Procurement

The main task for Procurement is to help steer the Company’s success in the areas of efficiency, sustainability and resilience. 2023 was mainly devoted to safeguarding the supply of vehicle parts and optimizing costs in order to make a contribution to the Group’s result. The previous year’s rising energy prices again resulted in catch-up effects at our suppliers in the reporting year. Dealing with supplier requirements so as to safeguard the supply of our components was therefore a key task for Group Procurement.

Procurement strategy

The procurement organizations at the Volkswagen Group are an integral part of the NEW AUTO Group strategy. A key task is to strengthen the procurement network and intensify cooperation across brands and regions. Making use of global synergies also creates potential for a long-term reduction in costs for raw materials, components and services.

The frequency, duration and intensity of crises and the supply chain disruption they entail have risen significantly since the beginning of the 2020s. As a consequence, the procurement organizations intend to work together with internal interface partners and suppliers to strengthen supply resilience. By establishing strategies and tools and providing additional capacity for strategic and risk analyses, the aim is to enable forward-looking and comprehensive monitoring of supply chains in line with defined criteria, such as political influencing factors, economic developments, or environmental risks.

The transformation of the automotive industry toward e-mobility means that the procurement organizations must adapt their supplier network. The way in which the Volkswagen Group works with these suppliers will be shaped on an individual basis through strategic partnerships, treating the transformation as a joint undertaking. Expansion of partnerships is generally another area of focus in Procurement, both internally in the form of collaboration across brands and departments and externally with the Volkswagen Group’s suppliers. Digitalization and efficient processes are the foundation for all such strategic measures. The roll-out of a new digital supplier platform for interaction and the successful connection of the cross-sectoral data network Catena-X in 2022 were particularly noteworthy in this regard.

E-mobility

As technology advances, the automotive industry is rapidly forging ahead with its transformation toward e-mobility. A key task for Procurement is to safeguard supplies in order to meet the constantly growing requirements brought about by this change in a way that is sustainable and cost-efficient. Sustainable actions, transparent supply streams, and energy- and carbon-optimized supply chains are important elements of our contract awards. We support our partners with active management of the supplier transformation, as the industry moves from combustion-engine to all-electric vehicles, and with a lasting reduction in CO₂ emissions along the entire supply chain. To put our Company in a leading cost position, we award Group contracts that pool global demand from the markets of Europe, North and South America, and Asia-Pacific. To reduce economic and geopolitical risks, we use diversified supply chains in conjunction with a dual-supplier strategy as well as localization of the supplier portfolio for all core components of our all-electric vehicle fleet.

Digitalization of supply

We are working to implement a completely digitalized supply chain. This is intended to help us to safeguard supply and leverage synergies throughout the Group. We are therefore creating a shared database and using innovative technologies to enable efficient, networked collaboration in real time – both within the Group and with our partners. The Procurement division aims to standardize transactions with our suppliers in the future and automate them where possible. This will not only reduce transaction costs but will also accelerate business processes. The integration of Catena-X, the data network for the automotive industry, is one important part of this. It will

allow possible supply risks to be identified at an earlier stage and appropriate measures and alternatives to be jointly developed faster. We are following the implementation of Procurement’s digitalization strategy with the specific aim of not only eliminating the weaknesses of Procurement’s IT system environment but also increasing the organization’s effectiveness, efficiency and future viability. The initial systems or modules such as a cloud-based module for automating procurement activities in the vehicle project phase and an acclaimed online negotiation tool have already been implemented and integrated into the existing system environment.

Structure of key purchasing markets

Procurement at the Volkswagen Group is responsible for ensuring cost-efficient, resilient and sustainable supply chains. Procurement is organized at a global level, with a presence in the most important purchasing markets around the world. Alongside local bodies and decision-making structures, Group Procurement manages the brands and regions. This helps us to jointly implement potential cost savings and to control risks. Organized networking of the procurement organization in the brands will enable us to leverage Group-wide synergies and purchase production materials, investments in property, plant and equipment, and services worldwide at the quality required and on the best possible terms. In addition to the brands’ procurement units, Procurement operates regional offices in strategic purchasing markets. Working together in the procurement organization, these constantly identify and qualify new local suppliers.

Supply chain management in Procurement

Supply chain management activities at Procurement are focused on safeguarding supplies during start-up phases and for series production. This entails providing support in our suppliers’ industrialization processes, monitoring series production and managing supply crises, which may arise, for example, as a result of geopolitical crises such as the Russia-Ukraine conflict or natural disasters such as the flooding in Slovenia. By introducing strategic semiconductor purchasing, the Volkswagen Group is realigning the procurement of these electronic components for the future. The procurement organization therefore intends to assume direct negotiating responsibility for strategically important semiconductor volumes so as to safeguard long-term supply and ensure competitiveness.

