Howes: VW emissions scandal exposes inconvenient truths

Daniel Howes
The Detroit News

Mainz, Germany — Volkswagen AG’s bottom line isn’t the only thing getting pummeled by its metastasizing emissions scandal.

It is exposing the German automaker’s not-so-little secrets. Here’s an automaker that employs nearly three times General Motors Co.’s worldwide workforce of 212,000 to produce roughly the same amount of vehicles annually, complicating VW’s ability to respond quickly to its rapidly deteriorating financial situation.

Here’s a company whose oppressive corporate culture wields fear mingled with deep technical competence to get results. As one industry executive familiar with the situation explained: If ousted CEO Martin Winterkorn, an accomplished engineer and product development executive, didn’t know about the scheme to rig emissions tests in the United States and Europe, the “culture of fear” he and his longtime mentor, Ferdinand Piëch, fostered made it possible.

Here’s a company whose cozy relationships with German regulators and their bosses inside the governments of Lower Saxony and the nation itself reinforce the reality that VW continues to be one of Germany’s leading employers and generally untouchable. That symbiotic relationship raises legitimate questions about the ability of government regulators and prosecutors to independently investigate — much less prosecute — VW’s deliberate deception.

Here’s a company whose controlling shareholders, the Porsche-Piëch clan, have a demonstrated penchant for secrecy, loyalty and running the publicly owned enterprise as if it’s solely a family company. Faced with a global crisis, they replaced Winterkorn with Matthias Müller, an ally from within senior management of the group, and installed another ally as chairman of the governing supervisory board. Not much of a shake-up or a signal that real change is needed.

The message: The clan, with all of its soap opera-style dramas, will clean up the mess produced by the culture it enables. But the paternalism of the Porsche-Piëch variety may reach its limits in this crisis, especially if rippling market pressures continue to squeeze the group’s books in ways the good ol’ boys fail to anticipate. They’ve never seen anything quite like this.

Carrying all those extra workers (and, for the record, Toyota last year produced more than 9 million vehicles worldwide with 340,000 employees) is OK, and certainly popular with the powerful IG Metall union, if the politically connected VW machine keeps humming. When it stalls, when efforts to appease union leadership and satisfy the politicians’ hunger for jobs, jobs, jobs run headlong into an comparatively inflexible cost structure VW and its shareholders cannot afford, something needs to give.

That’s why Wolfgang Porsche, grandson of VW’s founder, aimed to reassure employees at headquarters in Wolfsburg that the clan’s 51 percent stake in the group stands behind the company and the employees. The subtext is clear: labor leaders who have stood by the family during its internecine war pitting Piëch against the rest want public assurances the status quo will not change, even to appease pesky American regulators blamed for manufacturing this problem.

“I am of the rock-solid conviction that Volkswagen can weather the situation and emerge even stronger from the crisis,” Porsche told employees, according to Bloomberg News. “No one here is giving into panic.”

By now, it’s clear the German automaker will get hammered by regulators on both sides of the Atlantic for its schemes to game emissions test for carbon dioxide and nitrogen oxide. VW will take hits on sales, undercutting the likes of its assembly plant in Chattanooga, Tenn. Declining residual values will pressure its finance company, swelling its liabilities.

Brand perception built in the United States around its “Clean Diesel” campaign will take a major hit. Rivals continue to track how the fallout is affecting VW and how they might capitalize on the stumbles; VW’s U.S. sales slumped 24 percent in November; European customers are ordering fewer vehicles from VW dealers; large fleet buyers are showing a reticence to place large orders with VW, offering opportunities to competitors only too happy to oblige.

And the American plaintiffs’ bar will have a litigation bonanza at VW’s expense, using the courts to force the German automaker to atone for its sins with cash payments, vehicle buybacks or both — all of it in the epicenter of gas-guzzling pickups and SUVs, a cruel irony not lost on the Germans who pay attention.

The culmination of events, so far, prompted Standard & Poor’s last week to lower VW’s credit rating because of what it called “a tarnished reputation and brand image, reduced business prospects, a more challenging competitive position, substantial costs and weaker leverage metrics. In addition, we consider that VW’s cost structure may not be sufficiently flexible to enable it to fully adjust its expenses in a timely manner.”

The battle is just beginning. Beyond regulators and lawyers, VW is likely to find itself pitted against the politicians, shareholders and labor interests deeply invested in a culture no longer right for these times.

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Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN and catch him at 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.