Volkswagen’s New Boss Promises “Monumental Change”



    Business Matching Services Malaysia

    VOLKSWAGEN’S new boss, Matthias Müller, was no doubt hoping that his firm’s launches of new models at the Geneva motor show this week would help it move on from the scandal over its cheating in emissions tests. A British prankster had other ideas. As VW’s sales chief, Jürgen Stackmann, unveiled a new version of the Up city car, Simon Brodkin, a comic whose past targets include FIFA’s former boss, Sepp Blatter, gatecrashed the presentation in overalls, with a spanner and a “cheat box” which he tried to fit to the car (see picture), before being led off by security men.

    Mr Müller can afford to see the funny side of the stunt: he owes his job to the scandal. He was brought in to replace Martin Winterkorn, who was forced out when it emerged last September that 11m of the company’s diesel cars had been fitted with software to cheat tests for nitrogen-oxide emissions. This week VW admitted that Mr Winterkorn had been sent a memo in May 2014 about irregularities in the cars’ emissions, but said he may not have read it. Speaking to The Economist in Geneva, Mr Müller promised “monumental change”. But whatever VW does to make amends, the more far-reaching overhaul that it needs seems unlikely to happen.

    The emissions scandal was a symptom of a corporate culture focused on ramping up output to 10m vehicles a year and toppling Toyota as the world’s biggest carmaker. In the quest for scale, profitability suffered. Operating profits have hovered around €12 billion ($13 billion) for years despite a big expansion in output, with the group’s huge returns from China disguising poor performance in Europe and losses in America and emerging markets.

    Mr Müller says he is determined that VW not be “paralysed” by the emissions affair. Its sales fell in Europe and America in January even as their overall demand for new cars rose. But Mr Müller says 2016 has started well and that he expects little lingering impact from the scandal. He may be right. General Motors’ faulty ignition switches and Toyota’s “unintended accelerations” forced both firms to make huge recalls and generated plenty of bad press. Yet sales recovered within a few months.

    Uncertainty about financial penalties will hang over VW for some time. It has delayed its annual report for 2015 until April, when the picture should be clearer. America’s Department of Justice could in theory levy a fine of €60 billion but it is unlikely to go that far. Some analysts reckon that the cost of settling with the authorities and private litigants, worldwide, and fixing the affected cars or compensating their owners, might come to a grand total of as much as €30 billion—roughly the amount by which VW’s stockmarket value has fallen since the scandal broke. Others think it could be far less: both GM and Toyota escaped with fines of around €1 billion.

    If paying for its perfidy proves painful but not life-threatening, the impetus to overhaul VW will lose some of its force. Change is needed. VW is a sprawl of brands of varying fortunes. Almost two-thirds of its profits come from its premium-car brand, Audi, and performance-car division, Porsche (see chart 1). The main VW brand is a drag on the group: Sanford C. Bernstein, a research firm, reckons that in 2014 the brand’s profits essentially came from parts sales and royalties (paid by its joint ventures) in China, and that it made no money in its core European market.

    Mr Müller is making a start by attempting to revamp the culture of a company in which hitherto a strict hierarchy sent decisions, big and small, to the German engineers that ran VW from its headquarters in Wolfsburg. Mr Müller has replaced seven out of ten senior executives. Some are outsiders, though many of the “new” faces are, like Mr Müller, VW insiders ingrained in the firm’s ways. He is, however, trying to speed up sclerotic decision-making by giving the heads of the group’s profusion of brands more responsibility.

    A comprehensive restructuring plan is promised for later in the year, but the firm has said it will concentrate harder on profits. As a start, it will make €1 billion of cost cuts at the VW brand next year. But analysts reckon the company, which alone among big carmakers failed to reduce costs during the financial crisis, has plenty more fat to cut. For no good reason, its administrative expenses have trebled since 2007.

    The firm will also cut the extravagant number of model variations it offers—more than 300 at last count—and its absurdly long lists of options. The choice of steering wheels on the VW Golf is set to fall from 117 to a mere 43. VW will “reconsider all costs”, says Mr Müller, including even its hallowed research-and-development budget. In 2014 it was €13 billion, €5 billion more than Toyota’s. But it is unclear what VW’s huge outlays have yielded. It missed the craze for SUVs, it is lagging its main rivals in electric-car technology and it lacks a cheap platform for budget cars in emerging markets. A project to standardise the underpinnings of many VW group models with a platform called the MQB seems not to be producing the expected cost savings.

    Mr Müller is resistant, however, to disposing of any part of the firm, even a unit that makes marine diesel engines. A gruff “No” is his response when asked if he would consider selling it, though it is unclear that this division, or another that builds lorries, or Ducati, a maker of exotic motorbikes, is a core part of VW.

    The most intractable problem is low productivity, especially at the mass-market VW brand. The group’s labour costs have risen from around 13% of sales in 2007 to almost 17%. Outside China (where it makes cars in joint ventures with local firms), the group’s 520,000 workers made 6.7m vehicles in 2014, or about 13 each. That is about the same productivity as at Daimler’s Mercedes division, which makes only high-margin premium models (see chart 2).

    As other carmakers have shifted production to low-wage countries, VW has remained largely stuck in Germany. Some 45% of its employees are based there, many enjoying a four-day work week. The VW brand’s German factories are “among the highest-cost plants in the industry”, says Patrick Hummel of UBS, a bank.

    But VW’s commitment to Germany is absolute. “We are a German company”, says Mr Müller, and will “preserve German jobs”. Powerful unions would be sure to resist job cuts. Mr Müller says that they agree on the need for reform but admits to disagreement over how it might happen. Unions could also prevent a wider rethink that might shift investment from the VW brand to others that are more profitable. The supervisory board, made up largely of union representatives and nominees of the state of Lower Saxony, which holds a 20% stake in VW, has the power to resist most changes of strategy.

    Maybe an outsider with a mandate for change, if backed by the Porsche-Piëch family, which controls the voting shares, could have achieved more. But Mr Müller’s hands seem tied. The good bits of the VW group will continue to prop up the underperforming bits. That burden may get heavier: premium and low-cost carmakers are thriving while the mass market, the core of VW’s business, becomes more competitive. Odd as it sounds, VW could have done with a bigger crisis.

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