Even in the early stages of new projects, we conduct audits to ensure that our suppliers will be able to deliver. Furthermore, we provide support for purchased parts along the individual project milestones up to the start of production. Complex components in particular frequently require onsite support from our supplier management team. Finally, an acceptance test of production capacities is carried out to facilitate the timely start of series production of the vehicles at our plants.

In addition, regular checks are carried out during series production, for example related to the continuous matching of demand and capacity or possible capacity adjustments at suppliers. This also safeguards the capacity at suppliers when using existing components in new projects.

Thanks to our established crisis management structure and global supplier network, we are able to overcome complex challenges along the supply chain and have access to a wide range of locations and technologies. Cross-divisional work among Procurement, Quality Assurance, Development, Production and Logistics largely prevented looming losses due to supply risks and, in cases where a reaction was required, maintained production capability. Nevertheless, the precarious situation in global supply chains resulted in limited vehicle availability for customers, albeit to a lesser degree than in the prior year.

Sustainability in supplier relationships

Successful relationships with our business partners are based on respecting human rights, compliance with occupational health and safety standards, active environmental protection and combating corruption. These sustainability standards are defined in the contractually binding Volkswagen Group Requirements for Sustainability in Relations with Business Partners (Code of Conduct for Business Partners), updated in 2023. The

Code of Conduct for Business Partners also sets out the expectation that business partners will pass on the requirements formulated therein along the supply chain. We review compliance with the requirements, which has been an explicit condition for the award of contracts since 2019, using sustainability ratings (S-rating) for relevant companies and suppliers. The relevance of a business partner for this rating depends, among other things, on the size of the company or the risk exposure arising from the type of service provided.

In our sustainability rating, we determine the sustainability performance of our suppliers by means of self-disclosures and in a risk-based evaluation process involving audits. In the reporting year, we received 10,912 S-ratings for suppliers. The proportion of revenue contributed by suppliers with a positive S-rating amounts to 79% of the total procurement volume. Both the validation of the questionnaire and the performance of the audits are carried out by selected service providers. As a rule, contracts are not awarded to suppliers who fail to meet our requirements concerning compliance with sustainability standards. Tying award decisions to sustainability criteria is one of the strongest levers for enforcing these. We address existing sustainability risks and violations of sustainability principles by systematically defining and implementing measures to correct these; this also includes the upstream supply chain. To enable continuous supplier development, we invite our suppliers to attend sustainability training courses and workshops on specific topics at selected sites or online and also offer web-based training. In the reporting year, over 7,700 suppliers received such training.

With regard to decarbonization, the Volkswagen Group is striving to continuously reduce greenhouse gas emissions or avoid them altogether over the entire life cycle of a vehicle. The Group’s transformation into a provider of sustainable mobility solutions and in particular the trend towards e-mobility are shifting the action required from the service life of the vehicle to supply chains and the manufacture of vehicles and components as well as the disposal thereof following the vehicle’s use phase. We are aware of our social responsibility and are committed to the Paris Climate Agreement. In the Modular Electric Drive Toolkit (MEB), we have incorporated the use of renewable energy, among other things, into the contracts with cell manufacturers. For new vehicle projects, CO₂ emissions will be a technical feature for relevant components for the Volkswagen Group in the future. This means our suppliers will be given binding CO₂ targets, with which they must be able to demonstrate compliance at any time. One example is the Scalable Systems Platform (SSP), the new mechatronics platform on which the batteries have a CO₂ limit. To be able to achieve these limits, suppliers need to implement measures in their own production processes and upstream chains – for example, the use of renewable electricity. Measures like these are designed to reduce the carbon footprint of many electric vehicle models. For the ID. models, the Volkswagen Passenger Cars brand uses additional sustainable components, including battery cases and wheel rims made of CO₂-reduced aluminum. In this way, the ID. family’s carbon footprint is to be improved by around two tonnes per vehicle by 2025.

In our sustainable supply management, we are also involved in protecting groups of people who may be subject to a high risk of potential human rights violations at any point in our supply chain. We implemented a Human Rights Focus System in 2022 to achieve greater impact in this context. Our aim here is to identify and work on issues that can be associated with human rights and environmental risks and that require more in-depth analysis. The aim is to implement suitable prevention and remedial measures that take into account the diverse and often structural causes of human rights violations. We continued to implement our activities as part of the raw materials due diligence management system in 2023 to manage the sometimes extensive risks in the upstream raw material supply chains. The management system currently comprises 18 high-risk raw materials, for which we use risk-based specific measures to identify, measure and, in particular, reduce sustainability risks. For our battery suppliers, transparency requirements constitute an important basis for responsible raw material purchasing. Within the framework of these contractual requirements, we ask, for example, that our battery suppliers disclose their entire upstream supply chain before we award new contracts.

For more information on human rights, please see the section on Supply Chain and Human Rights in our 2023 Group Sustainability Report.