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VW halts German production after unprecedented move by supplier

[MUNICH] Volkswagen AG factories in Germany are grinding to a halt after a supplier took the unprecedented step of cutting off the automaker as the two battle in court and engage in a public war of words about who's to blame for the impasse.

VW stopped Passat production on Thursday and will halt assembly of its best-selling Golf on Monday if the conflict isn't resolved, said people familiar with the matter, who asked not to be identified. VW has officially said the factories producing those models face slowdowns, as do plants that build chassis, the basic underpinnings of vehicles. The supplier, which builds seat and transmission parts, has essentially called the automaker a bully, prompting VW's top labor boss to respond that he's "furious." The production holdup threatens to reduce Volkswagen's earnings by as much as 40 million euros (S$61 million) a week - according to Christian Ludwig, an analyst at Bankhaus Lampe - at a time when the carmaker is trying to boost sagging profit at its namesake brand by lowering annual spending by 1 billion euros. The conflict centers on a contract that VW signed with the supplier, then later canceled. The parts maker says it wants VW to pay for the factory alterations it made to provide the services.

"This is the most extreme case of escalation between a supplier and a carmaker that I've heard of," said Stefan Bratzel, a director at the Center of Automotive Management in Bergisch-Gladbach, Germany. "There have been court cases in the past, but not a supplier stopping deliveries during series production."

The shares dropped as much as 2.5 per cent and were trading down 1.5 per cent at 119.95 euros as of 4.36 pm in Frankfurt. The stock has declined 10 per cent this year, valuing Europe's biggest carmaker at 62.5 billion euros.

Prevent Group's Car Trim seat-component division and ES Automobilguss transmission-parts unit suspended deliveries after Volkswagen rejected discussions to reimburse the supplier when the new contract was dropped, the parts manufacturer said in a statement. The canceled order involved a 500 million-euro deal with Car Trim that was scheduled to start next year, said a person briefed on the supplier's business, who asked not to be named discussing the legal case.

A German court last week ordered the suppliers to resume deliveries, and an appeal in one of the cases has been set for Aug 31. VW in the meantime has asked the court to fine the suppliers and allow the automaker to go to their factories and load up the parts on its own, the court in Braunschweig said in a statement. The parts makers have until next week to respond, and the court will decide then on VW's request, according to the release.

"VW's treatment of suppliers is in no way acceptable and can leave every small provider in ruins," Alexander Gerstung, an ES Automobilguss executive, said in the statement. ES Automobilguss said VW was trying to "exploit" its dominant market position to squeeze suppliers.

Christoph Adomat, a VW spokesman, didn't respond to phone calls and e-mails Friday seeking comment.

The factory that builds the mid-sized Passat sedan and wagon in Emden has a daily production capacity of 1,250 cars, while Wolfsburg, which makes the Golf as well as the Tiguan sport utility vehicle and Touran minivan, can produce 3,800. About 80 percent of the 9,000 employees at Emden are on shortened work hours, VW said this week. The automaker assembles chassis in Zwickau and Braunschweig.

The suppliers' move is a "rotten, infuriating game," Bernd Osterloh, VW's top labor representative, said in an interview with the Bild newspaper. "When businesses put burdens on the backs of the employees, it's reckless and asocial, and must be stopped."