Saïd Business School expert Matthias Holweg shares his view on what led VW to its grave emissions scandal.

Business

By Richard Lofthouse   

As corporate scandals go, the Volkswagen emissions scandal is big. Other comparably large scandals – Enron for example – affected stakeholders, and lots of reputations, but not hundreds of thousands of innocent consumers scattered around the world.

In fact I know alumni on both sides of the Atlantic cursed with owning the wrong VW, having thought they’d done ‘the right thing’ by buying a diesel. One of them is in Boston, Mass. Another is right here in Oxford.

At least they are not alone. Former Formula One winner Damon Hill OBE recently said in an interview, ‘I have one of those illegal VW's – a Passat with the 2.0-litre diesel engine that doesn't meet emissions standards. You try to do what's right for the planet by having something nice and efficient, and it turns out it's the worst thing you could possibly have chosen.’

So here I am today at Saïd Business School to meet a renowned Oxford expert on the global automotive industry, to tell me what he believes went wrong at VW and why, and what it means the next time you have to replace your car. https://www.oxfordtoday.ox.ac.uk/interviews/what-went-wrong-volkswagen-and-why

Matthias Holweg is a Professor of Operations Management at Oxford’s business school. He’s German by birth, and he’s consulted to most of the German car makers and was previously a Sloan Industry Center Fellow at MIT’s Engineering System Division. By specializing in process improvement in complex manufacturing organisations, I figure he’ll have something to say about VW that gets us behind the headlines. Like everyone else, my main question is simply this: how could a company with such a carefully nurtured public reputation as VWs commit a blunder of such epic proportions?

Over the first of several strong coffees, we begin by considering car company culture. ‘We’ve seen the huge recalls and quality issues suffered by Toyota. This is the result of trying to be the biggest car company in the world, and allowing certain processes to fall into disrepair in the rapid pursuit of a meaningless goal…’ ‘VW’s woes came out of the pursuit of the same goal, but there’s actually no benefit from achieving this goal. It’s just bragging rights for the chief executive. It’s nothing more than ‘mine’s bigger than yours.’’ Holweg adds that car makers routinely discount heavily to achieve sales, hurting profit margins and ultimately damaging their brand. 

When pushing hard for rapid growth, car companies tend to accumulate extraordinary stresses in markets where they are weakest, says Holweg. In VW’s case that meant the US, where it has a tiny market share of less than 3%, compared with approximately a quarter of the European market when you include group brands such as Audi, Skoda and Seat. (Holweg reminds me that VW made a loss of US$1 billion in the US in 2004 and thereafter stopped reporting the numbers. Many analysts suspect it has not made a profit in the US since.)https://www.oxfordtoday.ox.ac.uk/interviews/what-went-wrong-volkswagen-and-why

There was an even deeper cultural problem. VW made no effort to bend to American preferences with cars, most notably by believing they could sell diesels in a gasoline market. ‘Even taxis in the US run on petrol…what does that tell you?’ 

This was where VW’s marketing machine had to stoke itself into a frenzy around the slogan of ‘clean diesel,’ which of course had worked in Europe since the 1990s. 

The claim of clean diesel turns out to be a very subjective matter in one sense, and a very objective, legal matter in another. In Europe, legislators came around to the German engineer’s view that a diesel engine is more efficient, and emits less CO2, the gas primarily associated with global warming. But in the US, the priority has long been ‘tailpipe’ emissions at the point of use, which is precisely where even the cleanest diesels perform badly on account of the high levels of nitrous oxides and particles they produce. https://www.oxfordtoday.ox.ac.uk/interviews/what-went-wrong-volkswagen-and-why

This all turned out to be crucial. Back in 2005, VW had failed in a bid to buy a particular exhaust cleaning technology from Mercedes-Benz, called Adblue. From then on they had had to rely on a less comprehensive solution called a lean NOX trap – a catalytic converter rather than the active cancellation of nitrous oxides through the spraying of a urea solution. The technology was adequate in the face of less stringent emissions levels required by law in Europe, but inadequate in the face of limits demanded by states like California, which has some of the toughest emissions legislation on earth. Profit margins also came into the equation, because a completely separate US-only emissions solution would impact badly on the profitability of medium sized, Golf-type vehicles (the US has always preferred the Jetta, a saloon version of the Golf). 

