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Reports that U.S. Volkswagen Dealers are Growing Restless Regarding the Ongoing Diesel Emissions Scandal Fixes

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The ongoing brand crisis involving Volkswagen and specifically its customers and dealers over the diesel engine emissions alteration admission continues to take on new dimensions.

Last week, The Wall Street Journal reported that VW dealers across the U.S. are fuming regarding the receipt of specific guidance  regarding the estimated 12,000 diesel powered autos that they are not allowed to sell. These unsold and currently prohibited stop-sale vehicles have been sitting in lots for over 10 months while VW and U.S. regulators traverse a legal process for determining next steps. According to this report, U.S. VW dealers are now sitting on approximately 107 days of finished goods inventory of which 12 percent represent currently non-saleable models.

Not wanting unsellable inventory to be clearly visible, many dealers have reverted to moving stop-sale inventory onto adjacent or off-site storage lots. While VW is currently compensating dealers for additional financing and needs for periodic servicing of this large amount of unsold and un-positioned inventory, dealers are not apparently making up the difference in new sales volume because of a lack of new saleable inventory. The long awaited family-sized sport-utility vehicle is not expected to be introduced in the U.S. until early 2017 while anew Alltrack small station wagon is due to be introduced in the next several months adding to dealer frustrations for more models to sell. Plans are very unclear as to whether the new family-sized SUV model will be offered with any diesel powered options as previously planned.

Last week, California regulators rejected a proposed VW fix for cars with the larger 3.0 liter diesel power plant. VW executives indicate that they have a fix related to the 2.0 liter diesel engines but regulators also need to approve this process as well.

In its report, the WSJ quotes one specific VW dealer executive as indicating that the scandal, compounded by the current glut of unsaleable inventory has soured his view of VW senior management. This executive further indicates that VW should take the unsold diesel vehicles back to Germany or some other location in the world where they can comply with emission standards.

On Friday, VW U.S. executives met with 150 Northeast U.S. dealers to review what was termed as a TDI Settlement Program, and pledged  additional compensation to dealers. While the details of such restitution still are not known it was the first time that VW indicated that the dealers themselves will receive direct compensation.

A detailed timeline was reportedly outlined regarding the proposed buyback and repair program across the U.S., one that is expected to extend through the end of 2018.  According to a subsequent report from the WSJ, a software fix would be made available for third-generation diesels by October, followed by a combination hardware and software fix for first-generation diesels beginning in January 2017, and a software update for second-generation diesel powered vehicles in February 2017. VW further indicated that it expects to have a hardware fix ready for third-generation diesels by October 2017.

This overall timeline, if approved by U.S. regulators will affect the nearly 500,000 existing diesel powered vehicles now on U.S. roads in addition to the unsold inventory of 12,000 vehicles.  Thus, it is more than likely that U.S. VW dealer service teams will be very, very busy over the coming months and years. However, VW continues to decline media outlets regarding any specifics related to overall time lines or specific restitution for its dealers. The WSJ report also indicates that for consumers electing to sell their vehicles back to VW, a “third-party settlement specialist” would be inserted to act as an intermediary and direct communicator with dealers.

There is little doubt that U.S. VW dealers face a service management crisis, one that will tax both aftermarket and pre-sales service business segments.

As noted in previous commentaries, VW continues to experience painful lessons regarding its ongoing emissions scandal. A company noted for a somewhat tops-down management style and an engineering-driven culture and among one of the two top global producers will learn some tough lessons as a result of this scandal. The most important when all the dust settles, will be more sensitivity to customer, market and dealer network needs along with implications of being afoul to governmental emission standards.

Once again, all of these challenges in the months to come demand that VW executives move decision-making beyond the halls of Wolfsburg with more emphasis on major geographic based leadership such as VW U.S. The supply chain implications alone place a major emphasis on service management and responsiveness or risk even more erosion to the brand and to customer loyalty. VW needs to think more boldly and more creatively to address fixing the current challenges with non-conforming diesel powered vehicles including the need for augmented resources.

Bob Ferrari

© Copyright 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.


General Motors Embroiled in Supplier Crisis

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In supply chain and procurement communities, there is somewhat of a known axiom that any lower-tiered component supplier, even smaller in scope, can cause a significant supply chain and production disruption. That lesson was reaffirmed in the 2011 devastating earthquakes and tsunami that struck Japan when automotive and high tech manufacturers discovered later in the aftermath that important component suppliers suffered major damage in production facilities.

This week, automotive supply chains have yet another reminder.

