Its iconic “Beetle” was named the world’s fourth-most influential car in the 1999 Car of the Century competition. Its models were three-time winners of the European Car of the Year and five times the Motor Trend Car of the Year. Earlier this year, Volkswagen overtook Toyota as the world’s top carmaker by sales. The company is a financial juggernaut, recognized as a major driver of Germany’s economy.
Late last week, the proverbial wheels came off when it was revealed that during the last seven model years, the diesel cars of Volkswagen and Audi were intentionally rigged with software designed to circumvent emission tests. When being tested, the software fully activated a car’s emission control system, and everything appeared hunky-dory. When not being tested, the software deactivated the emission controls, greatly improving fuel economy but increasing nitrogen oxide emissions by as much as 40 times the allowable level.
The list of those who will be hurt in this scandal is long and growing. The first business day after it broke, the company’s market value plummeted by 23 percent, then another 17 percent the second day. It’s facing $18 billion – that’s billion with a B – in fines, along with bearing the cost of recalling and fixing nearly 500,000 cars. The company has warned investors of the potential for a $7.3 billion hit to profits.
The owners of the cars will lose considerable fuel efficiency when the software is removed. Not only will it cost more to drive them, they will be worth less in the resale market because of it. Class-action lawsuits, anyone?
Although he claimed to have done nothing wrong himself, the CEO quickly resigned. Those who are found to be complicit in the scheme are almost certain to face criminal charges.
Business analysts already have begun to fret about a possible rippling effect throughout Germany’s economy. The company employs 274,000 people in Germany and nearly 600,000 worldwide, and its suppliers employ tens or hundreds of thousands more. The analysts also worry about the possible impact on Germany’s auto industry as a whole as the world looks with jaundice at the formerly unassailable descriptor, “German-engineered.”
We’re accustomed to seeing organizations in crisis because they were negligent, or pushed the envelope too hard. Sometimes they exacerbate their troubles by trying to cover things up. It’s rare to see organizations blatantly violate the law, presumably with the naïve assumption that they will fool everyone indefinitely.
The Volkswagen fiasco provides an opportunity to make a couple of points about crisis and reputation management. First – and we’ve said this before – there are no secrets in the Digital Age, only information that hasn’t been discovered yet. The idea that the company could produce 11 million cars equipped with emission device cheating systems, distribute them worldwide and never have anyone figure it out is unfathomable. Yes, it took seven years, but it was uncovered (here’s how).
Second, although this crisis may not destroy the company and the brand, it will be a very long and painful road back. Except among the haters, negligence and pushing the envelope can be forgivable. Blatant duplicity, not so much.
As we post this item, questions are swirling about whether the emissions cheating was confined to Volkswagen or extend throughout the auto industry. The New York Times published an insightful piece detailing how the industry controls its own testing protocols, suggesting that self-policing may be at the heart of the problem.
In admitting its transgression, apologizing and accepting responsibility, Volkswagen has taken the first steps toward redemption. Beyond that, it’s tough to prescribe specific solutions until we know the full extent of the crisis. We’ll check back in as we learn more.