Volkswagen: the end of a German industrial myth?

How did Europe’s leading carmaker, the largest industrial employer in Germany and a symbol of its style of capitalism and harmonious co-management between shareholders and unions, get to this point? As a result of a series of strategic errors, baroque governance and toxic management practices.

A German model

Austrian engineer Ferdinand Porsche founded Volkswagen in May 1937 in response to Adolf Hitler’s request for a “people’s car” (literally, a Volkswagen in German). The result was the Beetle, a robust, practical and economical vehicle that went on to sell over 15 million units, succeeding the Ford Model T as the most successful car in the history of the automobile.

However, by the end of the 1960s, the Beetle’s design (which included an air-cooled rear engine and rear-wheel drive) was showing its limitations. The company’s salvation lay in the acquisition of its competitors Auto Union and NSU, merged into the Audi brand, which brought along their expertise in the design of front-wheel drive vehicles. Volkswagen then became a genuine group, and the Golf (which had a water-cooled front engine and front-wheel drive), launched in 1974, was the symbol of its renaissance.

In the 1980s and 1990s, the Volkswagen Group expanded rapidly through acquisitions, with the purchase of Spain’s Seat in 1988, the Czech Republic’s Škoda in 1991 and then England’s Bentley and Italy’s Lamborghini in 1998. The group also acquired MAN and Scania trucks, Ducati motorbikes and Bugatti hypercars. Its share of the European market rose from 12% in 1980 to 25% in 2020. In 2017, the group overtook Toyota as the world’s leading carmaker for the first time. Volkswagen was then at the height of its glory, with a somewhat arrogant slogan: “Das Auto” (The Car). But the group’s fall was to be significant.

The “dieselgate” affair

The grain of sand in the company’s gears came from the United States. In 2015, the Federal Environmental Protection Agency revealed that the Volkswagen TDI type EA 189 diesel engine emitted up to 22 times more nitrogen oxide (NOx) than the current standard. Volkswagen then admitted that, since 2009, it had equipped its vehicles with “rigging” software capable of identifying test phases and reducing NOx emissions during them. Under normal circumstances, the software is inoperative, which makes the vehicles pollute much more than advertised, constituting fraud vis-à-vis the authorities and deception vis-à-vis customers. The EA 189 engine was sold in more than 11 million of the group’s vehicles, spread across 32 models.

The scandal was resounding. As legal actions multiplied in the United States and in Europe, Volkswagen’s share price fell by 40% on the Frankfurt stock exchange. The chairman of the group’s management board was forced to resign. In 2024, before all of the judgements have been handed down, it is estimated that the affair has already cost Volkswagen more than €32bn.

Anxious to redeem itself at a time when the image of its diesel engines had been irreparably tarnished, Volkswagen launched a colossal plan to convert to electric vehicles, announcing a €122bn investment in 2023. But its first electric models are not competitive enough with Tesla’s or with Chinese manufacturers, and are struggling to convince in a market that has been generally depressed since the Covid-19 pandemic.

A sluggish business model

More generally, since at least the early 2000s, the core of the Volkswagen Group’s strategy has been relatively clear – and indeed shared by most of German industry, with the active support of former chancellors Gerhard Schröder and Angela Merkel: to sell German quality manufactured using Russian gas to Chinese customers. Two events tipped this model toward the abyss: the European embargo on Russian gas following Moscow’s invasion of Ukraine, which caused the cost of energy to soar, and, above all, China’s desire for a self-sufficient automobile sector.

In the 1970s, Volkswagen was one of the very first Western manufacturers to invest in China. It led the local market for more than 25 years. In the mid-2000s, while almost all Shanghai taxis were Volkswagens, every Chinese Communist Party dignitary had to be driven in a black Audi A6 with tinted windows. Volkswagen even specifically designed extended models of the A6 according to the wishes of the party, and Western expatriates in Beijing also bought black A6s with tinted windows, knowing that no policeman would risk bothering them for fear of having to deal with an influential political figure.

When Beijing growls

In recent years, however, the Chinese Communist Party’s instructions to its citizens – and its dignitaries – have changed: they must now drive Chinese cars. This reversal is particularly problematic for the profitability of the Volkswagen Group. Audi had become its main source of profits, and most of those profits came from China. Those days are gone, not to mention the fact that Chinese manufacturers such as BYD – largely supported by their government – have developed electric vehicles, against which the Volkswagen Group has had a hard time justifying its higher prices.

On this subject, it is amusing to recall that the “Made in Germany” label, which for decades ensured the worldwide success of German products, was originally a mark of infamy demanded by 19th-century British industrialists, who resented seeing mediocre German copies of their products sold at low prices. In order to continue selling in Great Britain, German manufacturers had to systematically label their products “Made in Germany”, which at the time aroused much the same suspicion as “Made in China” can today. But the wheel has turned, and now it’s Chinese products that are rapidly earning their spurs.

Constrained governance

In addition to the stagnation of Volkswagen’s strategy, the group’s governance is particularly problematic. Volkswagen’s founder, Ferdinand Porsche, had two children: a daughter, Louise, and a son, Ferdinand (nicknamed Ferry). In 1928, Louise married the lawyer Anton Piëch, who ran Volkswagen’s main factory from 1941 to 1945. Ferry, for his part, greatly expanded the Porsche sports car brand, which was founded by his father in 1931.

Porsche attempted to take over the Volkswagen Group, which was 15 times its size. The failure of this effort, led by the Porsche family, resulted instead in Volkswagen’s takeover of Porsche.

The central figure in this turnaround was Ferdinand Piëch, Louise’s son, who began his career with his uncle Ferry before joining Audi and first becoming chairman of the Volkswagen Group’s management board in 1993, and then its supervisory board in 2002. Holding in-depth knowledge of the group (and of Porsche, in which he held a 13.2% stake), Ferdinand Piëch gained the support of the German state of Lower Saxony, where Volkswagen is headquartered and which holds 20% of its shares. The state’s former minister-president was none other than Gerhard Schröder, German chancellor from 1998 to 2005.

This tangle of family struggles and political influences did not make for serenity within the Volkswagen Group’s management bodies. In addition, management practices were often toxic.

A toxic management culture

Influenced by family rivalries and an arrogance that stemmed from being the world’s number one, Volkswagen’s management culture drifted in a direction that could best be described as toxic during the era of Ferdinand Piëch.

Known for his intransigence, ambition and authoritarianism, Ferdinand Piëch frequently sacked managers he judged to be underperforming. It is even said that when a subordinate presented him with a problem he had failed to solve, Piëch’s favourite response was, “I know the name of your successor… ” He did not hesitate to follow through on this threat, which may explain why some managers took reckless risks, particularly during dieselgate.

Since the affair, several chairmen of the Volkswagen Group’s management board have called for the emergence of a new corporate culture that is more decentralised and encourages people to speak out, even as whistleblowers. But changing a culture is one of the most difficult managerial tasks, and the urgency of Volkswagen’s situation will not make it any easier.

What does the future hold for the company? The collapse of its revenue from China, its lack of success in electric vehicles, the still emerging fallout from dieselgate, its colossal debt, and its need to overhaul strategy, governance and culture are nothing short of titanic obstacles.

However, just as a former General Motors executive stated in the 1950s, that “what’s good for GM is good for America,” we can assume that Germany will never give up on Volkswagen. Thanks to the company’s success – but also because of its contradictions – Volkswagen has become a veritable German myth.

This article is republished from The Conversation under a Creative Commons license. Read the original article.