Operational risks and opportunities
For this risk category, the likelihood of occurrence is classified as high (previous year: high) and the potential extent of damage is classified as medium (previous year: medium).
The most significant risks from the QRP lie particularly in volatile procurement markets, here primarily in relation to the supply of parts, as well as in cyber security and new regulatory requirements regarding IT, and in quality problems.
Risks from extraordinary events in the Volkswagen Group’s procurement and production network
Extraordinary events beyond our control including natural disasters, climate-induced extreme weather events, pandemics – such as the spread of the SARS-CoV-2 virus – and other events, for example violent confrontations – such as the current conflict between Russia and Ukraine – fires, explosions, or the leakage of substances hazardous to health or the environment, may result in supply risks in procurement and heavily impair production. As a consequence, bottlenecks or even outages in production may occur, thus preventing the planned production volumes from being achieved.
Early warning systems help to identify supply risks and prevent assembly line stoppages. Furthermore, we counteract other risks with measures such as fire protection and hazardous goods management, and we take out corresponding insurance coverage where this makes economic sense.
Due to the uncertainty arising from the further development of the Covid-19 pandemic, the Russia-Ukraine conflict and associated sanctions, and the further development of the energy market, there is a risk throughout the automotive industry that looming supply breakdowns may not be recognized early enough and that countermeasures may not be initiated in time to maintain production.
Countermeasures to stabilize global production include, for example, monitoring the spread of infection and the measures taken to contain the pandemic, analyzing the impact on suppliers and supply and transport chains, finding alternatives where suppliers are unavailable and organizing special processes. Procurement, working together with all Group departments and the supplier network, was able to put these
measures to the test in 2022, particularly in securing purchased parts from Ukraine. Through our organization, we are also keeping other global and local risks under observation and aim to be able to respond quickly to factors throughout the entire supply chain as a result.
Risks and opportunities from Procurement and Technology
Current trends in the automotive industry such as e-mobility and automated driving are resulting in an increased need for financing among suppliers, presenting them with considerable challenges. These are being exacerbated by the current commodity price situation and the limited availability of semiconductors. The supplier risk management department in Procurement at the Volkswagen Group evaluates suppliers, and particularly their financial situation, before they are entrusted with the implementation of projects. Procurement takes into account the recommendations of the supplier risk management department.
The risk of supply shortages and disruption to supply continues to exist, particularly given the current global geopolitical and macroeconomic situation. Examples include the continuing constraints in the supply of semiconductor components and the direct and indirect effects of the Russia-Ukraine conflict, including potential temporary interruptions to the energy supply.
Supply risks are identified in Procurement by means of early warning systems and task force and mitigation structures have been created to reduce these risks. In addition, strategic measures are to be taken to avoid future impacts in the long term.
A global economic slowdown exacerbated by trade disputes and the consequences of the Covid-19 pandemic, including sharply increased commodity and energy prices, is impacting the financial situation of many suppliers. This, too, is giving rise to the risk of bottlenecks and disruption in supply.
Procurement employees specialized in restructuring and supply reliability constantly monitor the financial situation of our suppliers throughout the world, taking measures designed to counter the risk of possible supply disruptions.
Demand for resources, possible speculations on the market and current trends in the automotive industry, such as the growing share of electrified vehicles, may affect the availability and prices of certain raw materials. Trends in raw materials and demand are continuously analyzed and assessed on an interdisciplinary basis to enable steps to be taken at an early stage in the event of potential bottlenecks.
The risks in battery cell production relate particularly to the rising demand for battery cells and the resulting reliance on suppliers, from technological change and from the service life of battery cells. Additional risks may arise from long-term ties to cell manufacturers and the direct responsibility of Volkswagen in the supply chain. To counter these risks, the Volkswagen Group maintains multiple strategic supplier relationships while extending the scope of its own activities along the value chain (raw material extraction, cell production) at the same time.
Commodity risks can be partially mitigated through backward integration of the value chain. For example, partnerships and long-term supply agreements with commodity suppliers can be used to ensure the supply of the relevant material while also achieving competitive prices.
Quality problems may necessitate technical intervention involving a substantial financial outlay if the cost cannot be passed on to the supplier or can only be passed on to a limited extent. Assuring quality is of fundamental importance, all the more so in the US, Brazilian, Indian and Chinese markets, for which we develop vehicles specific to the country and where local manufacturers and suppliers are established, particularly as it may be difficult to predict the impact of regulations or official measures. We constantly analyze the conditions specific to each market and adapt our quality requirements to their individual needs. We counter the local risks we identify by continuously developing measures and implementing them locally, thereby preventing quality defects in the supply chain from arising.
It is not possible at present to rule out the possibility of a further increase in recalls of various models produced by a variety of manufacturers in which certain airbags manufactured by Takata were installed. This could also affect Volkswagen Group models.
Specialists in Procurement systematically investigate risks resulting from antitrust violations by suppliers and file claims for any losses that may arise.
