THE BLOG
12/26/2015 03:58 pm ET | Updated Dec 26, 2016

Volkswagen Realizing the High Cost of Deception

Just three months after regulators discovered that Volkswagen employed a "defeat device" to fool emissions testing equipment, the German automaker reported a 2.2% drop in year-on-year sales in November. The latest figures confirm the slide in VW sales since it admitted to falsifying emissions tests in some models - covering roughly 11 million automobiles worldwide. While it is hard to accurately determine the long-term damage, Credit Suisse (in its report to investors) estimates the scandal could cost VW up to $86 billion.

The right first step that came a little too late

Volkswagen executives took the first step of proper crisis management protocols by admitting fault and apologizing. However, the effectiveness of this step was seriously compromised because the company did not disclose the deception. It was uncovered by the Environmental Protection Agency when it found pollutants up to 40 times allowable limits coming from VW diesel models.

The high cost of choosing deception over engineering

Because German auto manufacturers liberally use the "German engineering" moniker in their marketing, it is ironic that VW invested so much time, effort, and money to create software to defeat emissions tests. Wouldn't it have been a win-win to invest that money into engineering the "Clean Diesel" vehicles it represented its cars to be? They continue to pay a heavy price for this deception, which can only be categorized as a lose-lose strategy.

Possible spillover to other brands

While VW uses a "brand separation strategy" whereby Audi and Porche are separate divisions with separate images, this scandal is so serious that many believe it could spill over to these other VW-owned brands. In fact, one of the offending vehicles is an Audi A-3. Even worse, some are concerned that it will damage the "made in Germany" brand that is coveted by those that admire German engineering.

Toyota moves back into the number one spot

In addition to the tangible costs of deceiving the public, VW's archrival, Toyota, has moved back into first place in global auto sales for the 5th consecutive month with 9.21 million vehicles sold in the 11-month period from January through November. Ironically, Toyota had its own problems in 2010 with reports of self-acceleration and other issues with some of their models. Even though subsequent investigations by the Department of Transportation concluded that most problems were related to driver error, the Company's mishandling of the crisis cost it untold billions of dollars.

What VW is doing to right the wrongs

Volkswagen put itself in a deep hole. To get out of it, it needs to follow proper crisis management protocols - namely the "fact procedure," which includes the following three steps:

  1. Admit the problem and apologize
  2. Limit the scope (put the scandal in perspective)
  3. Propose a believable solution so this is extremely unlikely to ever happen again.

As for step one, the company has admitted, apologized and replaced the CEO. With 11 million vehicles involved in the deception, it will be difficult to implement step two - especially since the number of offending vehicles are greater than 9.1 million cars it sold through November 2015. As for step three (the believable solution), the company has engineered a fix to meet European pollution standards that will be retrofitted on vehicles starting in January of 2016. As reported in the New York Times, this fix will not work on all affected engine types, and will not meet American pollution standards. For that, buyers will have to wait for at least another year. Furthermore, that fix won't be easy. It is expected to take up to 10 hours per vehicle to retrofit. For the future, VW executives have promised to change their engineering and management procedures so this problem won't reoccur.

The lesson for all businesses

The takeaway for all businesses is to implement product fixes as soon as problems are discovered. Experienced business executives know that the longer you wait to fix problems, the more expensive they will be. The most expensive problems are those that customers or interested third parties discover. If companies try to sweep them "under the rug," or even worse - invest resources to deliberately deceive the public, there is likely to be a big explosion as the pressure builds under that rug. This is what has happened to VW. Shock waves from this "explosion" have caused costs to multiply, sales to fall, and reputations to be damaged in the eyes of the public. The damage is not limited to the Volkswagen brand. It carries over to Audi, Porche, and German engineering in general. Hopefully, the result will be safer, less-polluting vehicles and a change at VW and other auto makers so this is unlikely to happen again.