Volkswagen's woes

Dieselgate Dogs VW

WOLFSBURG, GERMANY - APRIL 28: Matthias Mueller (R), CEO of German automaker Volkswagen AG, shows Karlheinz Blessing, Volkswagen's head of human resources, the inside of Mueller's briefcase as the two men arrive at the company's annual press conference on April 28, 2016 in Wolfsburg, Germany. Volkswagen is facing high costs and stiff penalties, including the possible buyback of up to 500,000 cars it sold in the USA, as a reult of VW's diesel emissions scandal. (Photo by Sean Gallup/Getty Images)
Board members at the beleaguered carmaker sought to put the past behind them and focus on a brighter future.
  • Why it matters

    Why it matters

    Volkswagen is striving to regain trust following last year’s emissions rigging scandal, but the repercussions are likely to continue for some time and the company is reacting only slowly to make the expected changes.

  • Facts

    Facts

    • Even without the effects of the emissions scandal, the operating margin of the core VW brand is weak, at just 2.0 percent.
    • Chief executive Matthias Müller is working on a new strategy, which he plans to present in June.
    • Experts are calling for a reform of the company’s complex remuneration system following the publication of managers’ bonuses for 2015.
  • Audio

    Audio

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At the annual photo shoot before VW’s accounts press conference kicked off, the managers on the board lined up for the cameras as usual.

But little else that was business as usual at the presentation as Volkswagen sought to distance itself from the past year’s struggles and focus on a bright new future.

The location of the press conference was more modest, in Wolfsburg where the company’s headquarters is located, a fitting decision for a company trying to underline not a flashy location but modesty, frugality and closeness to customers.

These aren’t areas where the company has distinguished itself and the change of tack is due to the group’s disastrous figures for 2015, the year it was found to have been rigging the results of diesel emissions tests. VW had to set aside €16.2 billion ($18.36 billion) for fines and technical improvements, leaving it with a net loss of billions.

Spurned by customers, the Phaeton has become a symbol of how much Volkswagen has lost contact with customers in the last few years.

Even without these burdens, VW’s figures mercilessly exposed its weaknesses. While Audi and Porsche reported good profits, the operating margin of the core VW brand remains weak, at just 2.0 percent before the extraordinary effects of the diesel emissions scandal.

This is due to problems that have been under discussion for a long time: vanity projects like the top-of-the-range Phaeton are operating at a loss, the group’s German plants lack efficiency and its product range is getting out of hand.

Spurned by customers, the Phaeton has become a symbol of how much Volkswagen has lost contact with customers in the last few years.

The emissions scandal made it clear that the manufacturer had also lost sight of standards for responsible conduct internally.

VW is losing ground to competitors in Europe, the United States and South America. “We are putting all our efforts into restoring confidence,” chief executive Matthias Müller has promised. Dealing with the effects of Dieselgate is proving to be a long-term project, and the company will continue to suffer from the repercussions. “2016 will be a transitional year for Volkswagen, that much is already clear,” the CEO said.

Mr. Müller refuses to be paralyzed by the crisis. He has little choice, given the current shake-up in the sector. Digitalization and electrification are set to fundamentally change business models. Mr. Müller was not known for his openness to these new influences during his time as head of Porsche, and thought little of self-driving cars. But this changed since the racing fan took over at the helm of VW last September. Mr. Müller said Volkswagen is expecting a lot from new mobility services: “This will open up significant earnings potential for our industry in the coming years.”

However, while rivals BMW and Daimler offer blanket coverage with their car sharing and mobility services, VW and its 11 affiliated brands have introduced these concepts only on a piecemeal basis.

Mr. Müller’s evocation of a bright future seems more like an attempt to escape the dismal reality. Volkswagen is still caught up in the emissions scandal. The group may have reached an agreement last week with the U.S. authorities and car buyers in the United States, but this is only provisional and the details have yet to be worked out. Investigations by the U.S. ministry of justice and other authorities are still ongoing and will no doubt continue to put “Dieselgate” in the headlines over the coming months.

 

VW press conference lineup managers dpa
A very different outlook this year for the board members at VW. Source: DPA

 

Meanwhile, a dispute between Volkswagen and the U.S. automobile workers’ union UAW has escalated. The U.S. National Labor Relations Board has filed a complaint against the company on the union’s initiative, in which it has accused VW of dishonest practices at its site in Chattanooga, Tennessee. The carmaker now has until May 10 to respond to the complaint and reach a settlement with UAW, otherwise there will be a hearing.

Volkswagen hopes that its new strategy, which it will present in June, will signal a turnaround. The aim is to break up the group’s rigid structures with over 600,000 employees. Mr. Müller alluded to this indirectly in his speech when he said: “Proud, technology-driven companies like ours are not used to recognizing that we cannot, and do not have to, develop everything ourselves.”

Mr. Müller said that the group plans to set up a separate company soon to work on new mobility services. VW’s management will need a lot of money for its plans; the restructuring of the group is likely to swallow up capital, along with the necessary investment in digital services and electromobility.

The amount of funding left over will also depend on the outcome of investigations into the emissions scandal. U.S. law firm Jones Day has been appointed by VW’s supervisory board to investigate how the emissions fraud occurred and which members of staff at VW were involved.

Volkswagen had originally hoped to present the Jones Day report by now, but has postponed this indefinitely due to pressure from the U.S. authorities. The group explains in its annual report that there has been no evidence to date that the management board was involved.

 

29 p22 What board members earned in 2015-01

 

Whether or not management could have prevented the manipulation remains unclear. Right at the beginning of investigations by the U.S. environmental authorities, there were references to Martin Winterkorn, who was chief executive at that time, and other managers. If senior management is found to have failed in performing checks, the penalties could be tougher.

Comments made by Mr. Müller also suggest that the matter is not yet over in the United States. At a meeting with U.S. president Barack Obama at the start of the week in Hanover, Mr. Müller not only apologized on behalf of Volkswagen, but also said he hoped that Americans would be able to “build a bridge” to the company over the emissions issue.

Volkswagen is working on all fronts to redress Dieselgate and the problems that have ensued. VW has released details of managers’ bonuses for 2015, which had been the object of much speculation in recent weeks. The figures show a mixed picture, which is partly due to the complexity of the company’s remuneration system and the large number of staff changes. Francisco Javier Garcia Sanz, who is responsible for procurement, has seen his variable pay shrink from €5.51 million in 2014 to just €2.25 million, a drop of 59 percent.

Former chief executive Martin Winterkorn has had his total pay cut from €15.8 million to €7.3 million. But experts are calling for a broader reform of the company’s remuneration system including a good degree of simplification.

Instead of this, however, Volkswagen’s supervisory board recently made it even more complicated, with 30 percent of the variable salary components to be withheld for the time being and paid out in 2019, depending on the future performance of the company’s share price.

 

Martin Murphy writes about the automotive sector for Handelsblatt. Christian Schnell also covers the car industry. Astrid Dörner is a Handelsblatt correspondent based in the United States. To contact the authors: murphy@handelsblatt.com, schnell@handelsblatt.com, adoerner@handelsblatt.com

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