Volkswagen: the end of the German myth?
At the end of October 2024, the Volkswagen works council announced that group management planned to close three plants in Germany, leading to the loss of tens of thousands of jobs and an overall reduction in wages. With a debt of more than 200 billion euros, Volkswagen has become the largest listed company in the world. Its sales fell and its costs (especially energy, personnel, and research and development) skyrocketed. On October 30, the group confirmed these concerns by announcing a 63.7% drop in third-quarter net profit.
How did Europe’s leading car manufacturer, the country’s largest industrial employer, get to this level? German quality (German quality) and a symbol of Rhineland capitalism and harmonious joint management between shareholders and trade unions? No doubt this is the result of a series of strategic mistakes, whimsical management and toxic management practices.
German model
Volkswagen was founded in May 1937 by Austrian engineer Ferdinand Porsche in response to Adolf Hitler’s request to create a “people’s car” (literally Volkswagen in German). The result was the Beetle, a reliable, practical and economical car that sold over 15 million units and replaced the Ford Model T as the most successful car in automotive history.
However, in the late 1960s, the Beetle design (rear-engine, air-cooled, rear-wheel drive) showed its limitations. The company’s salvation lay in the acquisition of its competitors Auto Union and NSU, which merged into the Audi brand, which shared their experience in designing front-wheel drive cars. Then Volkswagen became a real group, and the Golf (front-wheel drive, water-cooled), released in 1974, symbolized its rebirth.
In the 80s and 90s, the Volkswagen group expanded rapidly through acquisitions: the Spanish company Seat was acquired in 1988, the Czech Škoda in 1991, then the English Bentley and the Italian Lamborghini in 1998, not forgetting MAN trucks and Scania Ducati motorcycles and Bugatti hypercars. Its share of the European market has increased from 12% in 1980 to 25% in 2020.
In 2017, the group overtook Toyota as the world’s number one automaker for the first time. Volkswagen was then at the height of its glory, its somewhat arrogant slogan was “Das Auto” (“The Automobile”), but its fall was to be deafening.
Nail in the coffin
The United States had to put the nail in the coffin of this wonderful industrial machine. In 2015, the US Environmental Protection Agency found that the Volkswagen Type EA 189 TDI diesel engine emits 22 times more nitrogen oxides (NOₓ) than the current standard. Volkswagen then admitted that since 2009 it had equipped its vehicles software a “trick” that can identify test phases and reduce NOₓ emissions only during them.
However, under normal circumstances software This didn’t work, so the vehicles were much more polluting than advertised, which is a fraud to the authorities and a deception to customers. The problem is that the EA 189 engine was sold in more than 11 million cars of the group, in 32 models.
The scandal was heard. As lawsuits increased in the US and Europe, Volkswagen’s share price fell 40% on the Frankfurt Stock Exchange. The chairman of the group’s board of directors was forced to resign. In 2024, when all the verdicts had not yet been rendered, it was estimated that the case had already cost Volkswagen more than 32 billion euros.
In an attempt to regain its virginity at a time when the image of diesel engines has been irreparably tarnished, Volkswagen has launched a colossal plan to transition to electric vehicles, announcing a €122 billion investment in 2023. Unfortunately, the first electric models are not competitive with Tesla and Chinese manufacturers, they are difficult to conquer a market that is generally depressed after the Covid-19 pandemic.
A business model that is failing
Overall, at least since the early 2000s, the essence of the Volkswagen Group’s strategy has been relatively clear (and, indeed, shared by most of German industry, with the strong support of Chancellors Gerhard Schröder and Angela Merkel): to sell quality. German cars made with Russian gas for the Chinese. Two events plunged this model into the abyss: the European embargo on Russian gas after the outbreak of the war in Ukraine, which led to a sharp rise in energy costs, and, above all, China’s desire to provide itself with cars.
Volkswagen was one of the first Western manufacturers to invest in China in the 1970s. He has led the local market for over 25 years. In the mid-2000s, when almost all taxis in Shanghai were Volkswagens, all high-ranking Chinese Communist Party officials were required to drive a black Audi A6 with tinted windows.
