Cultural Revolution

Reengineering Volkswagen

VW Jens Wolf DPA
The VW crisis grows by the day. Here, company headquarters in Wolfsburg.
  • Why it matters

    Why it matters

    • As VW’s emissions-rigging scandal takes on ever-greater proportions, CEO Matthias Müller wants to change the culture that allowed Dieselgate to happen. But it remains to be seen whether he himself is too much a part of the problem to do so.
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    •  
  • Facts

    Facts

    • Mr. Müller is turning to a combination of symbolic gestures and invasive actions in his bid to reinvent the company.
    • The design team alone, which consumes around €100 million annually, is set for a significant haircut, sources said.
    • Mr. Müller’s “Strategy 2025,“ planned for completion in July, will provide details on the company’s restructuring.
  • Audio

    Audio

  • Pdf

 

As workers pour out of brick assembly halls at Volkswagen’s main factory in Wolfsburg en route to a nearby train station, much more than a mere change of shifts is in the air.

“Our cars are good,” said one employee in passing. The pride is still there, but uncertainty is growing about the future of the scandal-ridden automaker.

As VW’s emissions-rigging machinations take on ever-greater proportions, the company faces perhaps the most daunting existential crisis in its 78-year history.

In addition to slashing costs to pay for mounting fines – already estimated in the tens of billions of euros – the world’s largest automaker must completely reengineer the corporate culture from which this scandal emerged.

The question is, what do we do with which brands in which regions?

That job falls to Matthias Müller, who on September 25 replaced Martin Winterkorn as Volkswagen’s chief executive, one week after VW shocked Germany and the world when the U.S. Environmental Protection Agency accused the company of installing software in its diesel cars designed to cheat emissions tests.

Mr. Müller is supposed to announce his “Strategy 2025” plan by next year. Volkswagen will radically overhaul its structure and organization by early 2016 in response to the crisis, according to sources.

The changes range from significant cuts in the marketing budget to reorganizing the company’s entire passenger car business, sources told Handelsblatt.

Mr. Müller, 62, wants to embody the carmaker’s new beginning and is calling for a “cultural shift” – a concept his advisors have whispered into his ear.

For Mr. Müller, creating this cultural change will be no easy endeavor, as someone who has spent more than 40 years at Volkswagen, and whose career closely follows that of his predecessor. It was Mr. Winterkorn who brought Mr. Müller over to VW from subsidiary Audi and who handpicked him to lead Porsche.

This week’s revelations make his task even more daunting, as the crisis reaches new heights.

On Tuesday, the EPA disclosed its further discovery of more deceptive software – which activates noxious emissions controls during testing but disables them under normal driving conditions – in larger, 3.0 diesel engines. This includes VW’s profitable luxury brands Audi and Porsche.

Volkswagen denied the allegation. But just hours later, the company admitted to an even deeper deception involving software used to artificially lower climate-altering carbon-dioxide emissions during testing, possibly also for its gasoline-powered vehicles, which would give the scandal a new dimension.

These lower values mean many drivers have paid less in taxes than would otherwise have been due. Now, the German government is calling on VW to refund this money too.

Concerning Dieselgate 2, “nevertheless,” said one manager, “we discovered that ourselves.” In other words, its internal investigations are working – at least in this case.

 

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Sitting in the same building in Wolfsburg where investigators are buried in documents, and where pride became arrogance and deception under his predecessor, Mr. Müller is turning to a combination of symbolic gestures and strong actions in his bid to reinvent the company.

“We must change the way we interact with each other, also when it comes to problems and mistakes,” Mr. Müller recently promised in a presentation of the company’s third-quarter results.

But Volkswagen faces a long road ahead, consisting of many forks, before its destination comes into view. Mr. Müller sits behind the wheel, and it is up to him to determine which route to take.

In one of his first moves, Mr. Müller will end the tradition of extravagant parties on the eve of important trade shows, when bosses would wine and dine journalists and prominent figures at their Wolfsburg headquarters while celebrating new models – and themselves.

Management doesn’t want such open celebration anymore, according to company sources. At around €8 million, or $8.7 million, per event – including three per year at car shows in Geneva, Frankfurt and China – there will be cost savings. Compared to VW’s €200 billion in revenues, or billions of euros in fines, however, these savings may seem small.

Still, it’s a symbolic gesture.

Mr. Müller is also taking on VW’s management culture, with its tendency toward pomposity. Corporate headquarters will be reduced in size and separated from subsidiaries. Although previously planned under Mr. Winterkorn, this was never executed.

At Mr. Müller’s own request, a team will screen the tasks of the carmaker’s central administration in Wolfsburg. Rather than serving as a command post, it will be responsible for coordination only.

“As tragic as Dieselgate is, we can now implement tougher measures.”

VW manager

Overall, Volkswagen has enormous potential for savings. The design team alone, which consumes around €100 million annually, is set for a significant haircut, sources said.

In the end, jobs will be lost.

“We have too many colleagues on board at headquarters,” said one employee.

The new human resources manager – who has not yet been named – will play an important role in developing new leaders to shape VW’s cultural shift. Union IG Metall has named five candidates for the vacant post, including the powerful head of VW’s works council, Bernd Osterloh.

Mr. Müller would rather have an external candidate, say sources, even through he plans to accept IG Metall’s decision – expected on November 20 – because he knows he cannot win a battle with the union.

But reducing headcount in Wolfsburg is just the beginning of a far-reaching restructuring at the company, with its more than 600,000 employees. Mr. Müller’s “Strategy 2025,” planned for completion in July, will provide the details.

Thomas Sedran, the new head of VW’s strategy unit, will oversee the effort. Mr. Müller handpicked the former Opel boss for his analytical acumen. But it may take some time before Mr. Sedran is able to get started, since the unit currently consists of only two employees, according to sources.

It also falls to Mr. Sedran to restructure Volkswagen’s car business.

“The question is, what do we do with which brands in which regions,” said one manager. Some models of Seat, Škoda, Audi and VW are direct competitors. Previously, such competition was encouraged. But, said the source, “The internal rivalry comes at the cost of profitably and must, therefore, be stopped.” In the future every brand must be in the black, even if it means fewer sales for the group as a whole, the source added.

“It is inevitable that some people at the company will butt heads over the restructuring of our brands,” said another manager. The pressure is especially great for core brand VW, with its weak margins, led by Herbert Diess.

Mr. Diess regularly invites his closest colleagues on weekend retreats, where they are encouraged to think outside the box on potential savings, according to a company source. One topic discussed was a moratorium on promotions.

The VW unit made its first big decision by stopping production of its gasoline-fueled Phaeton – which it now plans as an all-electric coup to compete with Tesla.

But with bigger decisions looming, it remains to be seen whether conflicts with the union emerge. The works council will not stand in the way of financially sound proposals, according to a source, even those involving job cuts.

Currently, because production is not well organized, VW’s main factory in Wolfsburg is bursting with workers. In fact, the company just brought on 700 new temporary employees.

“It is insane,” said one worker.

Mr. Diess has his hands full – and, ironically, the Dieselgate scandal should help. According to one manager, he will have more room to maneuver.

“As tragic as Dieselgate is, we can now implement tougher measures.”

VW’s leadership, to be really convincing about a cultural shift, will have to make some sacrifices too, believes another manager, who suggested, “Forgoing bonuses would be a strong signal.”

Such a move might help to counteract the impression given by the awkward photos that appeared in German media this week of Mr. Müller and his partner at the Leipzig Opera ball last weekend – bottle of champagne in hand.

 

Martin Murphy covers the auto industry for Handelsblatt. To contact the author: murphy@handelsblatt.com

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