Germany Manfred Gerstenfeld

OFF TOPIC: MANFRED GERSTENFELD ON VOLKSWAGEN SCANDAL AND COMPANY’S FUTURE…….

This was originally published in Hebrew, and presently the only publication of it in english, and published with the author’s consent.

THE VOLKSWAGEN SCANDAL AND THE COMPANY’S FUTURE

Manfred Gerstenfeld

Dr.Manfred GerstenfeldThe recently disclosed large-scale cheating of Volkswagen regarding the emissions of its diesel cars in the US is likely to develop into one of the world’s largest industrial scandals. What the American Volkswagen engineers did was simple. They developed and installed a device which reduced emissions far below their actual level when they were measured. Once the measurement was over, emissions returned to a multiple of the measured one.

The selling of cars with this device has been going on for years. One can only wonder how it wasn’t discovered much earlier. The discovery took place because some outsiders did driving tests of a Volkswagen car on the road instead of a lab test. They measured emissions and found that the Volkswagen diesel car emissions were many times bigger than they were announced to be. Only the tight Volkswagen culture can explain why there was no whistle blower in the company who told the story years earlier to the media. Yet it has become known that within the firm there were engineers who warned against the cheating. In a hearing before the US senate, the head of the US subsidiary of Volkswagen, Michael Horn, said that he only heard about the problem in 2014.

The reasons given for this major cheating are that the development engineers were given performance criteria for new diesel car emissions which could not be met within the planned budget. Once again, the rigid Volkswagen culture explains why they did not expose the problems to top management.

There are huge potential costs and other consequences of this cheating. Volkswagen is currently selling the largest number of cars in the world. It will have to recall all the cars which have deficient devices and make changes which bring emissions down to a legally admitted level. This seems to concern eleven million cars. Furthermore, no new diesel cars can be sold until they have been fitted with alternative devices.

The new Volkswagen management has to assess the future on a number of important issues. These include how to change its product policy. The second issue is to assess what costs it may incur as a result of the cheating being revealed. The third is how to cut back costs in order to have as much cash available as possible for fines and claims. A fourth challenge is what media policy to follow.

The answers to these questions will only become gradually available. In the past days the new management has already given some indications in a press release. It indicates its media strategy. The release refers to many issues. The problems of the diesel cars are mentioned only in a few lines, saying that “Diesel vehicles will only be equipped with exhaust emissions systems that use the best environmental technology.” In other words the company admits that it has a problem but says that it is only one issue among the many important things it has to tell the public.

Concerning future costs to Volkswagen as a result of the scandal the ones which can be easiest evaluated is the recall of the cars to be equipped with new exhaust systems. A figure of more than 6 billion Euro has been reserved by the company for this. It may however be the very expensive tip of the iceberg.

To this have to be added fines imposed by the authorities in the US and probably elsewhere. These cannot be estimated yet. Some have estimated the potential fines in the U.S at up to 18 billion dollars. Then there are a variety of complaints of different natures. US regions have already announced that they will claim damages for pollution caused by Volkswagen diesel cars. Individuals may also put in claims if the recalled cars, once they have been fitted with alternative devices, do not meet the originally guaranteed performance standards. This compensation will have to be paid to all owners of the refitted cars.

The overall impact is even greater. The company has already announced one billion Euro of savings. New investments will have to be cut back. All this will be accompanied by cost reductions through dismissals of personnel. Nothing has yet been announced but it is unavoidable. On this issue a strong battle with trade unions can be expected. The more the costs as a result of fines and legal actions increase, the more chances are that also subsidiaries may have to be sold off. Initially this will be companies outside the core private car business. Volkswagen subsidiaries have for instance a big business in trucks. One of them Ducati makes motorcycles. If the need for funds increases further than even car subsidiaries such as Skoda, Seat, Audi, Lamborghini and Porsche may have to be sold. Is a Volkswagen bankruptcy imaginable? In a reality where future costs cannot be estimated anything is imaginable but if it at all happens it is years away.

The impact of the scandal however, goes far beyond Volkswagen. One evident consequence is that the town of Wolfsburg, which is dominated by Volkswagen will lose much tax income. Another evident casualty is the prominent Wolfsburg soccer club, which is subsidized by Volkswagen.

However these impacts are small compared to those on Volkswagen’s suppliers. The less cars Volkswagen produces, the less parts they can supply. A car manufacturer usually has several thousand suppliers of parts and services. The impact will thus be felt by many companies.

The damage will not only be felt in Germany. Volkswagen and its subsidiaries have factories in tens of countries, and sell in more than hundred fifty countries. Factories of subsidiaries abroad may also be affected. There are already some suggestions that Volkswagen should altogether withdraw from the US market where it has been losing money. Dealers in many countries will be heavily hurt, in particular those for whom the sale of diesel cars is a large percentage of their turnover.

To all this comes the damage to the brand of Volkswagen and to the brand “made in Germany” of which the company is a flagship. Yet the Volkswagen issue does not at the moment take the prime place in the German media, however big the scandal is. The reason is that the German Chancellor Angela Merkel’s policy of letting in huge numbers of refugees into the country dominates the public debate.

I was for several decades a strategy advisor to the boards of major corporations in the Western world. Each time when I got a new client, I asked myself what the fastest way was to destroy the company? It is an efficient method to understand rapidly where the weak points of the client were. Had I worked for Volkswagen, which I did not, I would however never have come up with the idea that its staff were able to cheat in such a stupid way and cause potential damage of at least ten billion Euro to the company and possibly much more.

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