General Motors indicates that a contract dispute and bankruptcy filing from a key supplier could force it to close all North American assembly plants, potentially causing millions of dollars in losses per day. Clark-Cutler-McDermott Co. is a component supplier for 175 acoustic insulation and interior trim parts that are apparently utilized in nearly every vehicle GM produces in North America.

According to a published report from The Detroit News, the supplier stopped producing parts for GM after shifts on Friday and laid off its workforce. Clark-Cutler-McDermott previously had shut down business operations June 17 and laid off workers until GM was granted a temporary restraining order last month by a U.S. District judge in Detroit, forcing the supplier to temporarily resume production. That order expired Monday. According to a published report by The Wall Street Journal, GM has accused the supplier of using the bankruptcy process and its position as a critical parts supplier to protect personal interests rather than honor contracts.

The Franklin Massachusetts-based supplier filed for Chapter 11 bankruptcy last week, and is seeking to sell its business assets because of what it calls unprofitable contracts with GM that have led it to lose $12 million since 2013. Further indicated was that the loss rate of loss had recently accelerated to more than $30,000 a day. The company, which also filed bankruptcy for its subsidiary CCM Automotive Lafayette LLC, says in court records that more than 80 percent of its revenue comes from GM. That is a significant risk for any supplier, especially a smaller one in the nature of a global automotive producer.

A report indicates that GM loaned the supplier millions of dollars to continue operating and also increased prices paid for parts. GM, in court filings, said it told the supplier it would completely fund the sale of the business to another entity.

A U.S. Bankruptcy Court hearing is scheduled to discuss several requests from the supplier and GM. The judge may rule on motions from the supplier to reject GM contracts, give it the authority to pay wages and benefits and obligations, use of collateral cash or GM’s motions that would require the company to deliver inventory to GM and turn over GM tools and equipment or honor its contracts with GM.

Obviously this is a situation that no procurement and supply chain operations team looks forward to and obviously has a lot of GM teams scrambling in back-up contingency planning. The subsequent weeks will be critical in producing back-up supply plans.

Supply Chain Matters recently highlighted a WSJ report of a different focus by GM’s procurement teams, one that allowed 400 U.S. and Canada based component suppliers for GM vehicles being produced in Brazil and Mexico to be able to periodically renegotiate their supply contracts. These suppliers are currently challenged with the effects of a volatile foreign currency environment causing rising material and labor costs. This development was newsworthy because among long time automotive industry watchers, GM developed somewhat of a past reputation as a strict negotiator with what the WSJ describes as “ironclad” contracts with suppliers. Unfortunately, this latest news, coupled what eventually transpires regarding this one supplier, will either add or distract from previous perceptions regarding GM as a customer.

Bob Ferrari


Tesla Motors Reports Q2 Production and Operational Results- The Critical Ramp-up of the Supply Chain

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Tesla Motors remains challenged by supply chain ramp-up issues as it strives to meet aggressive short and long-term production and supply chain needs.

On Sunday, Tesla announced that the electric auto maker had produced 18,345 vehicles during Q2, a volume increase of 20 percent from Q1. However, in classic “hockey stick” fashion, 5150 completed vehicles were still in-transit to customers at the end of Q2 because production completion was skewed toward the latter part of the quarter.  That in-transit number represented double the number reported in Q1 (2615 in-transit), a reflection of Tesla’s unique challenge of supporting a direct to consumer distribution model that adds direct to customer delivery acknowledgement to actual revenue recognition.  Telsa Motors Model S

The auto maker acknowledged that almost half of the quarter’s Q2 final production occurred in the final four weeks of the quarter which is an obvious sign of component supply and other production challenges.  The goal set by Tesla management in Q1 was to produce 20,000 total vehicles in Q2.

Tesla reaffirmed that it is on-track to deliver 80,000 – 90,000 new vehicles in 2016 which implies that production volumes in Q2 and Q3 must continue to ramp-up to deliver 50,000 total vehicles. To that end, Tesla indicated that it excited Q2 at a production rate of 2000 vehicles per week, with milestones of 2200 vehicles per week in Q3 and 2400 per week by Q4. Thus there is little tolerance for any future supply chain disruptions.

