling of angst: the sense that they may well become servants of their supply base. As carmakers expand internationally, the number of suppliers who can keep up is shrinking, making them more critical. Meanwhile, as cars become more like computers on wheels, suppliers contribute a far greater portion of the value added to the vehicle. They're often more profitable than the auto-makers and valuations tend to reflect this.
Carmakers already make few components themselves, with Tesla fairly exceptional. Trends like electrification could reduce the value added by the traditional giants even further. If electric motors replace the combustion engine, which auto companies still build themselves, the carmakers may even end up as mere assemblers.
The triumph of the suppliers isn't written in stone of course. Their profit growth has slowed lately, attesting to the high R&D and capital spending needed to develop technology. Being a mass market German carmaker does give you lots of revenue to play with.
Tech upheaval is also triggering parts sector consolidation, such as ZF Friedrichshafen's $12.9 billion takeover of TRW. Only the largest, nimblest and most innovative suppliers will prevail: there's already a profitability gap between the largest and smallest players. Some suppliers will also place expensive bets on tech that fails or that lasts only a short while, such as hybrid vehicle engines. Recent reports that VW may spend billions of euros on battery factories to supply an expanded line up of electric vehicles suggest it won't go quietly.
Still, its hobbling by a minnow shows how far the industry's masters are being challenged by erstwhile servants.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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