Load this up with an immensely hierarchical organizational culture (‘it’s a civil service-style bureaucracy,’ says Holweg), lace it with what he considers to be incestuous corporate governance, where VW only recruits from within itself, and suddenly it does not seem far-fetched to imagine the company developing a secretive algorithm to twist outcomes on diesel-powered cars. Especially, this does not seem so crazy when you remember that the Environmental Protection Agency had long known about the broader discrepancy between theory and practice on the subject of emissions. As another expert put it recently at a seminar held in Oxford on this scandal, ‘the regulators were not deceived. They just called the deception.’*

So what does it all mean, I ask? 

Holweg runs through a checklist faster than I can gulp my next coffee. First, he says that VW will survive – (‘It’s not existential as it was for BP in the Gulf of Mexico,’ he adds.) Even with a US fine in the region of $18 billion, they can survive. He thinks they might have to withdraw from the US market with the VW brand, but that is a comparably small detail unless you’re a US VW dealer. Secondly, he says that he understands why VW is handling the crisis with a slightly aloof, ‘hold your head high’ manner. ‘I understand it – but it may not be the best approach longer term…even Toyota – and this is really saying something – has more fresh blood coming into its top management than VW.’ https://www.oxfordtoday.ox.ac.uk/interviews/what-went-wrong-volkswagen-and-why

Thirdly, Holweg says that the crisis has finally galvanized all the German car makers towards hybrid and fully electric alternatives to diesel engines. Until now, this has been a Japanese strength.  

Does that mean we should all buy a hybrid?

‘It’s an interim solution rather than a defining solution,’ says Holweg. The energy intensive process of digging up lithium in Chile and China and making batteries out of it, means that at the end of the day, the resulting cars are no better than their petrol and diesel counterparts. Hybrids and EVs do have a decisive advantage in heavy traffic and cities, however, where their emissions are low and efficiency optimised. 

He adds, by an extension, that whereas we’ve had one defining technology for over a century now – the internal combustion engine – going forwards there will be many competing technologies, from serial hybrids like the Toyota Prius, to plug-in hybrids and fuel cell cars, a tiny handful of which already exist but rely on energy- and carbon- intensive hydrogen production. 

https://www.oxfordtoday.ox.ac.uk/interviews/what-went-wrong-volkswagen-and-whyAs you can see from this last comment, all discussions about transport lead back to the ultimate source of energy, as in fact do most issues facing global society in the twenty first century, from how to cook your evening meal to whether you can justify flying when you go on holiday.

In a wonderful moment over a third coffee, (by which time we’ve talked about how if you gave everyone half a single square metre the world’s entire population of 7.2 billion souls could fit onto the island of Majorca), Holweg suddenly says, as we return to the subject of cars and fuels, that “the energy intensity of our life styles is not sustainable.”

The big unknown is whether there could be another technological fix for this – such as massive sustainable energy infrastructure. I refer him to the next print issue of Oxford Today in which we also consider the question of nuclear fusion! 

Matthias Holweg’s latest book, co-authored with Nick Oliver, is Crisis, Resilience and Survival Lessons from the Global Auto Industry (Cambridge University Press, 2016). A seminar on the VW Emissions Crisis was held at the School of Geography on 11th March.

Images: Oxford University Images, Richard Lofthouse, Shutterstock

Comments

By john Hirst
on

Volkswagen - ‘it’s a civil service-style bureaucracy,’ says Holweg
Errm, no it wasn't.
It was a fully fledged, profit making, international scam. Absolutely nothing like the civil service who are honorable people doing a great job at lousy wages.

By Paul Walker
on

The VW emissions case will be a management case study for years to come. May I elaborate on some governance issues.

First, companies will often have what I describe as loyal criminals: staff who are so loyal to the company and its success that they will act criminally to help it succeed, for no personal gain. The criminality will be justified as the greater good and the sense that it isn’t really criminal, not like like stealing a colleague’s wallet. Long-serving employees are particularly at risk of getting into that mindset.

Secondly, much of corporate business life operates in grey areas, where there are complex compliance rules with detailed exceptions. Employees in technical departments are especially at risk of bending the abstruse rules they have to comply with. Thus you might hear the phrase that something is ‘technically wrong’, as if that was different from being just plain wrong. For example, whilst you might know that emissions-test defeat devices were outlawed in the US, you could persuade yourself that software that changed the way the car was driven was actually no different from just having a very good driver driving the car on the test day. Easy, really.

