Volkswagen’s Emission Scandal Calls its Operating Model into Question

The recent emission scheme reveals the ineffectiveness of VW’s culture, compliance and governance and highlights the risk of an interwoven, global production network.

The Volkswagen Group (VW) is the world’ second-largest automaker aiming to become the world’s largest car maker by 2018. The conglomerate has 593k employees, holds a 12.9 percent share of the world passenger car market and sold 10.1m vehicles in 2014. It was highly praised for its business and operating model until the recent emission scandal[1], highlighting the risks of an interwoven, global production network.

 

Business model

Innovation-driven VW frequently launches new models. It adapts to meet local requirements, and focuses on specific features of individual countries (esp. in growth markets). While emphasizing demand for quality, VW strives to reduce costs through efficient production processes and economies of scale. The Group’s goal is to “offer attractive, safe and environmentally sound vehicles which can compete in an increasingly tough market and set world standards”[A].

VW’s vehicle portfolio covers niches and reaches across segments, ranging from motorcycles to low-consumption small cars, luxury vehicles, pick-ups, buses and heavy trucks. It undertook aggressive expansion efforts in recent years: VW acquired Bentley, Bugatti, and Lamborghini in 1998, turned Skoda in a wholly owned subsidiary in 2000, acquired MAN in 2010, won the mutual turnover against Porsche in 2012, and fancied to acquire Suzuki and Alfa Romeo. Today, it is made up of twelve successful and very well-known brands, with distinct and individual images: Volkswagen Passenger Cars, Audi, Seat, Skoda, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Volkswagen Commercial Vehicles, Scania, and MAN.

 

Operating model    

Through a certain degree of centralization VW secures control and leverages its size, while the global presence allows it to take account of local specifics: R&D (including international trend- and technology-scouting) is fairly centralized in Germany, with minor research bases in the US, Japan and China. Similarly, Group procurement purchases production materials, services and capex centrally to leverage bargaining power, but works in 39 locations across 23 countries.

To ensure stable and efficient flows of high-quality and innovative procured components, VW pursues sustainable, long-term relationships with a variety of suppliers and demands a high degree of quality and commitment.

The Group’s multi-brand strategy generates internal competition, supports switchers experimenting with different brands, and appeals to a broad spectrum of people. Its strict hierarchical brand architecture with sub-brands (e.g. Lupo, Polo, Golf,…) minimizes internal cannibalization of sales. The brands translate into corporate hierarchy and structure the business to represent consumer preferences inside the organization; the conglomerate consists of four product groups: passenger (VW), premium (Audi), luxury (Porsche), and commercial business holding company.

The key component of process optimization and standardization is the modular platform strategy: design, engineering, production, and major components are shared over outwardly distinct models and types of cars. While other automakers share platforms across brands, VW’s initiative is much more far-reaching: its entire production will rely on only three modular toolkits by 2020: The “MLB”[2] supports bigger vehicles with longitudinally mounted engines, the “MSB”[3] rear-engine sports cars, and the “MQB”[4] engines mounted transversely to the direction of travel, which is common in microcars, sedans, crossovers and SUVs. The modular toolkits standardize the engine positioning and the distance between the front axle and pedal box; width, length and wheelbase can expand or contract according to model. Thus, different models can be integrated in the same production line. The modular platform strategy cuts costs, reduces production time, enhances flexibility to adapt to market trends and allows for shorter model development cycles. Consequently “MQB could prove to be as revolutionary as Henry Ford’s production line or Toyota’s just-in-time system”[B]. However, a defect component potentially impacts millions of cars and leads to very high recall costs.

Platform

VW’s ambitious goals strongly influenced its very meritocratic culture. Employees perceived high pressure to perform, promoting an authoritarian climate with limited open communication. Critics describe VW’s feedback culture as backward and management style as “military” and “North Korea minus work camps”[C], identifying it as root cause for the emission scandal. Furthermore, VW lacked strict standards of compliance and governance esp. concerning its engineers, who can have enormous ramifications on the entire operational ability.

While business and operating model align to a certain extent, VW remains exposed to ineffectiveness regarding company culture, compliance and governance.

