Volkswagen Crisis – A Lesson in Trust

By Michael Czinkota

The Volkswagen crisis, triggered by misleading emissions measurements, has reinforced the idea that truthfulness and simplicity are pillars of international marketing and integral to a business’ public face. The (formerly ?) largest car global manufacturer in terms of sales has been accused of fitting defeat devices into its diesel cars in the United States that can discern when the vehicle is undergoing emissions testing and turn on full emissions control for that duration. Once the testing is over, however, the emission controls are switched off and allow the cars to emit between ten and forty times the regulation standard of nitrogen oxide. Since this deception has come to light, Volkswagen’s stocks have crashed, with shares falling 38% in two days. This initial loss to investors and the brand alike showcases the importance of truthfulness in business operations.

Businesses are constrained by the nations and societies in which they operate. Their standards of conduct should ensure their business activities are beneficial to the people and society. Companies that are seen to violate such expectations will see their trustworthiness diminished. Reduced trust results in tangible losses for the company in terms of fines and costs of recall, and also causes the public to censure the company via strongly diminished sales. In order to regain the trust of the consumers, Volkswagen must engage with both short and long term measures.

Already, Volkswagen has taken important steps to punish those responsible (either directly or via neglect) for the violation of the emission standards and the disappointment of the public’s trust. Within five days, CEO Martin Winterkorn has resigned, although he denies having any knowledge of the wrongdoing. Additional heads will roll, with lay-offs signaling to the public that the company expects adherence to high standards of behavior, and is not lenient on those that break the social contract. Volkswagen has also set aside 6.5 billion euros ($7.3 billion) to cover the costs of recalling the cars with the defeat device, as well as any other damages. Together with future direct and indirect costs, this step curtails the company’s profits for years to come. Yet it goes a long way in indicating that Volkswagen is ready to accept responsibility and do what it must in reparation of the betrayal of the trust which customers and governments had placed in the company.

Public trust is an important determinant of a society’s willingness to allow international firms to do business in their nations. Volkswagen will have to rebuild this broken trust, and reinforce the values of truthfulness and simplicity in its workings. No longer will VW consumers allow the company’s real activities to be shrouded in complexity, or permit the lines of truthfulness to be blurred. For Volkswagen, standards will be scrutinized more and enforced more sharply. Its ways of doing business must become more transparent and understandable by the public. For a company that is at the heart of Germany’s manufacturing and export economy, and thought to reflect the social responsibility and consciousness of its home country, this active misleading of regulations and claims is a shock for supporters and customers, particularly those who bought a VW diesel to help the environment. Also affected is the general German reputation for fine workmanship and honesty – in other words all fellow firms doing business in and from Germany. The economic downdraft which results from the misstep also major collateral damage. For example, missing billions of revenue means that money targeted to help the migrants in Germany, will be much less available.

Volkswagen now will have to prove itself anew as an honest partner, and engage in curative marketing to heal the wounds. Doing so will be a very expensive uphill task, considering the magnitude of the deception and the corresponding stain on the “People’s Car”. Best wishes to the firm and its workers.

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Cars going to the East

General Motors has opened China’s largest factory in Anhui, with an investment of RMB 1.6 billion ($253 million). An article in the  Financial Times suggested that the move is “the latest sign of the growing readiness of multinational companies to invest in research and development in emerging markets”.

Indeed, China has become the largest market for GM for seven consecutive years and has also been tops for other major companies.  Many car manufacturers are considering moving their sites out of Europe, where production has exceeded demand.

The future of our driving maps may be very different from what we see now.

GM Needs A Global Strategy to Survive

The U.S. government now owns 60 percent of General Motors. Some say that the company really belongs to the taxpayers ― but just have them try to sell some of “their” GM shares ― they’ll quickly see how limited their ownership rights are. U.S. officials now have a new mandate that is familiar to business executives: meet increased sales goals in an ever-expanding sales territory. If GM is to succeed, global sales and operations, not just American, must be a priority.

In an industry that is among the most competitive in the world, GM’s future will inevitably be linked to global markets and how well it does as an Asian car company.
Of course, this is not lost on GM. Indeed, at the same time as the firm filed for Chapter 11 protection, CEO Fritz Henderson said that “China remains a key part of our business. Our ventures in China are a critical part of the new GM ― unequivocally. Our business in China continues to grow at a very fast, even torrid pace and remains a critical part of GM going forward.”
As GM pares down its presence in Europe with the sales of Opel and Saab, the company has expansive ambitions in Asia.
China is GM’s largest growth market. The firm has more than 20,000 employees, enjoys booming sales and occupies the leading position among global automakers with market share of about 12 percent in the region. The China Daily reported that GM plans to open a new factory and double sales in China over the next five years.
Another significant Asian market for the new GM will be South Korea, where it is the majority owner of GM Daewoo Auto & Technology, Korea’s third largest automaker. Elsewhere in Asia, auto markets have been more depressed by the economic crisis, yet GM has plans for growth throughout the region with emphasis on Thailand and India. In India, look for GM to engage Tata’s Nano in competition with its own version of a mini car. India should be a hot market as the country continues its strong economic growth. With 95 percent of the world’s customers living outside the United States, GM must look overseas for long-term expansion.
The growing needs of Asian markets will require adjustments in production capacity and product. Consistent with the product cycle theory, over time, established products are produced in new locations with more local advantages.
Asian production sites with lower cost structures and locally based R&D are essential for the new GM to fulfill its mission. To succeed in its post-bankruptcy life, GM will need to rationalize its global production platform to maximize economies of scale and eliminate waste.
While GM will need to temper its ambitions to avoid mistakes of the past, it must compete globally or be marginalized as a niche competitor. However, global efficiency becomes particularly sensitive if GM uses overseas production facilities to import cars to the United States
Indeed, the U.S. administration’s rescue plan for GM is contingent upon producing more cars in the United States, even as it closes factories and eliminates jobs at home. Yet, inefficient production is one of the principal reasons for GM’s Chapter 11 filing and should not be championed under the guise of protecting American jobs.
Utah Gov. Jon M. Huntsman, the designated U.S. ambassador to China, has his work cut out. He will be confronted with competitive realism while supporting American idealism. But he’s the right man for a tough job.
The Obama administration may not intend to be an active manager of the new GM but its policies on trade, foreign investment and taxation will shape the company’s future. Government policies must allow and even encourage GM to be competitive not just at home, but also abroad. Don’t expect administration officials to go on commission, but, whether they like it or not, they have a new obligation to help GM increase sales. Asia is the smart place to look.