Volkswagen AG’s (VLKPY) first reaction to its scandal over its over its cheating on diesel emissions is bad news for the company, for Germany and, in turn, for Europe.
VW is the biggest company in the most important sector of Europe’s biggest and healthiest economy. Mechanical engineering is the lifeblood of that economy: Germany’s reputation across the world is upheld by the phenomenal successful of its auto sector. The omnipresent Mercedes, BMWs and Audis on streets from Delaware to Delhi have an incalculable value to thousands of other companies that trade on the “Made in Germany” label.
So it’s vital that VW gets its reaction right. Too much of what has happened in the last week doesn’t look right. At least, not right enough. Assuming that Thursday’s leaks of hirings and firings are correct, the company seems to be hoping that it can appease public opinion by sacrificing a select few scapegoats, while closing ranks around those with ultimate responsibility in the group management and supervisory board.
Consider the resignation of CEO Martin Winterkorn and the (widely-leaked) dismissals of the heads of R&D at the group’s three biggest brands (VW, Audi and Porsche).
A couple of things don’t add up. By firing the tech-heads and (so far) only the tech-heads, the board is making it look like they cooked up a plot amongst themselves, duping everyone involved in finance or marketing. But Winterkorn was responsible for technical issues at group level, and board member Berthold Huber said that the board believed him when he said he knew nothing of it. That doesn’t add up.
Secondly, technicians–especially Germans who are insufferable snobs about product quality–don’t generally sell the public a shoddy product when they know they can make a better one. As the International Council on Clean Technology’s now-famous white paper shows, it’s quite possible to cut diesel emissions down to the levels insisted on by the EPA and its European counterparts. It just costs more.
VW, you’ll remember, was trying to triple its sales in a mature market, the U.S., where it had a massive cost disadvantage due to its lack of local production. Its operating profit margin last year has habitually lagged its peers BMW (8%), Daimler and Toyota (both 10%). There was little financial room for maneuver.
So, it doesn’t seem outrageous to think that commercial pressures, rather than technological constraints, were behind the cheating. But then, that could implicate a much broader circle of management, including all the brand heads and maybe even Hans-Dieter Pötsch, who is now designated to take over as supervisory board chairman after serving 12 years as CFO.
The other not-right thing about VW’s actions to date is the choice of Winterkorn’s successor. Porsche head Matthias Mueller, who’s widely tipped to take over, has worked at the group for the best part of 40 years. It’s impossible to build a career like that without building a network of allegiances and obligations that will hinder any attempt to clean up thoroughly. He owed his place as Audi’s head of product strategy to Winterkorn, and his place as Porsche CEO to Ferdinand Piëch, the ex-board chairman who tried to depose Winterkorn earlier this year. How can he be trusted to expose the full truth?
In mitigation, it should be said that Müller is unlikely to stay around for long–at 63, he’s already said he’s too old to effect the generational change that he says the group needs. Also, with so much at risk, financially and politically (see above), it’s natural for VW to look first to a known quantity who himself knows the sprawling concern inside out.
But there are too many signs that the first instinct of VW, like the banks before it, is to obfuscate and divert attention in order to limit the damage, rather than to face it head on and embrace a painful and humiliating, but quicker and ultimately more complete, cure.
Having watched what happened to Deutsche Bank AG and Siemens AG, it should know better. For Germany’s and for Europe’s sake, let’s hope it does.