Volkswagen reform attempts yet to tackle heart of the matter
Volkswagen has convinced investors that by purging some senior managers it has made sure corruption scandals like “dieselgate” are a thing of the past.
Trouble is, the main power source in the company, the supervisory board, dominated by unions and helped by the veto power of the state of Lower Saxony, remains in place. This system of organization makes sure that whenever tough decisions need to be made which impact the bottom line, labor not shareholder interests are paramount. This system of governance has been mainly responsible for the fact Toyota of Japan, which makes roughly the same amount of cars a year as VW— close to 10 million — employs about 300,000 people globally to do this, compared with 600,000 at VW.
VW’s main shareholders include the Piech and Porsche families, unions, and politicians from the state of Lower Saxony, which owns one-fifth of VW’s voting shares and with a veto of big decisions. Labor leaders have half the seats on the 20-member supervisory board, the powerful body that appoints and dismisses members of management. Any important decisions, like building or shuttering of plants, needs a two-thirds majority on the board.
VW is regularly embarrassed by scandals because of this opaque structure. In 2005 it was union perks and prostitution. In 2006 a corruption scandal involved bribes from suppliers. There was a market manipulation investigation in 2009 after smaller Porsche tried to take over the much bigger VW.
In September, VW admitted willfully seeking to circumvent EPA rules on noxious diesel fumes. The scandal later broadened to include its Porsche and Audi premium subsidiaries, and then questions arose about compliance with European fuel economy rules. The controversy is in three broad areas; “defeat” software installed in 11 million vehicles with engines under two liters across the world, questionable fuel economy ratings on about 800,000 vehicles, and an additional errant software probe on larger diesels in the U.S.
But according to investment adviser Evercore ISI, VW has made 13 significant management changes. And that doesn’t include Thursday’s news that more new leaders were appointed to run important functions across all its brands including Czech-based Skoda, Spanish Seat, upmarket Audi and Porsche, British-based luxury manufacturer Bentley and Italian supercar maker Lamborghini. Skoda and Seat sell cheaper cars with VW parts.
“We have never followed a company that has pretty much replaced its entire management team. We are counting 13 material changes on VW management boards and a new Chairman. It is important too for a view on the new team and (we) do not believe that this is just more of the same”,” Evercore ISI Arndt Ellinghorst said.
The veto-wielding top down structure remains intact though.
Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research (CAR) at the University of Duisburg-Essen, doesn’t think VW will ever properly reform itself.
“I don’t think VW will go through a big reform process,” Dudenhoeffer said.
“The old system continues. There’s no real revolution, and that means in eight, 10 or 12 years another scandal at VW, and that problem stems from the VW constitution (system of governance). You can change nothing at Wolfsburg (VW’s headquarters). As soon as you want to lose one job, the worker union will say “no.” It can block anything on the Supervisory board. There will be big problems for restructuring. It’s the old story at VW and the old story will continue,” he said.
Meanwhile in Europe, VW car sales are beginning to be undermined by the damage to its credibility from the dieselgate scandal. European Union car sales rose a strong 13.7 percent in November, but Volkswagen’s own brand car sales lagged with a meager 2.8 percent rise. Volkswagen brand sales of 131,450 dragged its market share down to 12.1 percent from 13.4 percent in the same period last year.
According to Evercore ISI there might be some good news to come for about 480,000 U.S. owners of VW Passat, Jetta, Golf, Beetle and Audi A3s powered by a four-cylinder 2.0-liter EA189 diesel. VW might simply buy them all back to try and restore confidence.
“The best outcome for the U.S. would be a comprehensive Buy-Back of all EA189 vehicles,” Evercore ISI said.