Volkswagen even developed special extended models of the Audi A6 in accordance with the wishes of the party, and Western expats in Beijing also bought black Audi A6s with tinted windows, knowing that no police would risk bothering them for fear of dealing with a powerful political figure. .
Changing course in Beijing
But in recent years, the Chinese Communist Party’s instructions to its citizens – and its senior officials – have changed: Chinese people must now drive Chinese cars. This change in direction is particularly problematic for Volkswagen Group’s profitability. Audi became the main source of profits, much of which came from China. Those days are gone, not to mention the fact that Chinese manufacturers such as BYD – largely backed by their government – have developed electric vehicles that make it difficult for Volkswagen Group to justify its higher prices.
In this regard, it is funny to remember the words “made in Germany”, which for decades guaranteed the global success of German products, was originally a brand with an infamy. In the 19th century, this was demanded by British industrialists who were upset to see their products copied by German imitations of mediocre quality and sold at low prices, which they considered unfair competition.
In order to continue selling in the UK, German manufacturers had to systematically display the “Made in Germany” label on their products, which was as suspicious at the time as it is today.made in China” But the situation has changed, and now it is Chinese products that quickly receive letters of nobility.
Limited Control
Beyond Volkswagen’s strategic stagnation, its management is particularly problematic. Volkswagen founder Ferdinand Porsche had two children: a daughter, Louise, and a son, Ferdinand (nicknamed Ferry). Louise married in 1928 the lawyer Anton Piëch, who ran the main Volkswagen plant from 1941 to 1945. Ferry, for his part, greatly expanded the Porsche sports car brand founded by his father in 1931.
Since then, cousins Piëch and Porsche engaged in a bitter competition for control of Volkswagen, which reached its peak in 2007 when Porsche attempted to buy the Volkswagen group, which was fifteen times its size. The failure of this Porsche family operation led instead to the takeover of Porsche by Volkswagen.
A central figure in this change of direction was Ferdinand Piëch, Louise’s son, who began his career with his uncle Ferry before joining Audi and later becoming chairman of the board of directors of the Volkswagen Group in 1993 and later head of the supervisory board. to the board of directors in 2002. In addition to his intimate knowledge of the group (and of Porsche, of which he personally owned 13.2%), Ferdinand Piëch was able to secure the support of the state of Lower Saxony, where the group is based and which owns 20% of its shares. The former Minister-President of Lower Saxony was none other than Gerhard Schröder, Chancellor of Germany from 1998 to 2005.
This tangle of family feuds and political influences, of course, did not lead to calm in the management of the Volkswagen Group. To all this, toxic management practices were often added.
Toxic management culture
No doubt influenced by family rivalry and the unabashed arrogance of becoming world number one, Volkswagen’s management culture led to what might be called a toxic direction in the Ferdinand Piëch era.
Ferdinand Piëch, known for his intransigence, ambition and authoritarianism, often fired managers whom he considered ineffective. They even say that his favorite answer, when a subordinate presented him with a problem that he could not solve, was: “I know the name of your successor…”. He never hesitated to carry out this threat, which may explain why some managers took reckless risks, especially during the case. dieselgate. Regardless, this culture of fear has certainly not contributed to the change that is now needed.
On the other hand, since dieselgateSeveral of the group’s board presidents have advocated for a new, more decentralized corporate culture that encourages speaking out and even shaming. But changing culture is undoubtedly one of management’s most difficult challenges, and the urgency Volkswagen now feels will not allow it to do so with equanimity.
What does the future hold for Volkswagen? China’s windfall collapse, lack of success in electric vehicles, fallout still lingering dieselgateits colossal debt and need to rethink its culture, strategy and management are nothing short of titanic obstacles.
However, as a former General Motors executive said in the 1950s, “What’s good for GM is good for America,” we can assume that Germany will never give up on Volkswagen, which, thanks to its success – but also its contradictions – has become a real German myth.