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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Spain Exits Recession, Job Losses Ease: Central Bank

Spain escaped from its two-year recession in the third quarter of this year with timid growth as job destruction eased, the country’s central bank said on Wednesday.

After nine straight quarters of contraction in the second trough of a double-dip recession, the euro zone’s fourth-biggest economy grew by 0.1 percent, the Bank of Spain said in a report.

The rate at which jobs were being destroyed in the recession, which has thrown millions out of work and increased poverty, eased to its slowest rate since the start of the crisis in 2008, it added.

“In the third quarter, the Spanish economy extended the gradual improvement that it has been observing since the start of the year,” the bank wrote.

Wednesday’s data came in an economic climate “characterized by a certain easing of financial tensions and improving confidence”.

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Environment, Conservation and Sustainability Issues

China’s and India’s rapid growth and push toward economic progress and better lifestyles for their citizens will cause the ongoing depletion of natural resources. Consequently, control of raw materials will be a vital strategic issue, often leading to preferential bilateral agreements that might contradict multilateral arrangements. Governments will attempt to put more land into grain production and use subsidies and price controls. Scarcity will also drive up the price of consumer alcohol. Protecting materials from theft (e.g., cutting electrical wires to steal copper) will become a priority. Recycling and recovery will be strong business opportunities. As fuel production from food accelerates, farming will become attractive and profitable. The global shortage of potable water will be rediscovered as a priority issue and constraint on global advancement and well-being. Government investment in desalination and reverse osmosis technologies will grow along with emphasis on water conservation.

In light of public concern over climate change, interest in energy-saving technologies will grow. Unusual natural phenomena will be attributed to global warming, a relationship that will be supported by a stream of scientific and nonscientific proof. Public perceptions will lead to changes in living patterns. For example, the population of dry, arid and hot  climate areas might shift due to water shortages and limitations on the use of air conditioning. Such changes will occur even if it becomes generally accepted that global warming is only slightly dependent on human activity.

Africa might offer the most opportunity for green investments and accumulation of carbon credits. Eventually, as governments frown on the transfer of resources resulting from carbon trading, wealthy countries and international operating companies will make agreements (both multilateral and bilateral) that create a framework to protect the environment. Key sectors for industry creation and expansion include public health; sustainability; saving energy, water and natural resources; biotechnology, genomics and nano-technology; and the creation and promotion of eco-products, services and processes. For example, sustainable water recycling technologies will spawn new industries, and governments will adopt and encourage more advanced pollution-control policies, particularly for heavy metals and engineered (non-naturally occurring) substances.

This is an excerpt from Dr. Czinkota’s book Global Business: Positioning Ventures Ahead, co-authored by Dr. Ilkka Ronkainen.

Michael R Czinkota and Ilkka A Ronkainen, Global Business: Positioning Ventures Ahead (New York: Routledge, 2011), pg. 229-230.