Chastened VW seeks a greener supply chain

DRESDEN, Germany — Volkswagen Group will soon begin awarding more business to suppliers that focus on sustainability while punishing those that don't.

The automaker plans to introduce a performance rating this year that takes account of environmental impact and social responsibility, and could add another layer that focuses specifically on each supplier's effort to reduce carbon dioxide emissions.

The plan could have a massive impact on suppliers, considering VW's global footprint and procurement budget last reported at around $197 billion in 2017.

"We're naturally hoping this will send a certain signal into the market that optimizing your production network for CO2 will be a competitive advantage," Marco Philippi, head of strategy for group procurement, said at VW's plant here.

VW Group is turning over a new leaf after booking $31 billion in charges so far to cover its diesel emissions scandal. The company wants to be recognized for greater environmental awareness. Ahead of the launch of its first mass-market electric vehicle, VW wants to remove as much carbon as possible from its supply chain.

To do that, it will begin analyzing its Tier 1 suppliers on aspects such as social responsibility and environmental impact. Ratings will be based on answers to a sustainability questionnaire that will require comprehensive documentation as well as on-site audits.

By mid-2019, those ratings will be given equal weight in allocating contracts, alongside the usual supplier sourcing considerations of piece cost, build quality and on-time delivery performance.

"Every one of our business partners will have to submit themselves to this," Philippi said. "Will this mean that there are repercussions for a negative rating? Definitely. Those that don't correspond to our ideas will be shut out."

The group ultimately wants to create enough incentive that all members of its supply chain will rethink their production processes and transform their businesses to be as sustainable as possible.

The company has committed itself to the Paris climate agreement, and in accordance with the pact, seeks to produce a carbon-neutral new-vehicle fleet by about 2040 to ensure that all of its vehicles achieve zero emissions within 10 years.

"In total, Volkswagen and its products account for roughly 1 percent of the world's greenhouse gas emissions," said Georg Kell, head of the group's independent Sustainability Council.

The plan won't be easily implemented, VW acknowledges. For one reason, the automaker does not have transparency over CO2 emissions along its entire global supply chain. Even its suppliers do not have full visibility.

But the automaker expects to get started on the effort in conjunction with the planned ramp-up of its I.D. electric vehicle. VW estimates that the EV's manufacturing will result in one and a half times as much CO2 emissions as the production of a comparable Golf diesel, half of which will stem from its suppliers.

"It's a marathon that we've only just begun," Philippi said. "It will be a learning process for both sides."

So far it has identified about a third of its expected CO2 savings through a variety of measures. It began by instructing the program's key supplier, LG Chem, to produce lithium ion battery cells using renewable energy. VW itself is converting its Zwickau, Germany, plant to run on clean hydropower supplied by the Austrian utility Verbund.

The goal is to deliver a vehicle that is carbon neutral. CO2 that cannot be either reduced or avoided altogether will be offset using certified programs.

But VW also plans to help by sharing best practices and holding supplier training programs and CO2 workshops to define concrete measures.

"It's only logical that CO2 becomes a part of our selection process," Philippi said, "since at the end of the day we have an economic rationale to do so as we will be offsetting these carbon emissions for a price."