Can Volkswagen Rebuild Its Brand?

The Volkswagen emissions scandal, which began unfolding in 2015, included 11 million cars and affected customers around the world who are still dealing with the deceitful decisions made by top brass at the German company. Six executives were criminally charged in the United States, and VW had to pay $2.8 billion for intentionally engineering their vehicles to cheat emissions tests. CEO Matthias Muller is being investigated about whether or not he held back information from investors as well. Meanwhile, German and European Union antitrust authorities are now extending an investigation into Volkswagen and Daimler regarding alleged collusion to fix prices for certain technologies, including diesel, over a number of decades.

Author Jack Ewing of The New York Times goes behind the scenes of the emissions’ scandal to consider how such developments can occur, in his recent book titled Faster, Higher, Farther: The Volkswagen Scandal. He discussed the book on the Knowledge at Wharton show, part of Wharton Business Radio, which airs on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

An edited transcript of the conversation follows.

Knowledge at Wharton: The book looks at the reasons behind what happened and why the people at Volkswagen made those decisions. Deceit is usually associated with money, but not necessarily in this case.

Jack Ewing: No, that’s correct. As far as I know, no one got a bonus or got rich off this. It was really just a question of trying to hang on to their jobs, and I think that has a lot to do with the corporate culture at Volkswagen, what they thought was expected of them and what they thought the consequences would be if they didn’t meet their engineering goals.

Knowledge at Wharton: While nobody got bonuses, they were obviously trying to keep their market share in good stead in Europe and trying to build it in the United States. So maybe there is a financial component of trying to reach the consumer who really wanted to have a clean diesel vehicles.

Ewing: It was really all about the United States market. Volkswagen didn’t really need to cheat in Europe because there’s so many loopholes in the rules that most of the car makers can comply legally, even if the cars are not that clean. But the United States was a different story. There certainly was a financial component for the company as a whole, and a market share component, because this was all about trying to get back the market share they once had in the United States in the heyday of the Volkswagen Beetle. That was really what was driving the whole thing.

“Volkswagen didn’t really need to cheat in Europe because there’s so many loopholes in the rules that most of the car makers can comply legally.”

Knowledge at Wharton: Without the discovery made by the students at West Virginia and Dan Carter, who was the person who oversaw a lot of what went on there, this could still be going on today.

Ewing: It’s almost happenstance that it was even discovered at all. It went on for almost 10 years and none of the regulators on either side of the Atlantic noticed it. It was Dan Carter’s team at West Virginia University and a bunch of graduate students with a $70,000 grant who really found that there were these anomalies, these funny emissions readings, and started the whole process that led to Volkswagen’s exposure. It’s kind of incredible that this huge company with 600,000 employees and more than €100 billion a year in sales was vulnerable to this small group with jerry-rigged equipment.

Knowledge at Wharton: What’s the latest on the executives who were charged in the U.S., and also on Matthias Muller?

Ewing: There’s one guy named Oliver Schmidt who was a liaison with regulators in the United States who is in jail because he made a mistake of visiting the United States and they arrested him. Everyone else is in Germany. There is no smoking gun or any evidence that Muller knew about the cheating. I’ve reported for The New York Times that people just below him were exchanging emails and documents having to do with the cheating, but Volkswagen says they never reached Muller or anybody at the management board. But the investigation is continuing, and I think it’s going to be something that keeps Volkswagen busy for quite a while.

Knowledge at Wharton: Has VW commented on your reporting that you have put together in the book?

Ewing: They haven’t commented specifically on the book. I had told them beforehand, as standard journalism practice — you don’t write something about somebody without giving them a chance to respond. I think I was pretty clear with them quite a few months ago before publication what it was going to say, and I gave them a chance to respond as much as they wanted to. Anything about the scandal, they just refer to the court documents. They don’t say much about it at all.

Knowledge at Wharton: What do you think has been the impact on the brand globally?

Ewing: It has hurt their reputation. You haven’t seen a collapse in sales. They’ve been pretty much flat the last couple of years, which is not solely a result of the scandal. It has to do with problems in certain markets like China or Brazil. But they have been losing some market share in Europe, which is still their core territory, and I think that’s a little alarming for Volkswagen because they’ve been the dominant car company in Europe. This seems to be chipping away at their dominance.

Knowledge at Wharton: We are in a unique time where automakers are having recalls seemingly every week. What do you think is the mindset of the industry right now as they deal with evolving technology?

Ewing: You put your finger on exactly the challenge that’s facing the auto industry right now because they know that they are going to have new challengers out of Silicon Valley. You’ve already got Tesla, you’ve got Uber and Google working on self-driving cars, and they actually have a lot more money than the traditional automakers. They’re worth more on the stock market. All of the car companies know this and are trying to adjust to it, but they’re spending money on recalls or legal settlements and fines and so on that’s taking away from money from research and development.

Knowledge at Wharton: Maybe the most important part for American consumers who thought they bought these clean diesel vehicles is that a trust was broken. How does Volkswagen get past that?

Ewing: That was one of the big mistakes they made. Not only did they have this illegal software, but they spent a lot on advertising convincing people that this was clean diesel. You had a lot of people who were environmentally conscious who thought they were driving a clean car. I’m not sure it’s even possible for Volkswagen to get those people back. I get emails from them all of the time. People are so upset. I really don’t know a strategy that is going to win back those customers. I think Volkswagen has to find a new strategy in the United States.