In addition, regulators have their responsibility. The EU regulators clearly knew that their testing procedures were unrepresentative of real driving and yet they continued with them, presumably out of a wish to help EU car manufacturers. It says something when even the manufacturers’ marketing departments accepted that their adverts should have a disclaimer that the EU test regime results may not be representative. Where the regulators connive or are just asleep, the technical teams can easily bend the rules further and yet still persuade themselves that they are compliant. We saw this 30 years ago where the DTI remained inactive while the City bent takeover share-dealing rules until they snapped.

Ultimate responsibility rests with senior management. They must set the tone. You only need to look at the damage this episode has done to VW’s reputation to see it is in shareholders’ interests to behave ethically. How long will it be before VW can use the word ‘trust’ in its adverts again? How much collateral damage will this episode do to any claims they might make about safety or performance or value for money? A reputation built up over decades can be lost in a day.

By Paul M Elliott
on

VW cars are beautifully engineered around the driver, something you notice immediately on a test drive. We bought a 2015 VW Golf petrol-driven car a few months ago, and my youngest son drives our 2001 Golf TDI - it would be a tragedy for us here in the US if VW had to withdraw and I hope they can fix their culture, and would have as a goal to compete more effectively in this market.

By Richard Stickland
on

A very interesting and thought-provoking article, which eplains the possible reason why VW behaved in the way it did. But it does not cover which part of VW thought up the deceit, and more importantly how VW managed to obtain and fit the illegal software/hardware without the top management apparently knowing. Or did the top management have an inkling of what was happening but preferred not to ask too many questions?

By Peter Hulse
on

When this story broke, my assumption was that it was over-enthusiasm by the calibration team. It was easy to see how it happened: senior manager tells junior manger that we have to get emissions down, junior manager tells calibration team leader that emissions are too high, but performance and fuel economy must not be jeopardised, team leader goes back to his cubicle and cries on his best friend's shoulder. Best friend says: I know how we can make this work - we have two calibrations, and a switch between them.

They'd need buy-in from the rest of the team, perhaps six or eight people. And then they just do it. I realised later that they'd someone in the software team to develop the switch, but that would be the easy bit. So not many people would be in the know.

I realised later that , at VW, it was going across vehicle lines, and over engine generations, so it was clearly more widely spread than I had first thought. But it wouldn't take much for this to come about - and that's something other industries should acknowledge.

By BEN AINSWORTH EXP
on

The EPA has had several high profile failures in recent years, the most recent two being the dumping of (sic) toxic mine wastes that achieved by negligent operations used in an attempt to remove same. The Gold King Mine, was opened without proper care and it dumped an estimated 3 million gallons of toxic water into the Animas River which flooded down into the Colorado River and the Grand Canyon National Park. Flint Ohio has had contaminated domestic water supply for several years particularly in the poorer sectors of the city populated largely by Afro Americans. EPA knew about and did not take remedial action. The EPA knew about the problems of comparing laboratory tests with highway tests well before VW admitted to cheating on the tests. VW was a convenient distraction for the EPA in a worse crisis than the small emissions difference caused by VW manipulating its data. The nitrogen fixed in the exhaust gases is a WEAK fertilizer for road side vegetation and an EPA storm in a teacup the bureacracy has invented to divert criticism.

By Ben Ainsworth
on

The EPA may be using VW as a very valuable source of revenue to make up for some major costs it may occur with failures such as the Gold King Mine discharge of "toxic" mine waters, and the Flint, Ohio water contamination with lead that EPA took no action on for many years. VW is probably the only large source of funding available out of these three areas of dereliction of duties by the EPA who knew about the problem of laboratory testing versus road testing and the discrepancy in results for years according to information published in the last few weeks. Since the EPA is funded from legal actions taken against so-called polluters and not the Super Fund, the timing of these disasters and the red flag thrown for VW looks like an obvious coincidence too much. The pollution due to VW is not much more than a weak fertilizing agent and should not be considered major crime against mankind but rather a response to a very difficult unnecessary Presidential anti-industry dictum.

By Dominic Driver
on

Thanks, John Hirst for the civil service comment (I am one). The point about electric and hybrid cars having lower emissions in cities is a key one if you think beyond the emissions to the impact quieter, less polluted city streets could have on building design and non-car transport design. Could be a part of making cities lower emissions overall.

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