 

[1] As new vehicles have to meet ever stricter emissions standards for a range of pollutants, VW engineers illegally programmed and installed a software, known as “defeat device”, in its diesel engines, which detects if a vehicle is in testing mode and activates emission controls to appear compliant with regulations. VW still seems uncertain about the details of the emissions scam, but up to 11 million VW, Audi and Porsche vehicles made from 2009 onwards may be affected and fines and penalties could hit $20 billion. Beyond the United States and Germany, several countries have launched investigations of their own against Volkswagen. The CEO resigned, but denied any knowledge of wrongdoing; several top executives and senior engineers have been suspended or fired. The long-term damage to VW’s reputation is yet to be established.

[2] Modularer Längsbaukasten (Modular Longitudinal Platform)

[3] Modularer Standardbaukasten (Modular Standard Platform)

[4] Modularer Querbaukasten (Modular Transverse Platform). It debuted with the Audi A3 and Golf VII in 2012 and will supersede gradually the current PQ25, PQ35 and PQ46 platforms from 2005.

 

Sources:

  • Boston, William (Sep 25, 2015): Volkswagen Names Matthias Müller CEO; Company veteran faces task of rebuilding car maker’s reputation, stock price. Wall Street Journal online. http://www.wsj.com/articles/volkswagen-names-matthias-mueller-ceo-1443200183
  • Frost, Laurence; Cremer, Andreas; Lienert, Paul (Feb. 11, 2013): Insight: Has Volkswagen discovered the Holy Grail of carmakers? Reuters Online. http://www.reuters.com/article/us-autos-volkswagen-future-idUSBRE91A04D20130211#Zc17M1sx5DyCYuIE.99
  • Hibbert, Lee (Oct. 2015): The Volkswagen emissions testing scandal has put the issue of professional ethics in the spotlight. Professional Engineering., Vol. 28 Issue 10, p3-3. 3/4p. Via https://www.ebscohost.com/
  • Jaeger, Jaclyn (Dec. 1, 2015): Volkswagen Scandal Puts Yates Memo to the Test. Compliance Week, Vol. 12 Issue 143, p20-21, 2p. Via https://www.ebscohost.com/
  • [C] Lobenstein, Caterina (Oct. 29, 2015): Führungskultur bei VW soll Abgas-Skandal ermöglicht haben. Die Zeit online. http://www.zeit.de/wirtschaft/2015-10/volkswagen-aufsichtsrat-stephan-weil-kritikkultur
  • Marketline (Sep. 2012): Volkswagen AG SWOT Analysis. p1-10. Via https://www.ebscohost.com/
  • [B] Rogers, Christina (Apr. 11, 2012): Volkswagen plans 4 million cars from one platform: VW’s modular unit will be the basis for more than 40 models worldwide. Autoweek online. http://autoweek.com/article/car-news/volkswagen-plans-4-million-cars-one-platform-vws-modular-unit-will-be-basis-more-40#ixzz3tgMhgMsg
  • Steinberg, Richard (Dec. 1, 2015): What Went So Wrong at Volkswagen. Compliance Week, Vol. 12 Issue 143, p44-45. 2p. Via https://www.ebscohost.com/
  • Stewart, James (Sep. 24, 2015): Problems at Volkswagen Start in the Boardroom. The New York Times online. http://www.nytimes.com/2015/09/25/business/international/problems-at-volkswagen-start-in-the-boardroom.html?_r=0
  • Tuttle, Hilary (Dec. 1, 2015): Volkswagen Rocked by Emissions Fraud Scandal. Risk Management, Vol. 62 Issue 10, p4-7. 3p. Via https://www.ebscohost.com/
  • Volkswagen Annual Group Management Report 2014. http://annualreport2014.volkswagenag.com/group-management-report.html
  • [A] Volkswagen Group Homepage. http://www.volkswagenag.com/content/vwcorp/content/en/investor_relations/Warum_Volkswagen.html

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2 thoughts on “Volkswagen’s Emission Scandal Calls its Operating Model into Question

  1. Thank you CO,

    Very contemporary post on a challenging, hot topic. This reminded be the Siemens case we studied recently; with that in mind, you mention the management culture at VW, to what extend from your perspective did such culture contribute/ support the group’s success until recently? Do you believe it is necessary to overhaul it or could/ should a middle ground be found?

  2. Interesting post!

    It is truly fascinating that such a large and successful company would take such a large risk by engaging in an emissions fraud scandal! I am curious what actions you would recommend to VW management to fix some of the cultural issues- and what the costs of this might be. Also, regarding the multi-brand structure, are there any downsides to having so many brands? For example, do you think that a lower quality brand associated with VW can hurt the image of a higher quality brand also under the VW umbrella?

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