Frédéric Fréry, ESCP Business School

In late October 2024, Volkswagen’s Works Council announced that the group’s management was considering closing three factories in Germany, which would lead to the loss of tens of thousands of jobs and a general salary reduction. On October 30, the group announced a 63.7% fall in third-quarter net profit. With more than 200 billion euros in debt, Volkswagen has become the most indebted listed company in the world. Its sales are down, and its costs (notably for energy, personnel, and research and development) have soared.

How did Europe’s leading carmaker, the largest industrial employer in Germany and a symbol of its style of capitalism and harmonious co-management between shareholders and unions, get to this point? As a result of a series of strategic errors, baroque governance, and toxic management practices.

A German model

Austrian engineer Ferdinand Porsche founded Volkswagen in May 1937 in response to Adolf Hitler’s request for a “people’s car” (literally, a Volkswagen in German). The result was the Beetle, a robust, practical, and economical vehicle that went on to sell over 15 million units, succeeding the Ford Model T as the most successful car in the history of the automobile.

However, by the end of the 1960s, the Beetle’s design (which included an air-cooled rear engine and rear-wheel drive) showed its limitations. The company’s salvation lay in acquiring its competitors Auto Union and NSU, which merged into the Audi brand and brought their expertise in designing front-wheel drive vehicles. Volkswagen then became a genuine group, and the Golf (with a water-cooled front engine and front-wheel drive), launched in 1974, symbolized its renaissance.

In the 1980s and 1990s, the Volkswagen Group expanded rapidly through acquisitions, with Spain’s Seat in 1988, the Czech Republic’s Škoda in 1991, England’s Bentley, and Italy’s Lamborghini in 1998. The group also acquired MAN and Scania trucks, Ducati motorbikes, and Bugatti hypercars. Its European market share rose from 12% in 1980 to 25% in 2020. In 2017, the group overtook Toyota as the world’s leading carmaker for the first time. Volkswagen was then at the height of its glory, with a somewhat arrogant slogan: “Das Auto” (The Car). But the group’s fall was to be significant.

The “Dieselgate” affair

The grain of sand in the company’s gears came from the United States. In 2015, the Federal Environmental Protection Agency revealed that the Volkswagen TDI type EA 189 diesel engine emitted up to 22 times more nitrogen oxide (NOx) than the current standard. Volkswagen then admitted that, since 2009, it had equipped its vehicles with “rigging” software capable of identifying test phases and reducing NOx emissions during them. Under normal circumstances, the software is inoperative, which makes the vehicles pollute much more than advertised, constituting fraud vis-à-vis the authorities and deception vis-à-vis customers. The EA 189 engine was sold in over 11 million of the group’s vehicles, spread across 32 models.

The scandal was resounding. As legal actions multiplied in the United States and Europe, Volkswagen’s share price fell by 40% on the Frankfurt stock exchange. The chairman of the group’s management board was forced to resign. In 2024, before all of the judgments have been handed down, it is estimated that the affair has already cost Volkswagen more than 32 billion euros.

Anxious to redeem itself at a time when the image of its diesel engines had been irreparably tarnished, Volkswagen launched a colossal plan to convert to electric vehicles, announcing a 122 billion euro investment in 2023. However, its first electric models are not competitive enough with Tesla or Chinese manufacturers, and they are struggling to convince a market that has been generally depressed since the COVID-19 pandemic.

A sluggish business model

More generally, since at least the early 2000s, the core of the Volkswagen Group’s strategy has been relatively clear – and indeed shared by most of the German industry, with the active support of former chancellors Gerhard Schröder and Angela Merkel: to sell German quality manufactured using Russian gas to Chinese customers. Two events tipped this model toward the abyss: the European embargo on Russian gas following Moscow’s invasion of Ukraine, which caused the cost of energy to soar, and, above all, China’s desire for a self-sufficient automobile sector.

