Once upon a time, a cute little car zagged its way onto American roads and into American hearts and announced its arrival with the most humble, unusual and truthful ads in the history of ad-making.
VW’s Beetle encouraged you to Think Small and made us think differently about a car. It promised reliability and great fuel economy at cheap prices and backed up that promise with excellent engineering and affordability; that recipe of democratizing greatness would fuel VW to the world’s largest carmaker with global sales outgunning mighty Toyota in the first six months of 2015.
But VW, as you’ve read, is now in big trouble.
Its CEO, Martin Winterkorn, is spending the rest of his career “on the beach” or possibly “in the cooler” if convicted of fraud. Meantime, pink slips are flying in its Wolfsburg headquarters like suds and brats at an Octoberfest beer tent. What’s more, investors have lost billions in market cap.
Indeed, this pain party is just getting started because every country from South Korea to China and Sweden want to know what’s up with their cars too. And not only is the EPA looking to levy fines, the FTC wants in on the action too. And now Audi and Porsche will soon be taking their turn in the barrel as well.
While the details and finger pointing continue to emerge, the facts will be revealed soon. As scandal and tragedy history shows us, it’s never just “one thing” that creates a crash like this, but rather, it’s a culture thing and a confluence of critical factors that put VW into the ditch. We work the gears around the apparent suspects here….
German Carmaking Hubris
BMW. Audi. Mercedes. Porsche….four words that make a strong case for Germany as the world’s greatest national carmaker (you could also add German acquired brands like Lamborghini, Bugatti, Rolls Royce and Bentley to that list but whatever). In Germany, car companies are national treasures. It’s also the home to the world’s greatest proving grounds, the Nurburgring and the world’s most famous highway, the Autobahn. And boy, do the Germans know how to make a motor; especially diesels. On racetracks, VW’s Audi brand shocked the world by boldly winning LeMans in diesel-powered cars from 2008-2014. And yes, Germany is home to some of the world’s best and most arrogant engineers who for years cursed stupid Americans and their desire for cupholders. There are many carmaking reasons to support German engineers as “Das Beste”, but it often gets them in trouble with “over-engineering” resulting in technology at the expense of useability and a routine reluctance to consider outside influence from analysts and suppliers.
If anyone could design a “clean diesel” as advertised with the TDi, it would most certainly be German engineers (just ask them), but in this case VW’s ambition exceeded the herculean design challenge of making them clean…and affordable… at the same time and within a relatively short development window. But the engineering train kept on rolling fueled by the past success of German engineering.
Unbridled Growth Ambition
In America, VW enjoyed a small but highly differentiated branding proposition in “affordable German engineering” but VW market share has routinely represented niche status. For over twenty years, VW missed out on the U.S. pickup and SUV boom and instead relied on an export strategy of home-cooked strudel; tech-laden sedans and premium pricing that limited volume growth.
More recently, VW has been a company with volume ambitions like few others. Since CEO Winterkorn took the helm of VAG he has sought to grow VW into the global sales leader. Any market that showed the most remote opportunity for growth was studied for expansion with appropriate market investments soon following.
North America was deemed a key strategic growth opportunity and soon, VW was up-sizing, de-contenting and re-pricing the Jetta and Passat to better suit American tastes while VW built a new manufacturing facility in Tennessee to grow U.S. volume. Big hopes were pinned on U.S. growth and Winterkorn committed to unrealistic volume and share targets over a small timeline.
But VW needed some product cachet to move the needle. Affordable diesel engines that went easy on the pump and EPA emissions would be a strong arrow in the quiver especially as gas hit four bucks a gallon in 2008. The TDi engine would be something amazing that no other carmaker would offer. It was almost too good to be true. And now we know it was…
Any auto analyst will tell you, that Winterkorn’s ambitious plan to double U.S. sales to 800,000 units over a few years was absolutely ludicrous. But VW kept driving the organization in that direction and only this past May did the company back off the unrealistic target.
Diesel Technology Hurdles & Investment
Through the run-up in U.S. fuel prices, VW enjoyed some nice success with its TDi diesel technology that, from a marketing standpoint, promised the dual benefit of amazing 40 mpg highway fuel economy and eco-pleasing tailpipe emissions.
