Energy shortage may force VW production move

NATURAL gas shortages in parts of Europe including Germany caused by Russia’s invasion of the Ukraine, are responsible for Volkswagen (and others) seriously considering a relocation of production out of affected areas if shortages persist.

In addition to other factors, the broader European economy is being adversely affected by inflated prices and insufficient gas supplies to the point where some economists are forecasting a continental recession.

Volkswagen Group has gone on record saying it could shift production out of Germany and Eastern Europe if the energy crisis unleashed by Russia's activities isn’t resolved.

Constrained gas supplies for whatever reason threaten to shake up Europe's industrial landscape.

According to a report in publication Automotive News Europe (ANE), VW this week said that moving production was one of the options available for it in the medium-term if gas shortages last much beyond this winter.

VW has major factories in Germany, the Czech Republic and Slovakia, which are among the European countries most reliant on Russian gas.

“As mid-term alternatives, we are focusing on greater localization, relocation of manufacturing capacity, or technical alternatives, similar to what is already common practice in the context of challenges related to semiconductor shortages and other recent supply chain disruptions,” said Volkswagen Consulting’s Geng Wu.

ANE says Southwestern Europe or coastal zones of northern Europe, both of which have better access to seaborne liquefied natural gas cargoes, could be the beneficiaries of any production shift.

VW operates car factories in Portugal, Spain and Belgium, all of which have LNG terminals.

According to ANE’s report, VW said it should be able to maintain production in the next five to six months if Germany continues to fill its gas reserves but rising energy prices and instability in supply chain networks present a risk to global production.

A similar impact to that being experienced by VW is radiating outwards hitting industry suppliers in energy-intensive areas such as glass and chemicals who will not be able to shoulder gas and electricity price increases for long, VW executives warned.

“Though most car parts made in Europe are used by European plants, some are shipped to plants abroad. Just one missing piece can bring production to a standstill, as shown by the fallout from the semiconductor shortage of recent years,” said VW’s spokesman.

The company is concerned about the effect high gas prices could have on suppliers.

“Politicians must also curb the currently uncontrolled explosion in gas and electricity prices,” said the company's head of external relations, Thomas Steg.

“Otherwise, small and medium-sized energy-intensive companies in particular will have major problems in the supply chain and will have to reduce or stop production,” he said.

VW executive Michael Heinemann this week told a media conference that the car maker will reduce its natural gas intake by over 20 per cent, the minimum set by the government.

However, in total, VW could reduce its consumption across European locations by a mid-double-digit percentage figure, he added, without specifying an exact number.

Russia’s decision to use gas supplies as a political weapon against Europe in response to European sanctions against Moscow following their invasion of Ukraine has raised concerns that Germany might be forced to ration its fuel.

In some positive news on the issue, European gas storage levels hit 90 per cent ahead of schedule serving to reduce fears of acute shortages this European winter but Germany is not out of the woods as it faces a challenge to replenish depleted reserves after winter without Russian gas.

ANE reports that European gas storage is currently at 85.6 per cent full, Germany is close to 90 per cent but what happens after winter is unclear.

VW is digesting the possibility of no gas deliveries to Germany from Russia through the Nord Stream 1 pipeline any time soon and is preparing for gas shortages from June 2023.