In the 1970s, Volkswagen was one of the first Western manufacturers to invest in China. It has led the local market for more than 25 years. In the mid-2000s, while almost all Shanghai taxis were Volkswagens, every Chinese Communist Party dignitary had to be driven in a black Audi A6 with tinted windows. Volkswagen even specifically designed extended models of the A6 according to the party’s wishes. Western expatriates in Beijing also bought black A6s with tinted windows, knowing that no policeman would risk bothering them for fear of dealing with an influential political figure.

When Beijing growls

In recent years, however, the Chinese Communist Party’s instructions to its citizens and dignitaries have changed: they must now drive Chinese cars. This reversal is particularly problematic for the profitability of the Volkswagen Group. Audi had become its primary source of profits, most of which came from China. Those days are gone, not to mention that Chinese manufacturers such as BYD – largely supported by their government – have developed electric vehicles, against which the Volkswagen Group has had a hard time justifying its higher prices.

On this subject, it is amusing to recall that the “Made in Germany” label, which for decades ensured the worldwide success of German products, was originally a mark of infamy demanded by 19th-century British industrialists, who resented seeing mediocre German copies of their products sold at low prices. To continue selling in Great Britain, German manufacturers had to systematically label their products “Made in Germany,” which at the time aroused much the same suspicion as “Made in China” can today. But the wheel has turned, and Chinese products are rapidly earning spurs.

Constrained governance

In addition to the stagnation of Volkswagen’s strategy, the group’s governance is particularly problematic. Volkswagen’s founder, Ferdinand Porsche, had two children: a daughter, Louise, and a son, Ferdinand (nicknamed Ferry). 1928, Louise married the lawyer Anton Piëch, who ran Volkswagen’s main factory from 1941 to 1945. For his part, Ferry greatly expanded the Porsche sports car brand, founded by his father in 1931.

For decades, the Piëch and Porsche cousins engaged in a bitter competition for control of Volkswagen, which reached its climax in 2007 when Porsche attempted to take over the Volkswagen Group, which was 15 times its size. The failure of this effort, led by the Porsche family, resulted in Volkswagen’s takeover of Porsche.

The central figure in this turnaround was Ferdinand Piëch, Louise’s son, who began his career with his uncle Ferry before joining Audi and first becoming chairman of the Volkswagen Group’s management board in 1993 and then its supervisory board in 2002. Holding in-depth knowledge of the group (and of Porsche, in which he held a 13.2% stake), Ferdinand Piëch gained the support of the German state of Lower Saxony, where Volkswagen is headquartered and which has 20% of its shares. The state’s former minister-president was Gerhard Schröder, German chancellor from 1998 to 2005.

This tangle of family struggles and political influences did not make for serenity within the Volkswagen Group’s management bodies. In addition, management practices were often toxic.

A toxic management culture

Influenced by family rivalries and an arrogance that stemmed from being the world’s number one, Volkswagen’s management culture drifted in a direction that could best be described as toxic during the era of Ferdinand Piëch.

Known for his intransigence, ambition, and authoritarianism, Ferdinand Piëch frequently sacked managers he judged to be underperforming. It is even said that when a subordinate presented him with a problem he had failed to solve, Piëch’s favorite response was, “I know the name of your successor… ” He did not hesitate to follow through on this threat, which may explain why some managers took reckless risks, particularly during Dieselgate.

Since the affair, several chairmen of the Volkswagen Group’s management board have called for a new corporate culture that is more decentralized and encourages people to speak out, even as whistleblowers. However, changing a culture is one of the most challenging managerial tasks, and the urgency of Volkswagen’s situation will not make it any easier.

What does the future hold for the company? The collapse of its revenue from China, its lack of success in electric vehicles, the still emerging fallout from Dieselgate, its colossal debt, and its need to overhaul strategy, governance, and culture are nothing short of titanic obstacles.

However, as a former General Motors executive stated in the 1950s, “What’s good for GM is good for America,” we can assume that Germany will never give up on Volkswagen. Volkswagen has become a veritable German myth thanks to the company’s success – but also because of its contradictions.

Frédéric Fréry, Professeur de stratégie, CentraleSupélec, ESCP Business School

This article is republished from The Conversation under a Creative Commons license. Read the original article.