A year ago, the Volkswagen scandal was the world’s biggest car crash and some motor industry experts thought the company had no future.
America’s Environmental Protection Agency found that the company had intentionally programmed turbo-charged, direct-injection diesel engines to dodge strict limits on nitrogen oxide emissions. Up to 11 million VW diesel cars—Jetta, Beetle, Golf and Passat models as well as the Audi A3—were therefore emitting noxious fumes at up to 40 times the maximum US levels.
Dubbed “Dieselgate”, regulators across the world opened investigations into the scandal; US sales of 2015 models were halted and hundreds of thousands of cars recalled.
Chief executive Martin Winterkorn and US CEO Michael Horn resigned, while several company heads of brands and research and development were suspended. VW shares fell by one-third. It was hard to recall that the group had briefly been the world’s most valuable company just seven years previously.
In October 2016, US district judge Charles Breyer approved VW’s $14.7bn settlement with federal and California regulators and the owners of 475,000 polluting diesel vehicles. The firm also faces lawsuits from at least 16 US states for additional costs, while the first criminal charges from the scandal were lodged in September, when a VW engineer pleaded guilty in Detroit to helping the company evade US emission standards.
Prophets of the company’s imminent doom have been proved incorrect, however.
“I would not say that Volkswagen made a major mistake after the scandal broke,” states Christian Stadler, professor of strategic management of Warwick Business School. “We continue to get additional bad news, the latest being that Audi was more involved than we thought.
“But my impression is that this is not for a lack of trying but simply a reflection of how difficult it is to gather all the data VW needs to understand what’s going on. Most of the new information coming through has been unearthed by VW’s own investigation. So this is expensive for VW but not deadly, as many observers suggested when the scandal broke.”
The long view
However, Bertel Schmitt, editor-in-chief of motor industry website Dailykanban.com, says the scandal has to be viewed in the context of a much longer journey. He believes that VW’s recent troubles started in 2007 when newly appointed CEO Winterkorn announced Strategy 2018, VW’s highly ambitious plan to overtake Toyota as the world’s larger carmaker by volume, profitability, innovation and customer satisfaction.
The plan did reap some success, with VW’s global unit sales coming close to those of Toyota. Yet profitability lagged behind and Ferdinand Piëch, chairman of VW’s supervisory board and a leading member of one of the company’s two owning dynasties, wasn’t happy.
Under pressure, Winterkorn promised to cut spending by €5bn, hiring consultancy McKinsey in 2014. That angered VW’s trade unions, with Bernd Osterloh, leader of the company’s works council, complaining about “stone-age thinking,” a “senseless counting of heads” and the board “throwing money out of the window”. Osterloh’s lobbying of the idea that VW’s workers could do the cost-cutting task much better themselves reportedly led to VW axing McKinsey.
This catalysed a row between Winterkorn and Piëch; Piëch questioned the hiring of the consultancy and said he was concerned that VW was missing out on the boom for sports utility vehicles in China. Piëch is then said to have commissioned a new study, which was much more extreme than McKinsey’s, leaving open radical options—including the closure of VW’s huge factory in Wolfsburg, and a headquarters move to a nation where taxation is lower. This incensed the unions and state representatives on VW’s supervisory board.
After Piëch remarked in April 2015 that he was “at a distance” from Winterkorn, the unions and politicians sided with the CEO, and Piëch was forced out as chairman. When Dieselgate broke, Winterkorn was replaced by Matthias Müller, the former CEO of VW’s Porsche subsidiary, whom Piëch had recommended as Winterkorn’s successor five months before.
Schmitt sees little progress. “It’s been nearly three years since Volkswagen urgently looked for €5bn in savings [and] the company is deeper in the mud than ever,” he states. “The Dieselgate scandal could cost €30bn or even €40bn. Except for a few ritual beheadings, the old elite is still in power.”
Certainly, the new savings plan has been downgraded to €3.7bn by 2020. And Osterloh has resumed his attacks on the Porsche and Piëch families, who control VW, telling Germany’s DPA newswire that his union received “zero support” from them when it attempted to help eliminate waste.
Professor Luann Lynch, of the University of Virginia’s Darden School of Business, argues in The Volkswagen Emissions Scandal (an academic case study of Dieselgate) that there is a direct link between VW’s power struggle and the emissions scandal. The work suggests that a combination of autocratic leadership and lack of both controls and consequences led to a corporate culture that proved fertile ground for bad decisions.
It started, says Lynch, with an unrealistic target: the neglected US market. VW did this to help achieve its volume growth plan, but this depended upon a trebling of its American car sales. That put pressure on its engineers to quickly come up with powerful, fuel-efficient diesel cars whose emissions passed America’s stringent pollution regulations.
VW had dismissed the idea of competing in the hybrid market, electing to build diesel cars, which accounted for just 5% of the US automobiles market in 2007. Winterkorn believed diesel promised high fuel-efficiency without sacrificing power. Yet diesel cars generated significantly more pollutants than their petrol counterparts.
Lynch argues that this technical challenge, combined with the company’s culture of autocratic leadership, led to Dieselgate. Plus, VW leaders have a history of setting aggressive goals and micro-management.
“Former employees,” she writes, “described a workplace in which subordinates were afraid to admit failure or contradict superiors.
“Company leaders bullied employees. Piëch bragged that he forced superior performance by ‘terrifying his engineers’ and at times fired engineers or executives who displeased him.”
She continues: “Winterkorn didn’t like bad news. Before anyone reported to him, they made sure they had good news.”
