Rob Cox: VW needs an eight-step recovery plan

By Rob Cox
October 13, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Volkswagen needs an eight-step recovery plan. At the very least, Europe’s biggest carmaker – which has been caught in an elaborate engineering deception – needs to mollify that many key constituencies if it ever hopes to restore its credibility. Though there are many overlaps among them, Volkswagen’s customers, investors, suppliers and dealers, governments, unions, staff and, well, ordinary people will each require a somewhat unique approach.

It’s a gargantuan task for Matthias Mueller, the former Porsche boss parachuted in to replace Martin Winterkorn as chief executive. He has pleaded for time to figure out how VW authorized its manufacturing process to allow 20 percent of its passenger cars sold from 2009 to 2014 to manipulate emissions testing data. But one size won’t fit all. As Mueller embarks on his work, he ought to segment the different constituents he will need to satisfy:

Customers: Fixing VW’s credibility with existing owners and potential buyers is Mueller’s most important challenge. Volkswagen sold around 11 million diesels equipped with software permitting them to dupe testing authorities. While the trickery was exposed in the United States, which accounts for just 6 percent of unit sales, it has globally tarnished the company’s brand and its unique selling point of environmental friendliness.

Smoothly recalling the “defeat devices” will be critical to efforts to rebuild relationships with customers. If the vehicle’s performance suffers from the fix, VW will have to compensate owners, or even buy back cars. If customers are unsatisfied, future sales will be damaged, along with the company’s financial stability. VW has taken a 6.5 billion euro provision “to cover the necessary service measures and other efforts to win back the trust of our customers.” That’s just a start.

Investors: VW stock has lost about a quarter of its value since the emissions scandal was revealed, incinerating some $24 billion of wealth. Its borrowing costs also spiked. VW has never cuddled up to public shareholders. The government of Lower Saxony holds 20 percent of the voting stock and a veto on matters of importance, while former supervisory board chairman and leading shareholder Ferdinand Piech has run the business as a family fiefdom.

Before the cheating was revealed, outside shareholders – that is, those not associated with the Piech-Porsche clan holding 52.2 percent of the voting stock – accorded VW a meaningful valuation discount to Daimler and BMW. Even getting back to that point will require VW adopt a level of transparency that it has never sought in the past. As my colleague Olaf Storbeck points out, naming former finance chief Hans Dieter Poetsch as chairman of the supervisory board suggests VW is far from coming to grips with the poor governance that arguably allowed the current scandal to proliferate in the first place.

Dealers: As the front office in much of the world, dealers will interface first with VW drivers complaining about resale values, recalls and the like. They will also be tapped to refit the cars and generally placate customers. U.S. dealers are often important voices in local politics, playing golf with local leaders and giving to their campaigns. VW is already providing them with extra funds. As important advocates for fairness with regulators and attorneys general, keeping them sweet has to be one of Mueller’s top priorities.

Suppliers: Car companies are among the most complex manufacturing matrixes in the world, depending on an extensive chain of suppliers, from foundries to plastics makers to the designers of sophisticated electronics in the dashboard. Mueller will need to assure them they have no exposure to the company’s legal troubles. While some suppliers may benefit from providing the cleaning technology used to upgrade the affected cars, others, not unlike creditors, will need to know that VW’s woes won’t affect its ability to pay its bills.

Staff: If VW is to be believed, only a small fraction of its half-a-million strong workforce was involved in the deception. Yet all of them now are now tarnished by their employer’s venality. Motivating workers – blue collar and white, unionized and non – around the world is an extraordinary management task. Firing a few complicit executives and engineers is a good first step. But a root-and-branch reaffirmation of ethical principles, supplemented by town-hall style meetings and a rethink of financial incentives will be needed to keep VW talent working hard, doing right and staying put.

Unions: In Germany, the automakers’ union IG Metall is a political force in its own right and under the country’s system of corporate governance has a powerful role on the company’s supervisory board. The union representatives on the supervisory board were the driving force in ousting Mueller’s predecessor so soon after the emissions mess was revealed. Though the union has traditionally taken a collaborative approach with VW management, the scandal may have exposed that model’s flaws, especially when combined with the regional government’s 20 percent vote in the company. Teaming up with the politicians on the supervisory board arguably gives workers more leverage in any discussions that may arise, including over wages and benefits.

Governments: Politicians, prosecutors and consumer advocates are licking their lips over VW’s multi-year cover-up of the true state of its vehicular emissions. Aside from in the United States, where the Environmental Protection Agency as well as many state regulators are tucked into their respective investigations, the governments of Germany, France, Italy and South Korea are all looking into the matter. Kowtowing to each will require a combination of extraordinary – and heretofore unseen – humility and deft lobbying.

Ordinary people: Who was damaged by VW’s misrepresented nitrogen oxide emissions? The neighbor of the guy who every morning started his TDI Jetta and inhaled the fumes and developed cancer? The children of drivers exposed to the stuff? Though damages will be hard to prove – something akin to second-hand smoking – personal injury lawyers are already trolling the depths of human misery for victims. Class-action lawsuits can be expected for years to come, requiring a legal defense framework that, while beating back frivolous litigation, does not present VW as a callous corporation lacking in contrition for its deception.

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The only thing you didn’t address as one of the key items of the plan is to settle/make go away the hundreds or even thousands of law suits. Those things can drag on and keep VW in the news with testimonies in various court rooms. The legal expenses (settlements and legal fees) will be astronomical and certainly need to be accounted for.

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