Parts suppliers' acquisitions bring confusion to multinational companies
Volkswagen is now stepping into a complex situation that has already ensnared major players like Ford and General Motors. The automaker is currently divesting its own parts manufacturing facilities, a move that echoes similar strategies taken by other industry giants. This development comes at a time when General Motors is still dealing with the fallout from Delphi’s bankruptcy, highlighting the risks involved in such strategic shifts.
At the same time, mergers and acquisitions among non-core business units of auto suppliers are accelerating. One of the most discussed topics is the question: why do companies choose to outsource? What are the potential consequences? Will they face the same challenges as GM and Ford? Some analysts suggest that while these moves may seem promising, they can lead to unexpected outcomes. After all, there are successful examples of companies merging and reorganizing their supply chains effectively.
For automotive executives, selling or separating the parts division is often seen as a smart move. It can boost shareholder confidence, attract investment, and improve relations with banks. The reasoning is clear: reducing costs by sourcing cheaper parts from the market, focusing more on brand development and design, and leveraging global expertise aligns well with the image of a modern, international automaker.
Recently, Volkswagen AG auctioned off Gedas, its IT services subsidiary, as part of its cost-cutting initiative. This makes Volkswagen the second-largest automaker to outsource IT operations to third-party providers. However, outsourcing in the automotive sector is not without controversy. Companies like Ford, Toyota, Honda, and Peugeot still maintain substantial in-house IT departments, while BMW recently acquired an IT firm to strengthen its internal capabilities.
Volkswagen's decision to outsource parts and components also highlights the risks associated with this approach. The experiences of Ford and GM serve as cautionary tales. Once considered a silver bullet for efficiency, vertical integration—outsourcing as much as possible—has led to serious issues. When Delphi and Visteon, former subsidiaries of GM and Ford, were separated, both companies faced severe financial consequences.
On the flip side, some companies have found success through outsourcing. Porsche, for example, only maintains about 20% vertical integration, relying heavily on external suppliers. Toyota, however, takes a different approach, producing the majority of its parts in-house. This allows it to protect core technologies and ensure high-quality standards. The Prius, for instance, uses 70% internally manufactured parts, reinforcing its competitive edge.
Outsourcing isn’t inherently bad, but it must be tailored to a company’s specific needs. In niche markets, like Porsche’s, a product-focused strategy might not work for mass producers. While it’s wise to outsource simple components like exhaust systems or axles, critical elements such as brakes or engine control should remain under direct control.
Even something as personal as a car seat can make a difference. A comfortable seat can influence a buyer’s decision. If every car ends up using the same seats, steering wheels, and transmission systems, the industry risks losing its distinctiveness.
The automotive sector has evolved over the past century, achieving high levels of standardization. But with so many manufacturers building cars on shared platforms, differentiation through technology and design has become harder. As suppliers converge, profit margins shrink, and competition becomes tougher.
Outsourcing is not a mistake, but it must be carefully planned based on a company’s strengths, products, and market position. Differentiation should always be the priority. What works for Toyota may not work for GM.
In Volkswagen’s case, selling its parts factories won’t solve its real problems: underutilized factories and high labor costs. If the company continues to rely solely on outsourcing, it may find itself in even greater trouble soon.
Similarly, Chinese automakers looking to adopt global strategies should think carefully about the path they take. Success doesn’t come from copying others—it comes from understanding what truly works for your business.
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