German automotive group is one of Continental's top five clients and would therefore be a target for such a cost-cutting measure

Continental realises it will be in for tough negotiations with Volkswagen (VW) and other carmakers as OEMs look to reduce their cost bases, but it is not expecting to take a major write-down on its financial results as a consequence. According to a Reuters report there has been much talk of how VW's massive purchasing organisation will look to pressure suppliers to lower their prices following the EUR16.2 billion (USD18.5 billion) write-down the carmaker incurred as a result of the emissions affair.

VW is one of Continental's top five clients and would therefore be a target for such a cost-cutting measure. However, Continental's finance chief Wolfgang Schaefer said he believed that any such eventuality would have a minimal impact. He added that full-year orders for the automotive division's earnings could beat 2015's levels after rising by over one-third in the first quarter of the year to over EUR9 billion.

Significance: VW has always had a reputation for being a notoriously tough negotiator with its suppliers, as it uses its advantage and scale to get the best deals and lowest prices from its suppliers. This is simply good business and something it has always been very effective at. However, it remains to be seen how aggressive they will be in future negotiations with major suppliers like Bosch and Continental given that one may assume that margins in these supply contracts are already on the tight side. Ironically VW may use Continental's first-quarter financial results which were announced last week as leverage as they were very positive, with the company posting an adjusted EBIT of EUR1.1 billion (USD1.2 billion), which resulted in an highly competitive adjusted EBIT margin of 11.3%, compared with 10.6% a year earlier.

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