Volkswagen's U.S emission standards scandal will test the company's previously successful co-determination model at a time when it is struggling to manage a well-publicised power struggle. The scandal also raises significant questions about the practices of other car makers. As investigations continue our expectation is that the demand for tighter regulations will intensify. In a year when the world hopes to make serious progress on climate change, Volkswagen will become the poster child for a call for further action. If car makers are smart, they will invest their serious know-how on producing smarter, more efficient cars, and give away lobbying in the backrooms and playing games to defeat testing.
VW's internal machinations, which resulted in long serving, domineering chairman, Ferdinand Piëch being ousted in April 2015, will determine whether the company is able to proactively manage the fall-out from its manipulation of emissions readings which will include a US Justice Department criminal investigation. The company have appointed a new CEO -- Matthias Mueller -- but we must still see how he approaches the cultural issues that have led to the scandal.
Whilst the circumstances behind the internal approval of the emissions software are still unclear, VW's internal management issues have no doubt created an environment where management felt it was preferable to cheat rather than face the prospect of falling sales.
Under VW's co-determinist ownership structure, the Porsche and Piëch families control 50.7% of votes whilst the state of Lower Saxony controls 20% and trade unions have half of the company's supervisory seats. This complicated structure - that has resulted in VW becoming the largest car maker together with Toyota - only works when parties work collaboratively. The determination of Ferdinand Piëch to push for increased profits appears to have been at the heart of the internal split. The result is that the consensus model that has operated so successfully is currently broken. The question is whether VW can fix it?
VW acknowledges that it faces a challenging operating environment with the growth of electric vehicles, higher vehicle emission standards and questions whether we have reached "peak car" - the point at which car usage decreases globally. There is universal agreement that change is needed including by the dominant trade union, IG Metall, which has proposed cost cutting measures.
In the past, Germany's co-determinist economic model provided a mechanism to reach consensus on the future direction of the business. There is no reason to suggest that VW should abandon this approach. If anything, the failure to work collaboratively is at the heart of the current problems facing the company.
Management of collaboration is important at all levels of the company due the nature of disruptive innovation in the industry whereby auto manufacturers no longer control the interplay of ideas. Auto makers and their suppliers that can become experts at managing the collaboration process will stand a better chance of keeping up with the speed of innovation in this evolving ecosystem. Software and electronics are becoming a larger portion of the value of a car, as processing power becomes more important than horsepower. The traditional OEM model is under threat from new players like Tesla and Google who believe that cars should be more environmentally sustainable, safer and software-driven machinery. The game-changing nature of innovation trends in the auto sector poses a huge threat to companies that do not keep pace. The human capital challenge is to ensure that employees have the skills to collaborate and cooperate, particularly given the cultural differences that are crystallised through partnerships with organisations outside the auto industry, especially technology companies.
For investors, continuing simmering tensions with Ferdinand Piëch represent a risk. If VW is unable to demonstrate that it is able to work together with all stakeholders, then investors will be faced with unnecessary risk. Management collaboration will be the most significant factor that will determine the company's capacity to deal with the current emissions crisis, and more broadly the series of challenges facing the auto-industry globally.
VW has been part of a group of German car-makers that have lobbied within the EU against new vehicle emissions standards. According to German newspaper Spiegel, German Chancellor Angela Merkel personally intervened to block stricter emission standards, which would have impacted Germany's car makers that have long focused on high performance, powerful engines.
The EU lobbying raises questions as to whether other German car manufacturers have also sought to manipulate emission standards.
A recent report by the International Council on Clean Transportation and Germany's Institut für Energie- und Umweltforschung Heidelberg (IFEU), reveals the increasing real-world efficiency gap between official and real world fuel-economy figures has reached more than 30 percent, According to ICCT, 10 years ago the discrepancy between real-world performance and sales-brochure values was at 10 per cent. For cars that were introduced after 2009, the gap, on average, increases by 60 per cent with every model change. The Global Fuel Economy Initiative is concerned that this is a strong indication that changes in consumer behavior cannot explain the growing gap. Instead, it is likely that manufacturers are optimizing their vehicles more and more for the official test cycle instead of the real driving needs of the customers.
We believe that this indicates that there is a systemic issue across the industry. We consider that now that the VW scandal has highlighted what ICCT has been saying in their reports for some time, there will be a regulatory and political response. Smart car makers will finally acknowledge that the transition to a green economy is un-stoppable and invest, not only in electric vehicles, but in energy efficiency for their broader fleets. If they don't they are going to get caught out by a rising tide of regulation in an environment where the industry will no longer be able to lobby in the back room.