Risks in the supply chain may also arise from the non-fulfillment of statutory duty of care in respect of human rights and the environment, which might result in supply shortages. The requirements are compared with existing processes with the help of gap analyses, and processes are developed and implemented to fill in any gaps. In order to meet our duty of care in respect of human rights, and to identify, counteract and prevent the associated risks in the value chain, we developed a responsible supply chain system in 2022.
Volatile developments in the global automotive markets, accidents at suppliers and disruptions in the supply chain, which could be exacerbated by Covid-19 lockdowns and the Russia-Ukraine conflict, may cause fluctuations in production volumes affecting both vehicle models and plants. In specific markets we are seeing a trend away from orders for conventional vehicles with combustion engines and towards increased orders for electric vehicles. We use established tools, such as flexible working time models, to address possible risks related to fluctuations in the mix of vehicle types. The international production network enables us to respond flexibly at the sites. “Turntable concepts” adjust capacity utilization between production facilities. Volatility and assembly line stoppages, for example due currently to the Russia-Ukraine conflict and possible temporary interruptions in the energy supply, can be balanced across brands at multibrand sites.
Potential disruption to our own operating ability or to the supply of inputs crucial for operation that is caused by extreme weather events in the form of flooding and drought, severe storms or similar may lead to production stoppages with financial ramifications for the Group. The Group counters this risk by systematically analyzing the impacts of climate change on its production sites in order to gauge the potential risks and recommend action in response.
Sudden changes in customer demand for specific equipment features in our products, and the decreasing predictability of demand, may lead to supply bottlenecks. We minimize this risk, for example, by continuously comparing our available resources against future demand scenarios. If bottlenecks in the supply of materials are indicated, we can introduce countermeasures far enough in advance.
Production capacity is planned several years in advance based on long-term sales planning for all vehicle projects. This involves a degree of risk as it is subject to market momentum and changes in demand. If forecasts are too optimistic, there is a risk that capacity will not be fully utilized. However, forecasts that are too pessimistic pose a risk of undercapacity, as a result of which, it may not be possible to meet customer demand. In the event of short-notice fluctuations in demand beyond the technical capacity that has been installed, Volkswagen or its suppliers may be unable to meet demand that goes beyond the available technical flexibility. We counter such risks by matching demand and capacity at frequent intervals and issuing program scheduling guidelines where necessary.
The diversity of our models, the reduced product life cycles and the use of complex processes and technical systems are associated with the risk of a delay to the start of production of a vehicle. We address this risk by drawing on the experience of past production starts and identifying weaknesses at an early stage so as to ensure – to the highest degree possible – that production volumes and quality standards are met during the start of production of our vehicles throughout the Group.
Legal changes, for instance in the context of the changeover to the WLTP test procedure, may impact production. For one thing, a temporary reduction in the range causes demand to focus on the available variants. Moreover, gaps in production can occur if model variants have not been approved. These fluctuations necessitate measures to stabilize production, such as the temporary storage of vehicles until official approval.
Risks arising from long-term production
In the case of large projects within the Power Engineering Business Area, risks may arise that are often only identified over the course of the project. They may result in particular from contract design errors, inaccurate or incomplete information used in costing, post-contract changes in the economic and technical environment, weaknesses in project management, quality defects and unnoticed product malfunctions, product emergence, or poor performance by subcontractors. Most notably, omissions at the start of a project, overshooting of the development budget or timeframe, and legislative changes are usually difficult to correct or compensate for and often entail substantial additional expenses. The current disproportionate increases in commodity prices, energy prices and freight rates, and the limited availability of semiconductor products, may have a detrimental impact on production costs and revenue recognition.
By constantly optimizing the project control process across all project phases and by using a lessons-learned process and regular project reviews, we aim to identify these risks at an early stage, particularly during the bidding and planning phase of large upcoming projects, and take appropriate measures to eliminate or minimize them.
We strive to identify and rectify quality problems at an early stage during the development of our products to avoid, among other things, delays to the start of production. As we are using an increasing number of modular components as part of our platform strategy, it is particularly important when malfunctions do occur to identify the cause quickly and eliminate the faults. Nonconformity of internally or externally sourced parts, components or functions may necessitate time-consuming and cost-intensive measures, leading to recalls and therefore damage to the Volkswagen Group’s image. In addition, the resulting financial impact may exceed provisions. To meet our customers’ expectations and minimize warranty and ex gratia repair costs, we are continuously optimizing the processes at our brands with which we can prevent these faults.
If quality management is ineffective, there is a risk of losing ISO 9001 and KBA certification. This would lead directly to a loss of type approval from one or more authorities. We counter this risk by continuously training the Group’s system auditors, while our quality management system and process quality undergo internal audits.
We also check the conformity of series products (conformity of production – CoP) in vehicle production plants as part of system audits with a CoP component. Further risks are associated with discrepancies identified in conformity of production measurements and in-service-conformity (ISC) measurements. We have established an effective system for monitoring the conformity of CoP and ISC measurements for manufactured vehicles. To ensure that the results of the emissions CoP and ISC measurements are analyzed systematically, we have implemented an IT system throughout the Group. This is used for status reporting and documenting the results of the series of measurements.
