Varta's downfall: A case for stronger GRC processes
5 November 2024

Varta’s downfall: A case for stronger GRC processes

Varta, once a market leader in the battery industry, has recently faced severe financial challenges that have shaken its market position and raised questions about its GRC processes. The company, which produces batteries for electric vehicles and includes major customers such as Porsche, which pioneered micro batteries and has been used in almost all headphones and smartwatches, is plagued by a number of internal and external problems. These problems underscore the crucial role that GRC plays in preventing and containing corporate crises.

 

The roots of Varta’s difficulties

Several key factors contributed to Varta’s downfall:

1. Risk management – diversification of the customer portfolio

Varta was heavily dependent on a few large customers, which posed a significant business risk. Improved risk management would have sought to diversify the customer portfolio to minimize the risk of a drop in demand or cancellation of large orders. Processes for early detection of market risks and structured scenario analyses could have identified potential declines in demand earlier.

Optimization potential:

  • Implementation of a dynamic risk management system with real-time data to monitor demand and supply chain risks.
  • Diversification strategies for customers to mitigate the risk of market fluctuations.

 

2. Supply chain management – transparency and resilience

Disruptions in global supply chains have hit Varta hard, especially in terms of access to important raw materials for batteries. Comprehensive supply chain risk management that identifies potential weak points and develops alternative procurement strategies could have helped here. Transparency in the supply chain and resilience through sourcing from multiple suppliers could avoid supply bottlenecks.

Optimization potential:

  • Introduction of comprehensive supply chain risk management with early risk analysis and alternative procurement strategies.
  • Implementation of monitoring tools to proactively monitor supply chain risks.

 

3. Cybersecurity incident:

In 2024, Varta was the victim of a significant cyberattack that further impacted its financial forecast. The disruption caused by this event exacerbated existing operational challenges and exposed weaknesses in the company’s risk management strategies.

Optimization potential:

  • Stronger implementation of cybersecurity measures such as regular penetration tests, firewalls and training on IT security.
  • Development of a comprehensive emergency and recovery plan for cyber incidents.

 

4. Financial compliance and liquidity management

Varta’s increasing debt burden and the resulting financial imbalance could have been avoided through stronger financial risk management. Greater attention to liquidity planning and monitoring of the debt ratio would have been necessary in order to respond to financial bottlenecks in a timely manner.

Optimization potential:

  • Introduction of stricter financial compliance checks and continuous monitoring of liquidity.
  • Stronger control and limitation of debt issuance and implementation of liquidity and stress tests.

 

5. Leadership and strategic oversight:

Varta’s top management has been criticized for not responding quickly enough to the company’s challenges. The delay in addressing market volatility and supply chain risks points to a gap in governance and risk management processes.

Optimization potential:

  • Introduce independent audit committees to oversee corporate strategy and risk management processes.
  • Regular review of decision-making processes by oversight bodies to ensure that company leadership is acting responsibly.

 

How stronger GRC processes could have helped

GRC is critical for any organization navigating complex environments, especially for companies like Varta that operate in volatile industries. Here’s how improved GRC processes could have mitigated Varta’s decline:

1. Risk management and early warning systems:

Varta’s dependence on a few large customers exposed the company to significant risk when demand fluctuated. A more robust risk management framework would have helped the company diversify its customer base and better anticipate market changes. This could have included real-time monitoring of market trends and more rigorous scenario analysis to prepare for sudden changes in customer demand or supply chain disruptions.

 

2. Risk Supply chain analysis:

For Varta, better monitoring of its suppliers and logistics network could have identified bottlenecks earlier and enabled the company to find alternative suppliers or adjust production plans to avoid delays and cost overruns.

 

3. Cybersecurity and IT governance:

The cyberattack on Varta revealed weaknesses in IT governance. A stronger focus on cybersecurity risk management, including regular audits and penetration tests, could have minimized the damage caused by the attack. In addition, a comprehensive response plan could have reduced the financial and operational impact of the attack.

 

4. Financial compliance and debt management:

Varta’s financial burden due to rising debt suggests that tighter financial oversight could have prevented the situation from escalating. Regular compliance checks and financial health stress tests are crucial components of GRC processes. These measures could have alerted management to potential liquidity problems much earlier and enabled it to take corrective action before the company became over-indebted.

 

5. Management responsibility and governance:

Effective management ensures that management is held accountable and strategic decisions are aligned with long-term business sustainability. Had Varta put in place stronger control mechanisms, management may have been able to address the company’s growing risks more proactively. An independent audit committee or risk oversight committee could have identified issues related to customer dependency and supply chain risks earlier and taken timely action.

 

Conclusion

Varta’s financial difficulties underscore the critical importance of strong GRC processes in preventing corporate crises. Although external factors such as cyberattacks and market fluctuations cannot always be avoided, robust governance, risk management and compliance frameworks can significantly reduce the impact of these events. For companies in dynamic industries such as energy storage and battery manufacturing, adopting proactive GRC strategies is essential for long-term sustainability and resilience.

In Varta’s case, the company’s decline could have been mitigated or possibly even avoided altogether if the company had implemented stronger risk management systems, improved financial oversight and more robust supply chain management.

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