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