Vehicle registration and operation criteria are defined and monitored by national and, in some cases, international authorities. Furthermore, several countries have special – and in some cases new – rules aimed at protecting customers in their dealings with vehicle manufacturers. We have established quality processes so that the Volkswagen Group brands and their products fulfill all respective applicable requirements and local authorities receive timely notification of all issues requiring reporting. By doing so, we reduce the risk of customer complaints or other negative consequences.
With the increasing technical complexity of vehicles due to their internal and external connectivity, and the platforms and toolkit systems in use across brands, the quality of the parts and software components supplied must be assured. This is lending ever greater importance to cyber security. To better monitor and manage the risk of cyber attacks on our vehicles in the future, we are establishing an Automotive Cyber Security Management System in all Group brands. Harmonized processes across the Group, such as the car security incident process, enable a fast reaction speed across the brands in the event of an attack so that any weaknesses in our products can be promptly eliminated. The Automotive Cyber Security Management System is an integral part of our quality management system, which helps us leverage synergies with already existing structures. This approach serves to fulfil the legal requirements of the UNECE regulation on cyber security, which have applied since mid-2022.
We have established the Ausschuss Produktsicherheit (APS – Product Safety Committee) to comprehensively evaluate and efficiently resolve product safety risks for customers as the product users. In the event of safety defects, doubts about compliance with legal requirements, or issues relating to the brand or corporate image, the APS examines the matter concerned and decides on how to respond. In this context, the APS is also responsible for managing related inquiries from authorities. The cross-divisional Car Security Board (CSB) provides support with regard to cyber security issues. We have also created and established central units within the organization, which are responsible for managing incoming information on APS- and CSB-related topics. In 2021, a universal, transparent management and tracking system was established to follow up on all such information across the Group without employee involvement, right through to the APS decision. In addition, numerous events and training courses are held to improve awareness of safety risks and products’ legal conformity among all employees. These activities aim to avoid risks from delayed, erroneous or a lack of reporting and preliminary analyses. The entire APS process is, moreover, subject to regular review in the form of internal and external audits, aimed at minimising risks arising from delayed, erroneous or a lack of decisions and measures on the part of the APS or CSB.
At Volkswagen, a global, software-oriented mobility provider, the information technology (IT) used in all business units Group-wide is assuming an ever more important role. IT risks exist in relation to the three protective goals of confidentiality, integrity and availability, and comprise in particular unauthorized access to, modification and extraction of sensitive electronic corporate or customer data as well as limited systems availability as a consequence of downtime, disasters and the volatile geopolitical situation. Proper handling of data is a key factor for data integrity, and for the functionality of error-free systems.
The high standards we set for the quality of our products also apply to the way in which we handle our customers’ and employees’ data. There is a risk of cyber attacks, particularly on our digital offerings relating to our mobility services. Legal regulations including the UNECE cyber security regulation (R155) define the requirements for our vehicle and software development. These also have a large impact on our IT systems. We therefore work on an interdisciplinary basis to protect our connected vehicles and mobility services. Our guiding principles are data security, transparency, informational self-determination and the safety and security of the customer when using our services.
We counter the risk of unauthorized access to, modification or extraction of corporate and customer data by using IT security technologies such as modern security systems for detecting malware and malicious behavior.
We achieve additional protection by restricting the allocation of access rights to systems and central administration, including periodic identity checks. Based on business impact analyses, we counter data destruction or disruption to operation by designing systems with redundancy and implementing backup strategies.
An overarching committee with members from Information Security, Data Protection, Group Security, Legal Affairs and other parties involved handles interdisciplinary information security and reports directly to the Group Board of Management. This enables a rapid response and the efficient coordination of measures in the event of a possible incident. The technical measures are complemented by a wide range of awareness-raising measures and training courses for employees that create and deepen awareness of information security issues.
We use commercially available technologies to protect our IT landscape, adhering to standards applicable throughout the Company. We future-proof our IT through continual standardization and updates. Continuously increasing automation enhances process reliability and the quality of processing.
The further development and Group-wide use of IT governance processes, particularly the further standardization of the risk management process for IT and information security, also help to identify weaknesses at an early stage and to reduce or avoid risks effectively.
Another focus is the continuous advancement of Group-wide security measures to detect, avert and deal with cyber threats.
Risks from media impact
The image of the Volkswagen Group and its brands is one of the most important assets and forms the basis for long-term business success. Our policy and strategic orientation on issues such as integrity, ethics, sustainability and climate protection are in the public focus. One of the basic principles of running our business is therefore to continuously check and pay particular attention to compliance with legal requirements and ethical principles. However, we are aware that misconduct or criminal acts by individuals and the resulting reputational damage can never be fully prevented. In addition, media reactions can have a negative effect on the image of the Volkswagen Group and its brands. This impact also depends significantly on the effectiveness of our communication during times of crisis.