Knowledge at Wharton: There is a historic element to this, which you bring out in the book, that there were some signs that the company was leading up to this. It goes back to VW’s relationship with Germany during the time of Adolf Hitler.

Ewing: It was originally a Nazi propaganda project — the Beetle, the people’s car, was supposed to make it possible for every German to own a car. That never happened until after the war, but that was the origin of the company. I wouldn’t say you can drive a straight line to what is happening now, but later on you did have a number of scandals: a corporate espionage scandal, labor bribery scandal. What was notable was that after all of these scandals there really wasn’t any reform, no real wholesale culture change. Employees would get the impression that as long as you don’t get caught, the stuff is Okay.

Knowledge at Wharton: As you alluded to, there are so many legal loopholes that these automakers can get around in other places that they can’t in the U.S.

Ewing: One of the things that I think this scandal has taught a lot of people, including me, is that in Europe there was a bit of a holier-than-thou attitude, a feeling they were more environmentally virtuous than the United States. But the scandal has shown there was no real enforcement in Europe where there was in the United States.

“They see emissions as just a cost with no consumer benefit.”

Knowledge at Wharton: Is the German government starting to think differently about this?

Ewing: Not just in Germany but throughout the European Union there’s now a big debate. I should mention that diesel accounts for 50% of the cars on the road in Europe. It’s a very popular technology. People are realizing that it’s not as clean as it was advertised. Basically, all of the cars pollute more than they’re supposed to. You see that in big cities in Europe like Paris or Barcelona, where the levels of pollution are much, much higher than they should be if the cars were as clean as advertised. You’re seeing a backlash against that.

Knowledge at Wharton: How much impact was there on the Audi division? Audi is seen as a more technologically advanced vehicle than the VW.

Ewing: Well, they share a lot of parts. The whole Volkswagen business model is they use the same platforms, the same components in lots of different brands. The software that they used was invented by Audi and then adapted for Volkswagen. It seems like so far, Audi has not been hurt as badly for whatever reason. The Audi cars had also illegal software in them, and Audi separately had to pay a pretty substantial settlement in the United States. But in consumer’s minds it seems to be a Volkswagen story, and you’re not seeing as big of an impact on Audi sales.

The Porsche SUVs, the diesel model, also had this software. I don’t see any real sign that that’s been a big problem in the United States. It’s probably because Porsche never really marketed diesel that aggressively, so I think the vulnerability is not that great. Plus, Porsche is a brand that people love. They are very loyal to it. I think maybe it takes a lot more to push people away from a Porsche or an Audi than it does for Volkswagen.

Knowledge at Wharton: Do you think the culture has truly changed at Volkswagen?

Ewing: Well, they say they’re changing it. I think it’s too early to tell. I think some people at the company are pretty sincere about it, but how much has actually changed I think it’s pretty hard to tell. I know they hired a prominent judge in Germany, a woman who was the first women ever on the management board, to oversee the culture change, and she lasted a little more than a year. It seems to be a company that doesn’t change very easily, and also doesn’t absorb outsiders very well.

Knowledge at Wharton: What is Volkswagen saying now to American consumers?

Ewing: From my perception, they don’t really have a new marketing strategy in the United States. They’re coming out with a new SUV, the Atlas, which is a pretty big car and priced pretty competitively. It seems to me that’s what they’re pinning their hopes on, and I suspect that car appeals to a different group than the environmentally conscious people who were buying clean diesel.

Knowledge at Wharton: The 1990s were an interesting time for VW. The potential for cheating was floating around at that point.

“You just don’t have enough outside voices speaking truth to some of the people in power there.”

Ewing: There’s a long history of car companies, not just Volkswagen, trying to cheat on the emissions test. There was a big temptation in the 1990s when cars started to become computerized, when you had pretty powerful computers under the hood controlling engine functions. That was a big temptation for all of the car makers to then use that to cheat on the emissions test. They see emissions as just a cost with no consumer benefit. Nobody goes into a dealer saying I want this such and such, a catalytic converter. There were a number of other cases, including a big one at the end of the 1990s involving truck makers in the United States, which led to a $1 billion settlement. That was a pretty clear signal to the industry that this is not something they should do. But somehow that seems to have gone over Volkswagen’s head, and people in the industry were very surprised that anyone would still do something like that in this day and age.

Knowledge at Wharton: What has been the reaction of the VW shareholders?

Ewing: One of the strange things about Volkswagen is the number of shares that are publicly traded — the voting shares, that is — is pretty small. I think it’s a little over 10%, because the descendants of Ferdinand Porsche own more than 50%, the state of Lower Saxony in Germany owns another 20%, the Sovereign Well Fund of Qatar owns another stake. You’re left with a pretty small free flow, and this is one of the problems at Volkswagen. There’s not that many outside shareholders, so they don’t have that much influence. You don’t have that oversight role. Among those shareholders, there’s a lot of discontent. At a recent meeting, a number of shareholders were saying the current management should step aside or that they’re doing a bad job. There was definitely a lot of discontent, but those people have no real influence because most of the shares belong to the people I mentioned.

Knowledge at Wharton: Even though it’s public, it does feel like a private company.

Ewing: In a lot of ways it is. If you look at the supervisory board, by German law it is 50% workers. That’s true of all big companies in Germany. The rest are shareholders, but it’s all of the shareholders that I mentioned. There’s one person on the supervisory board who is not a Volkswagen insider or a Porsche family member, or a member of the labor union. You just don’t have enough outside voices speaking truth to some of the people in power there. I think that is really one of the things that was at the root of this whole scandal to begin with.