As noted in previous Supply Chain Matters commentaries and in the company’s statements to shareholders and customers, Tesla has elected to accelerate plans to ramp annual production volumes to 500,000 vehicles annually by 2018, two years earlier than previously planned. At the recent annual meeting of shareholders, Founder and CEO Elon Musk indicated that Tesla will “completely re-think the factory process.” Musk repeatedly raised the notions of “physics-first principles” and made the point that his team now realizes that where the greatest potential lies is in designing and building the factory. To that end, he disclosed that he now no longer has a Tesla office, instead spending the bulk of his time residing on the production floor and observing. He has challenged Tesla engineering teams to the principles of “you build the machines that build the machine.” In other words, the context is in thinking that the factory is the product, and that you design a factory with similar principles as in designing an advanced computer with many interlinking operating needs.

Further acknowledged was that the Model X design was overcomplicated, perhaps too much to accommodate production volume needs. Going forward with the development of the new Model 3, he indicated that a tighter integration loop among product design and manufacturing would be fostered.

Going forward, Tesla has to have a laser focus on supply chain and production execution. Invariably, the company will become distracted by other needs requiring management attention such as product issues or the ongoing autonomous auto-pilot software caused accident that has caught the attention of U.S. regulators.

Traditional auto manufacturers attain a supply chain ramp-up focus via a permeating culture of just-in-time continuous production and total elimination of production waste. Culturally, that can be a tall order for most innovative high technology companies whose emphasis is on innovative and breakthrough product design while leaving the production details to contract manufacturers.

Tesla however continues to push the envelope of traditional thinking. Over the coming months and years, we all get to observe the results.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters© blog.  All rights reserved.

 

 

 


Additional News Related to Tesla’s Gigafactory

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There has been some additional news regarding the status of electric car manufacturer Tesla Motor’s rollout of its planned gigafactory to produce its own electric cells for use in both its automobiles as well as other rechargeable battery supply needs.

The Associated Press reports that Tesla has now received and sold about $20 million in transferable tax credits granted by the State of Nevada in conjunction with an overall $1.3 billion incentives package put in place to lure Tesla to selecting the northern Nevada site location. In its most recent progress report issued to the state, Tesla indicated that as of the first quarter of 2016, an average of 369 workers were employed at the plant thus far, while an average of 599 construction workers continue to work on plant construction and fit-out.

Tesla battery gigafactory

Source: Tesla Motors

Reports point out that Tesla continues with a strategic supply agreement with Japan based battery supplier Panasonic. This supply agreement reportedly calls for the production of 1.8 billion battery cells through 2017, to support the output needs for both the Model S and the Model X. As of Q1, Panasonic had over 50 employees working at the Nevada battery plant.

The battery plant is being designed to eventually support the production needs of upwards of 500,000 electric powered vehicles per year. The design goal is that the plant would ultimately be able to produce batteries at 30 percent less cost, and when operational, would provide the capacity to be the single largest battery manufacturing volume plant in the world. The gigafactory is part of Elon Musk’s vision that batteries will not only be required in new automobiles, but in alternative energy applications as well. Hence, Tesla’s recent announcement of its intent to acquire SolarCity, the other component of this strategy, which includes supplying storage batteries to capture electricity captured by solar cells during the day, for use in other periods.

Meanwhile, a Bloomberg Businessweek published a report indicates that pressure to speed-up the original production ramp-up output of the gigafactory has taken on new significance because of the 330,000 preorders that have already been received for the new Model 3.

According to the report- “The accelerated schedule to supply the Model 3, the automaker’s first mass market car, doesn’t leave much time to create a complex supply chain that includes expanded mining and exploration operations.”

Further noted is that the Model 3 will feature a newer high-capacity battery with enhanced energy density to expand operating range.  To keep the base price of the Model 3 at its targeted $35,000 range, Tesla engineers are working on different compositions of metal content within the rechargeable batteries. Tesla has reportedly hired specialized metals experts to travel the world to seek out and work with metals suppliers.

In a Supply Chain Matters commentary published in September of 2015, we highlighted the bold supply chain vertical integration strategy that resulted in the concept of the gigafactory, destined to be one of the largest battery manufacturing plants in the world. We further noted the strategic importance of plant’s location in Nevada, close to available suppliers of lithium metal.

At Tesla’s annual stockholders meeting in May, Founder and CEO Elon Musk indicated that lithium metal will only account for two percent of the total materials in the firm’s electric cells. Rather than compete with high-tech and consumer electronics producers across Asia and Korea that consume 85 percent of current lithium supply, the strategy appears to be substituting other metal compounds instead. Similar to what we noted last year, the Bloomberg report indicates that strategic supply agreements for lithium have been signed with Bacanora Minerals and Pure Energy Minerals, each to explore and mine the metal within sources close to the new factory. However, a specialized metals research firm predicts a global deficit of lithium supply this year, turning to slight surplus in 2017 and 2018.

