HAMBURG, Germany -- Volkswagen's effort to boost operating profit by squeezing more savings from the manufacturing process drives home the pressure its suppliers face in a sector grown used to pinching pennies.
Providers of parts and components must boost productivity every year just to survive the price cuts that carmakers demand. Some struggling firms may end up getting swallowed by rivals, analysts and industry executives said on Friday.
Wolfgang Bernhard, a turnaround expert hired by Europe's biggest carmaker to whip its Volkswagen brand into shape, wants to save at least 7 billion euros ($8.46 billion) over three to four years with 3 billion euros of the total coming from suppliers, industry sources say.
That would help the group hit its goal of boosting operating profit by 4 billion euros by 2008.
"What Bernhard announced is routine business for us. We experience this all the time with our customers," said Alexander Ziems, the managing director in Germany for French supplier Valeo. "You don't get a contract from any manufacturer these days if you don't guarantee 5 percent price cuts every year."
But price cuts were reaching their limits, he said, proposing that the business had to change.
He suggested Volkswagen farm out to suppliers production of some parts it now makes itself, which would help ease the pain of price cuts.
"There are still some sacred cows to slay" at VW, he said.
German tire and car parts maker Continental AG also described Bernhard's campaign as typical.
"In the auto industry there is permanent pressure on prices of between 3 and 5 percent every year," a spokesman said, so VW's target to cut supplier prices by 10 percent over three years fits in well with the trend.
Suppliers are countering the trend by shifting more output to low-wage countries, as Continental has successfully done.
So-called systems suppliers, which provide entire modules to carmakers to install on assembly lines, also pass on the pricing pressure to their suppliers.
ZF Friedrichshafen, one of VW's biggest suppliers, said it saw more potential to boost production.