Understanding the VW scandal

The Volkswagen emissions scandal has sent shock waves around the world. Why would one of the largest car companies in the world, so successful on many measures, resort to cheating in emissions tests?

VW is certainly not the first, and will not be the last, car company to go off the rails in its efforts to survive in this fiercely competitive industry.

The auto industry has existed for around 120 years and different companies have enjoyed success at particular times. In recent years General Motors, Toyota and VW have vied to be the largest car maker in the world, yet all have experienced major crises. Why?

Recurrent crises in the industry stem from a ‘perfect storm’ of conditions that include long term overcapacity (resulting in lean margins); susceptibility to economic cycles; the need to realise economies of scale; and increasingly diverse and sophisticated markets.

The necessity of economy of scale is toxic when combined with complex and diverse markets. For car companies, too varied a range of models and too much decentralisation to different divisions means duplication and excessive cost; too little and HQ becomes increasingly disconnected from the operations they are controlling, as shown by Toyota’s recall disaster in the US 2010, when its centralised structure proved unable to respond quickly and appropriately to the unfolding crisis.

Such forces fuelled VW’s emissions’ scandal. As with Toyota before it, VW’s corporate objective of becoming the largest car maker in the world would have created huge pressures within the company. In VW’s case meeting this goal demanded a dramatic increase in its sales in North America. VW’s strategy to achieve this was clean diesel, but this had to be executed within a tight performance envelope of engine power, emissions standards, and fuel economy. Something had to give, and in VWs case what gave was any pretence of integrity between emission tests and on-the-road performance.

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