Musk reportedly indicated to stockholders that a bigger determinant for the Model 3 is the cost of nickel in the form that Tesla engineers require. That metal is being substituted for cobalt. Global-wide supplies of nickel have increased during the past two years resulting in a 50 percent decrease in prices.

As with many value-chain strategies related to a firm’s product supply chain, the ability to support both short and long-term customer demand need often rests with key strategic supply agreements. In the case of Tesla, that equates to the critical supply of not just battery cells, but the metals and compounds that go into the production of such cells.

A glance at Tesla’s recently filed Form SD, Specialized Disclosure Report with the U.S. Securities and Exchange Commission (SEC) related to adherence to avoidance of conflict materials can give one a sense of how important metals supply is for Tesla.  The Annex lists 41 different global suppliers of Tantalum, 51 suppliers of Tin and 35 suppliers of Tungsten. The scope is truly global in-nature.

Bob Ferrari

 


Volkswagen’s Initial Settlement with U.S. Regulators- More Challenges Remain

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Today marks the initial formal settlement by Volkswagen with U.S. based regulators regarding approximately 500,000 U.S. vehicle owners of two liter diesel engines as a result of the emissions cheating scandal. The financial settlement amounting to more than $15 billion, ranks as one of the highest ever incurred on an automotive manufacturer, a new industry milestone. It further represents what could be one of the largest vehicle buyback offers in U.S. history, one that we believe will test reverse supply chain processes.

Today’s settlement adds additional challenges for VW in its efforts to move beyond this emissions scandal. They include continued damage to brands because some consumers feel deceived and continued heartburn for existing VW dealers and retailers in selling what remains of existing gasoline powered vehicles.

Of the $15 billion total, a little over $10 billion is set aside in a civil settlement to offer vehicle buybacks and additional cash settlements to owners of existing vehicles that were implicated in the software manipulation of diesel powered emissions while $5 billion in allocated to offset excess diesel emissions and eventually boost efforts for new green energy and zero emissions vehicles by VW.

Yet remaining to be eventually settled is the issue of 85,000 4.0 liter diesel powered vehicles involving other primarily Audi and Porsche brands.

According to various published reports, existing owners of 2009-2015 affected vehicles will receive direct compensation of at least $5000 along with the estimated cash value of the impacted vehicles. Prior owners are expected to receive half the compensation of current owners while leased vehicles will also be included in some form of financial settlement. Buybacks are not expected to begin until October at the earliest, pending final judicial approvals of the settlements.

The company faces other fines involving governmental or civil settlements both in the U.S. and other countries as a result of the incident. According to Reuters, regulators will not immediately approve fixes for all three generations of polluting 2009-2015 vehicles. There are still open questions as to whether these vehicles can be economically and logistically repaired.  That opens the potential for a significant reverse supply chain challenge to move such vehicles to recycling or environmentally safe disposal channels.

As noted in our Supply Chain Matters commentary last September, Volkswagen runs the risk of losing the trust and loyalty of its U.S. and global customers if this crisis is not proactively managed. Thus far, it would seem that VW management is trying to move forward in settlements and in executive leadership changes but much more work remains. Many other ongoing supply chain and product related challenges remain as well.

One relates to the inventory of unsold diesel cars that now have had their U.S. and European sales suspended. That adds to the recycling and reverse supply chain challenges. If VW elects to repair or refit some of the diesel powered fleet, there are challenges related to who performs these services, how will compensation be administers and where the refits will be performed.

It is no secret that Volkswagen has struggled with its vehicle line-up for the U.S. market, including a market competitive and fuel efficient mid-sized SUV which was initially promised for 2016 market entry. That model availability problem has become much more complicated and may force VW to reach out to other manufacturers to fill-in holes in the model line-up.

VW continues to learn financially painful lessons regarding its ongoing emissions scandal. A company noted for a somewhat tops-down management style and an engineering-driven culture and among one of the two top global producers will learn some tough lessons as a result of this scandal. The most important when all the dust settles, will be more sensitivity to customer and market needs along with implications of being afoul to governmental emission standards. Now, more than ever in the company’s history, VW needs to take an industry leadership role in alternative powered and green energy powered vehicles.

All of these present a difficult set of challenges in the months to come, when that demands that VW executives move beyond the halls of Wolfsburg.

Bob Ferrari

© Copyright 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.

 


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