In a March 2015 presentation, VW boasted that it sold 70 percent of all “clean diesel” cars in the U.S. – a volume representing 98,500 units. But while VW was gaining traction with diesels in the U.S., CEO, Winterkorn was bemoaning the high cost of demanding environmental standards. While he vowed to make VW a leader in environmental protection, the cost of compliance with regulations was a source of angst to him. “Climate protection is not available free of charge,” he claimed at the Paris auto salon last year. “Every gram of reduction in C02 costs us 100 million euros. Every gram!”
While clean diesels clearly had the ability to fuel volume growth and competitive advantage, the realities of diesel engine emissions were a costly and complicated issue that scared off most every other manufacturer. Indeed, Honda, no powertrain slouch itself, said bringing diesels to America would require expensive SCR systems that would make their vehicles too expensive. VW included SCR systems on higher priced premium vehicles but decided to not include them on more basic VW’s as this would make them uncompetitive from a pricing perspective.
VW had made their bet that they could create an engineering miracle but they were finding out it was a higher investment hurdle than they thought. But from expensive sunk investments in powertrain development to TDi marketing, VW was committed to diesel success in a very big way and was too far along to tap the brakes.
This past week, the New York Times published a well-researched article on the culture at Volkswagen; the key takeaway is that the company has been run with all the balanced governance and level-headed organizational precision of the North Korean government.
What’s more, the company’s Board of Directors are comprised of male car industry veterans with common aims. One source in the Times article claimed that a scandal, especially one involving emissions was all but inevitable citing VW’s isolation, its clannish board and deep-rooted hostility to environmentalists. Further complicating this issue is the fact that VW is headquartered in “uber-auto” lower Saxony where the entire economy is automotive and the citizenry hold a less critical eye of the automobile’s impact on the environment.
Company cultures that lack diverse perspectives fail to see things objectively from a consumer point-of-view. An internal sales and profit bias versus external safety and environmental bias can be very dangerous. The Detroit automakers have been criticized for this very same thing over the years.
The Collision With the Green Revolution
VW’s alleged sins are amplified against a backdrop of global green awareness and sensitivity. For the past few years regular news reports have swayed opinion on the topic of global warming and climate change. To wit, a recent article in the U.K’s Guardian newspaper points to how bad VW’s action have impacted the environment:
“The rigging of emissions tests may have added nearly a million tons of air pollution by VW cars annually – roughly the same as the UK’s combined emissions for all power stations, vehicles, industry and agriculture”. The Guardian article concluded, by programming its cars to cheat on their emissions tests, “Volkswagen introduced as much pollution to the atmosphere as if it had built 25 exact replicas of Western Europe’s largest power plant, and let them all run around the clock, invisible to regulators and the public”.
The global green movement is here to stay and some industry experts have speculated that the internal combustion engine will one day cease to exist. The operating environment, fueled by other recent scandals, makes transparency and compliance a priority versus secondary consideration. Ten years ago, it’s possible this scandal would have been a non-starter, but VW should never have taken the greens lightly today.
Compliance is not fun or sexy like global sales and profit titles or shiny concept cars . Too often, it’s just a topic that appears in boring employee manuals that sit in three ring binders versus operational tenets ingrained in each and every employee. In any manufacturing industry today, a culture of compliance and putting customers and society first has to happen before anything else. But more and more, it’s not. Playing by the rules, is at odds against a demanding market with increasingly tougher regulations and mandates, smaller margins and competitors that are possibly cheating at the same game. In turn, companies are finding it’s very expensive when a culture of compliance is a secondary consideration. VW, with over 250,000 employees is of huge importance to Germany and is simply too big to fail. VW will similarly recover from this scandal but if nothing else, costly fines and the threat of prosecutions could and should, drive corporations to change their bad behavior.
VW recently won the battle for the world’s top brand. But it lost the war for something far more important. And ironically, the company that cajoled us to “Think Small” ran into the ditch by thinking too big and making their ambitions bigger than the planet and their loyal customers.
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