The Ins and Outs of VW’s Nightmare.
Who is responsible? What does the future hold for VW? and is it actually all that bad?
Following Nike’s attempt to get away with child labor in the nineties, the demise of Enron or Madoff’s ponzi scheme, the corporate world is doing very little to limit the number of companies illegally dodging institutional regulations.
As of late, the Volkswagen dieselgate crisis is the newest to join the ever growing list of scandals that have been taking over the corporate setting of the 21st century. In the midst of one of the largest recalls in the history of the automotive industry, VW is facing estimated costs ranging from 17 to 82 billion euros. A violation notice from the Environmental Protection Agency (EPA) stated that roughly 500, 000 VW vehicles in the US were equipped with defeat devices used to detect and ‘cheat’ emissions tests in the United States. Following the statement, the car manufacturer announced that 11 million additional models were equipped with the device, including those from VW’s subsidiaries Audi, Škoda, SEAT and Porsche. In November, the company further admitted to installing the same illegal device on 800, 000 petrol powered cars as well as 430, 000 models which have just been introduced to the market.
Who or what is to blame?
In situations such as these, it is inaccurate to point fingers at a handful of individuals. Instead, one must consider looking at the collective mindset of the company employees. The hiring processes of multinational corporations are old fashioned. They create a homogenous pool of workers with similar work ethics. Andre Spicer, a professor of organisational behaviour says:
In Anglo-Saxon style companies where people are coming and going more, people are promoted on delivery — I can deliver stuff, I can get things done. They become obsessed with getting things done rather than questioning how they get things done.
It is possible that the senior managers turned a blind eye towards the device since it was introduced in the 2009 models. Did they become overly obsessed with delivering on customers expectations? Did external pressures lead them to cut corners and introduce illicit diesel and petrol engines to the market? If this were to be true then they believed that the ends justified the means, and now we see what the end result has brought to them.
The herd-like behaviour of employees in large multinational corporations provides them with a false sense of security. When front line workers see something wrong or unethical they trust others to point it out or to blow the whistle. What does this result in? Complete silence from the front line workers. In VW’s case, its engineers committed to their secret. The middle and top management is left out of the loop. But is this really the case? Is it right to point fingers at a ‘couple of engineers’ as the LA Times suggested? Six years have elapsed since the inception of the defeat device. Is it really possible that VW’s management did not know about this infringement? The chances are miniscule.
This behaviour is predominantly attributed to bad hiring or more concretely the hiring of like minded people. Diversity seems to be a problem within Volkswagen. To put things into context, let’s look at the composition of the management board. It consists of three women and seventeen men, one Qatari, one Swede and eighteen Germans. The less diverse the group is, whether it is the management board or the front line workers, the more likely it is to engage in herd-like behaviour. Diversity has been repeatedly proved to be a crucial element of large successful corporations, and the predominantly homogenous nature of VW’s structure might have became one of its major drawbacks.
How will the “People’s Car” respond to this blowback?
The individuals who created the device managed to wipe out one third of the company’s stock price and caused a company wide restructuring. The lack of trust in the company decreased its sales (by 24.7% in the U.S.) and now VW faced its first quarterly loss in the past 15 years. To add onto the list of problems, Toyota took its spot as the world’s largest automobile manufacturer (in terms of volume). However, these figures capture only a few weeks of the crisis. It is also important to consider the medium to long term trajectory of the firm as a whole in addition to the financial performance metrics.
Before the company could consider divesting some of its assets, or selling off some of its 15 billion euros worth of marketable securities, VW first needs to know what the costs will be. Instead of getting into a lengthy, plausible but most likely to be wrong projection of which assets VW will have to sell, we must understand the costs associated with the diesel dupe. After the defeat device revelation, VW stated that only models from 2009 to 2015 have been affected. In November, it was revealed that new 2016 models in VW’s dealerships and those driving on our streets have the same device installed, but things could still get worse for the automotive giant.
A destructive scenario would be if VW further included the defeat device in its launch plans for future vehicles. This could lead the company to extreme financial difficulties or come close to bankruptcy. Sales of some of the car lines have already been halted cutting profits from the previous and upcoming quarterly results. VW is already setting aside large amounts of cash to cover some of the costs associated with its 2009 to 2016 models. If the device was indeed included in the launch plans of future models the company would have no choice but to scrap those models as well. The sunk costs of this possibility alone would be ruinous, not to mention the costs to be incurred and investments in R&D if the company was to substitute new redesigned engines with legitimate emissions into the future models.
Putting Dieselgate into Context
Even though the fact is acknowledged that VW deceived its customers, the media and the regulatory agencies it is necessary to consider where this crisis stands in the general context. By comparing dieselgate to the heinous acts of GM, Toyota and Takata it makes VW’s blunder seem almost innocent.
GM outsourced production of its ignition switches to a supplier in Delphi. The switches turned out to be faulty and turned off the car’s engine, disabled the airbags, the power brakes and power steering. This caused 124 deaths and 274 injuries. GM paid 280 million dollars as compensation to the affected families. The company further expects settlements adding up to 625 million dollars.
Toyota issued a recall of 10 million vehicles in the US in 2009 when news spread that their vehicles sped up without warning due to a problematic gas pedal. The fault resulted in more than 12 deaths. Toyota settled with a 1.2 billion dollar fine.
Takata supplied 35 million cars with flawed airbags which exploded too early along with sending shrapnel towards the driver and passenger. Six deaths were linked to this incident. Taka settled to pay 17 thousand dollars a day for withholding information.
Volkswagen admitted to installing defeat devices in 11 million vehicles to cheat emissions tests. The real result of this is, a significant lie told by the company. There was no death or injury caused by this act. There are far-fetched statistical forecasts holding assumptions stating that the emissions will cause multiple premature deaths. The fines that VW is facing, without the costs of recalls, are north of 17 billion euros which is ludicrous considering the fines that GM, Toyota and Takata got for knowingly killing and injuring people all around the globe.
What does comparing these scandals tell us? That governmental institutions care more about preserving their mandates set on the automotive industry than on the actual lives that have been lost. Do the authorities have their priorities set straight? All four companies lied to the US officials for multiple years so why is VW being fined by almost 20 times more than GM and 15 times more than Toyota?
To conclude
What is to blame? is it the the homogeneous workforce of VW or the outside pressure from clients, competition and shareholders pushing VW to cheat its way through the emission tests? Honestly speaking, the two complement each other. The more diverse the personnel, the less likely it would be to look for an illegitimate solution. While on the other hand, increasing pressures on a homogeneous workforce will just facilitate herd-like behaviour.
Volkswagen will first have to understand the costs of their entire swindle before selling off any of its subsidiaries. As of now it can only try minimising the costs and deal with what is known to the company. A 20 billion euro bridge loan has already been established between 13 banks, to strengthen its financials. Before knowing the final amount that VW owes, the company can only try mitigating the effects of the dieselgate crisis.
The scandal started in the US with VW but the domino effect already put others under the microscope. Who is to say that Volkswagen is the only company falsifying its emissions tests, are there any others? No other car manufacturer took the chance to boost their own PR and take a poke at Volkswagen. Perhaps they are afraid of the regulators themselves?