Winterkorn rejected a suggestion to link with competitor Daimler, whose BlueTec innovation used the chemical urea to neutralise nitrogen oxide, and instead gave VW engineers a tight deadline to solve the problem themselves.
Lynch believes that this led directly to the installation of software that recognised when a vehicle was being emissions-tested, temporarily lowering emissions.
She sees VW’s management error as allowing the “fraud triangle” of “pressure, opportunity and rationalisation” to combine.
“When all three parts of this dangerous triad are present, you have a situation in which employees can begin to engage in unethical behaviour,” says Lynch.
“The pressure from the top was intense. Volkswagen’s 25-page Code of Conduct, on which every employee was ostensibly trained in ethics, seemed irrelevant when contrasted with management’s autocratic leadership style and single-minded goal to succeed at any cost.”
In terms of opportunity, Bosch had recently sold diesel-engine-management software to VW, which could detect when a vehicle was being tested and turn on emission-controlling devices. The technology had been bought on the strict understanding that it would only be used for internal testing. Yet the 100 million lines of software code typically running a modern car made it easy to hide.
As for the rationalisation element, Lynch says VW’s engineers justified their action because the company had former experience in this regard. In the 1970s, VW engineers had installed “defeat devices” in Volkswagen vehicles, which allowed the company to cheat on newly enacted emission standards. The regulatory punishment then was a measly $120,000 fine. Surely the risk was worth taking again?
What can management do in such circumstances? Lynch believes the task for VW now is nothing short of a complete corporate culture change, with new leaders with different styles brought in from outside the company, internal oversight increased and consequences for unethical behaviour clearly stated and acted upon. Above all, VW’s top management must live the company’s values every day.
How well VW has done all this is debatable. New CEO Müller has appeared aggressive, insisting in January that the company had not lied to US regulators and claiming it had instead been guilty of misunderstanding US law.
In November 2016, he prompted calls for his resignation with his defence of compensating US customers at the expense of their European counterparts, and criticising Germans for thinking green but “wrinkling their noses” when it comes to electric mobility.
Jukka Rintamäki, Marie Curie research fellow at London’s Cass Business School, feels that VW’s communications could have been much better.
“The firm made some laughable statements,” he remarks, “such as not having understood the US law correctly and [that] unethical behaviour did not actually take place.
“VW did not even do a particularly good job in rearranging its top management, as the new CEO came from Porsche.”
VW’s communication of the scandal began with Winterkorn admitting the company’s responsibility and apologising for the wrongdoing. He blamed the “terrible mistakes of a few people,” saying that, while he accepted responsibility, he was “not aware” of any wrongdoing on his own part.
Michael Horn, president and chief executive of the firm’s US operations, went further, stating at a VW Passat launch that the company had “totally screwed up”. He said the company’s behaviour had been “completely inconsistent” with its core values of innovation, value and responsibility, adding: “It goes totally against what we believe is right.”
A little more sobriety
Fine words, but Donald Steel, who runs crisis management consultancy Donald Steel Public Relations, faults VW for failing to change the razzmatazz of the product launch, which saw Horn arrive on stage to blaring trumpets, hold up his hands and exclaiming: “Wow”, before having to calm down and read out the statement.
“It was just so wrong-footed of Volkswagen,” says Steel. “When the company is on its knees having deceived the American public and the authorities, it calls for a sober moment. In communications, you do have to look sorry as well as say you are sorry—and be sorry.”
Andrew Griffin, chief executive of reputation management agency Regester Larkin, adds: “The admission of deliberate wrongdoing breaks a bond between an organisation and its stakeholders that is not easy to fix. Volkswagen followed many of the golden rules for crisis management. Admit what has happened, say sorry and demonstrate change.”
However, Griffin believes the only true way out of the crisis is for VW to totally rejuvenate its performance. “This has been a performance crisis, not a PR crisis,” he says. “Real change has to come.”
That is certainly on the way, with VW announcing last month that it will cut 30,000 jobs, including 23,000 in Germany. The company claims that this is not a simple cost-cutting response to the emissions scandal, but part of a new strategy in a rapidly changing car market.
VW has fallen behind rivals in terms of profit margin per vehicle, even lagging behind Peugeot, which had a profit margin of 6.8% in the first half of 2016—more than three times that of Volkswagen’s, at 2%.
The company wants to increase this to 4%. Perhaps, most significantly, its restructuring also signals a belated move into electric vehicles for China, the world’s biggest car market, which is to force 8% of all vehicles sold in the country to be electric-powered from 2018, rising to 12% in 2020.
To keep pace, VW would need to sell 60,000 electric vehicles in China by 2018.
“That’s a huge undertaking,” points out Christian Stadler, of Warwick Business School, “given that the total amount of electric vehicles in China is around 500,000.”
Perhaps. But at least VW is talking again about growth, sales targets, environmental compliance and the health of the underlying business.
For all of the company’s faults and mistakes, that may well be the lasting legacy of the Dieselgate affair.
US Environmental Protection Agency reveals its discovery that VW has used software to trick emission tests.
VW is told to recall almost half a million US cars.
Frankfurt stock exchange opens; €15bn (£11bn) is wiped off VW’s share price.
VW CEO Martin Winterkorn quits, and is replaced by Matthias Müller.
VW announces recall of 8.5 million vehicles across Europe.
VW reveals Together Strategy, involving the introduction of 30 new e-vehicles.
VW obtains final approval for $14.7bn settlement.
VW announces plan to cut 30,000 jobs (23,000 in Germany) to enable investment in electric cars.
Andrew Cave is an experienced business journalist.