For years, Volkswagen thrived as a global company, building its cars all around the world. We illustrate the magnitude of this approach in Figure 8.4 (see page 350 in your text). But as war, health scares and trade disputes roll back decades of globalization, the firm is changing its manufacturing approaches to adapt. VW’s goal now, writes The Wall Street Journal (March 28, 2022), is to shore up access to components and raw materials and to shorten supply chains to make its regional businesses less dependent on faraway suppliers.
Without the vast home market of its U.S. competitors, VW long ago bet on international markets for growth. As the world’s second-largest car maker, VW benefited like few other companies from decades of post-Cold War detente, falling import tariffs and JIT supply chains. But can such a global business endure as supply chains are strained by the pandemic, the semiconductor shortage, rising raw-materials prices and new geopolitical fractures?
When Covid-19 shut China down at the beginning of 2020, components built there were suddenly missing from supply chains and VW’s factories in China and Europe stood idle. By the end of the year, VW produced 18% fewer vehicles than the year before. Then came the next crisis, with the world’s supply of semiconductors drying up, VW slashed production at its global factories in 2021, just as the industry was rebounding from pandemic lockdowns. VW production fell another 7% by the end of 2021.
Even isolated incidents have highlighted the fragility of a business woven across borders. A few months ago, a fire on a cargo ship destroyed nearly 4,000 of VW’s most expensive cars including Porsche, Bentley and Lamborghini on their way to the U.S. In February, when Russia invaded Ukraine, VW found itself without Ukrainian wiring harnesses, forcing it to halt production of electric vehicles at VW, Audi and Porsche, and stop production at its biggest German factory.
Ukraine and Covid production stoppages exposed how VW could no longer focus solely on obtaining the cheapest parts, however remote or scattered their producers. Now, VW is making the uninterrupted delivery of parts a priority over competitive pricing, and looking at dual sourcing of components, a practice that the industry gave up years ago in favor of single sourcing components and JIT delivery.
Classroom discussion questions:
- What OM lessons has VW learned from the chip and wire harness shortage?
- Why will VW invest over $7 billion in the U.S. in the next 5 years?