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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