Volkswagen fallout shows how not to manage a crisis

Two and a half weeks after the Volkswagen emissions scandal made world news, Volkswagen Australia has finally broken its silence. The company says more than 91,000 vehicles in Australia are affected, including Volkswagen, Skoda and Audi models.

Volkswagen Group’s reputation is in tatters after it was caught using “defeat devices” to deceive environmental regulators and the general public regarding its vehicles’ pollution emissions. At this stage the individuals responsible for the deployment of the devices remain unknown, or at least unnamed.

The company initially blamed the “moral and political disaster“ on “the unlawful behaviour of engineers and technicians involved in engine development”. But blaming a band of rogue engineers was an implausible explanation, especially since German newspapers reported the company had been warned by both employees and key supplier Bosch.

When CEO Martin Winterkorn was terminated, the supervisory board issued a press release explicitly stating that “Dr. Winterkorn had no knowledge of the manipulation of emissions data". And then the company suspended two R&D heads without further explanation.

The damage will grow

Regulator fines, various class action lawsuits by customers and investors, and the cost of a global product recall could top €100 billion. The effect on future sales may be even greater.

When corporations proclaiming social and ethical leadership violate their own stated standards, they are liable to charges of hypocrisy and will suffer disproportionately.

Increasingly, companies market their products and services on the basis of an overarching set of values. They no longer emphasise the narrow benefits of their offerings, but the broader set of values, or purpose, underpinning them. One of the key benefits of such value-driven brands is the ease of expansion. This approach allows companies to enter multiple, loosely related markets. Take Nike, for instance. Its expansion beyond running shoes into numerous categories of sports and fashion apparel as well as equipment was achieved by appealing to the lifestyle values of an “athletic subculture”.

Volkswagen Group holds a varied collection of automotive brands, including Volkswagen, Audi, Porsche, Lamborghini, Bugatti, Bentley, Skoda and Seat. The common values underpinning this diverse portfolio of brands are the group’s technical prowess and environmental sustainability. Individual brands have their own, distinct brand identities but also benefit from the parent’s reputation, thereby realising powerful corporate synergies Further synergies are achieved by sharing key components, such as engines, across the group, allowing significant cost savings. But in times of crisis, these corporate benefits can quickly turn into liabilities. The company’s carefully honed image of technical excellence and environmental responsibility, and the extensive sharing of components, has become a double-edged sword.

Sustainability is at the centre of Volkswagen Group’s avowed purpose – “to offer attractive, safe and environmentally sound vehicles". The company heavily promoted the green credentials of its diesel engine, even during the US Super Bowl. In another, now cringe-worthy commercial, Volkswagen highlighted its virtuousness by portraying its engineers as angels. Unsurprisingly, these messages are now seen as cynical marketing exercises.

Following the scandal, research showed 64% of US vehicle owners no longer trusted Volkswagen, and only 25% held a positive view of the company. Empowered consumers will vote with their feet.

Regulators and politicians will feel similarly deceived, and likely foolish for allowing Volkswagen and other car manufacturers to largely self-regulate. Volkswagen can expect their reaction to be commensurately harsh. The same is true for the investment community. As of October 6, Volkswagen Group has been removed from Dow Jones’s Sustainability indices for social and ethical failings.

All parts of the Volkswagen Group will feel the wrath of those whose trust has been betrayed. Brands that used the defeat device in their diesel engines, such as Audi, will suffer the most. A recent survey revealed that only 29% of US vehicle owners had a positive opinion of Audi, compared to 69% prior to the scandal. But even units that do not use the diesel engines in their models will sustain some reputational damage, simply for being part of the Volkswagen portfolio.

The company’s other practices will be scrutinised, possibly on account of a negative halo effect. Volkswagen’s tax payments in Australia, for example, are now in the spotlight.

Australian response also found wanting

Australia’s Volkswagen subsidiary has come in for criticism for its handling of the crisis. Mirroring a product recall debacle in 2013, where the Australian subsidiary was widely perceived as slow and ineffective, Volkswagen Australia has once again proved unresponsive to local concerns.

Because of Volkswagen Group’s centralised management structure, national subsidiaries are hamstrung in their communication with local customers, regulators and other stakeholders.

A week ago Volkswagen Group announced it would set up national websites to update customers, but Australians were left waiting until yesterday.

Australian regulators were equally frustrated with the local unit’s lack of cooperation. The Australian Competition and Consumer Commission (ACCC) vented its frustrations over Volkswagen Australia’s failure to notify the Australian market about the use of defeat devices. The company did eventually meet with Australian officials on October 2, but the extent to which the local market has been affected remained unclear until yesterday.

Even in the era of globalisation, country differences remain important and multinational firms need to be attuned to the different contexts in which they find themselves in. Reducing national subsidiaries to the role of neutered sales platforms is likely to deprive the multinational firm of valuable information and resources, as well as sales. In times of crisis, subsidiaries unable to meaningfully and promptly respond to local stakeholders reflect poorly on the group as a whole.

Overall, the direct and collateral damage arising from this scandal will be staggering: decimated shareholder value, damage to the environment and human health, and plundered public trust. For a while, Volkswagen’s oh-so-clever devices helped the company to defeat emissions tests around the world; in the end, however, their use proved self-defeating.

The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.