Parts suppliers' acquisitions bring confusion to multinational companies

Volkswagen is now stepping into a complex situation that has already ensnared industry giants like Ford and General Motors. The automaker has begun to offload its own parts manufacturing facilities, a move that echoes similar strategies previously adopted by other major players in the automotive sector. This development comes at a time when General Motors is still reeling from the fallout of Delphi’s bankruptcy, highlighting the risks involved in divesting key supplier divisions. Meanwhile, mergers and acquisitions among non-core business units of global auto parts suppliers are accelerating, signaling a broader shift in the industry. The question on everyone's mind is: why are companies taking such steps? What long-term consequences could arise? Will they face the same challenges as GM and Ford? Some analysts suggest that while the trend of outsourcing and restructuring may seem promising, it can also lead to unexpected outcomes. After all, there have been successful examples of mutual acquisition and integration within the supply chain. For car executives, selling or separating the parts division is often seen as a smart strategic move. It can boost shareholder confidence, attract investment, and improve financial performance. The benefits include cost reduction, allowing companies to source cheaper parts from the market; greater focus on brand building and vehicle design, which are more profitable areas; and better alignment with global supply chain efficiencies, reinforcing the image of a modern, integrated automaker. Recently, Volkswagen AG announced the sale of Gedas, its IT services subsidiary, as part of a broader cost-cutting initiative. As one of the top 10 automakers globally, Volkswagen is following a growing trend of outsourcing non-core functions to specialized service providers. However, outsourcing in the automotive industry remains a double-edged sword. Companies like Ford, Toyota, Honda, and Peugeot still maintain significant internal IT departments, while BMW recently acquired an IT firm to strengthen its own capabilities. This shows that while some companies choose to outsource, others prefer to keep control over critical operations. Volkswagen’s experience with outsourcing parts and components highlights the lessons learned from Ford and GM. In the past, many believed that minimizing vertical integration—outsourcing as much as possible—was the key to success. However, the reality has proven more complicated. Delphi and Visteon, once key suppliers for GM and Ford, were spun off and later faced severe financial difficulties. GM and Ford now find themselves struggling with the aftermath of these decisions. Opel, GM’s European arm, even failed to sell its Kaiserslautern parts factory, underscoring the risks of over-reliance on external suppliers. On the flip side, companies like Porsche and Toyota have found success through different approaches. Porsche outsources about 80% of its components, maintaining only 20% in-house, while Toyota takes a more balanced approach, producing around 70% of the parts for the Prius. This strategy ensures both technological control and consistent quality, which is crucial in competitive markets. Outsourcing isn’t inherently wrong, but it must be carefully tailored to a company’s specific needs. For smaller, niche markets like Porsche’s, outsourcing works well. But for large-scale manufacturers, a one-size-fits-all approach may not be effective. One thing is clear: a well-managed automaker should avoid producing low-value, high-cost items such as exhaust systems or brake components. But what about something as essential as the seat? A comfortable seat can make or break a customer’s decision to buy a car. If all cars end up using the same seats, steering wheels, and transmissions, the industry risks losing its identity and differentiation. As the automotive sector continues to evolve, many manufacturers have become too focused on standardization, neglecting their ability to stand out through innovation and design. More and more automakers are developing models based on shared platforms, leading to homogenized products and thinning profit margins. Outsourcing is not a mistake, but it must be based on a deep understanding of a company’s strengths and market position. A strategy that works for Toyota may not work for GM. Back to Volkswagen, selling off its parts factories won’t solve its core issue: underutilized factories and high labor costs. If the company continues to rely on outsourcing to fix these problems, it may find itself in even deeper trouble soon. Similarly, Chinese automakers looking to adopt global practices should carefully consider their path forward. The road to success lies not in blind imitation, but in thoughtful, strategic decision-making.

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