Key Takeaway:
Volkswagen, once a symbol of German industry and co-management between shareholders and unions, is facing a crisis due to strategic missteps, a convoluted governance structure, and a culture that often prioritizes control over innovation. The company’s journey began in 1937 with the Beetle, which became the world’s largest carmaker in the 1980s and 1990s. However, the Beetle’s technological limitations led to the launch of the Golf in 1974. The dieselgate scandal in 2015 led to legal challenges, a plummeting stock price, and the CEO’s resignation. Volkswagen’s business model, rooted in the post-Cold War era, was disrupted by geopolitical shifts and the rise of Chinese automakers. The company must reinvent its strategy, transform its internal culture, and streamline operations to reclaim its legacy.
The autumn of 2024 brought a storm of unsettling revelations for Volkswagen, a name once synonymous with engineering precision and industrial dominance. Reports surfaced that the automaker was considering shuttering three factories in Germany, threatening tens of thousands of jobs. Shortly after, the company disclosed a staggering 63.7% drop in third-quarter net profit. Laden with over €200 billion in debt, Volkswagen now held the unenviable title of the most indebted publicly listed company in the world. With soaring costs for energy, personnel, and research coupled with declining sales, the giant appeared to teeter on the edge of an abyss.
How could this emblem of German industry, a beacon of co-management between shareholders and unions, and Europe’s largest car manufacturer, find itself in such dire straits? The answers lie in decades of strategic missteps, a convoluted governance structure, and a culture that often prized control over innovation.
The Birth of a German Icon
Volkswagen’s journey began in 1937, shaped by a vision of creating an affordable car for the masses—das Volks-Wagen. Austrian engineer Ferdinand Porsche answered the call, crafting the iconic Beetle. This practical, reliable vehicle captured the imagination of millions and earned a place in automotive history by outselling the Ford Model T.
Yet, by the late 1960s, the Beetle’s charm couldn’t mask its technological limitations. Salvation came through acquisitions, with Auto Union and NSU bringing valuable expertise in front-wheel drive to Volkswagen. The result was the launch of the Golf in 1974, a vehicle that redefined the company’s fortunes and heralded a new era of innovation.
The 1980s and 1990s saw Volkswagen transform into a global powerhouse. The acquisition of brands like Seat, Škoda, Bentley, Lamborghini, and Bugatti expanded its empire. By 2017, Volkswagen dethroned Toyota to become the world’s largest carmaker, proudly touting its audacious slogan: Das Auto. But success bred complacency, and cracks soon began to show.
Dieselgate: The Scandal That Shook the Industry
Volkswagen’s unraveling began in 2015, when the U.S. Environmental Protection Agency revealed that the company had installed emissions-cheating software in millions of its diesel vehicles. This software detected testing conditions and reduced nitrogen oxide emissions accordingly, while allowing normal driving to emit up to 22 times the legal limit.
The fallout was seismic. Legal challenges mounted across the globe, Volkswagen’s stock price plummeted, and its CEO was forced to resign. The scandal, now known as dieselgate, has cost the company over €32 billion and counting. Determined to reclaim its reputation, Volkswagen announced a €122 billion shift toward electric vehicles in 2023. But its early electric offerings struggled to compete with Tesla’s technological edge and Chinese automakers’ affordability, leaving the company vulnerable in a rapidly changing market.
A Broken Business Model
Volkswagen’s woes were compounded by a flawed business strategy rooted in the post-Cold War era: leveraging German engineering excellence, powered by cheap Russian gas, to serve the lucrative Chinese market. This model unraveled when geopolitical shifts disrupted its foundation.
The European embargo on Russian gas following the invasion of Ukraine sent energy costs soaring. Meanwhile, China’s push for self-reliance in its automotive industry undermined Volkswagen’s dominance. Once a symbol of prestige among Communist Party officials, Audi—a cornerstone of Volkswagen’s profits—lost its privileged status.
Adding to its woes, Chinese automakers like BYD, buoyed by government support, began outpacing Volkswagen with competitive electric vehicles. The irony is palpable; once, Made in Germany was a label born of British derision for low-quality goods, much like the early reputation of Made in China. Now, it is Chinese manufacturers who are redefining global standards, challenging German dominance.
A Tangled Web of Governance
Volkswagen’s structural woes trace back to its founding family’s legacy. Ferdinand Porsche’s children, Louise and Ferry, laid the groundwork for decades of rivalry between the Piëch and Porsche families. This feud reached its zenith in 2007, when Porsche attempted a hostile takeover of Volkswagen. The effort backfired spectacularly, with Volkswagen ultimately acquiring Porsche instead.
At the heart of this drama was Ferdinand Piëch, Louise’s ambitious son, whose authoritarian leadership style cast a long shadow over the company. As chairman of Volkswagen’s supervisory board, Piëch wielded immense power, bolstered by Lower Saxony’s 20% stake in the company. Yet this power struggle fostered dysfunction, making long-term strategic coherence nearly impossible.
A Toxic Management Culture
Piëch’s tenure was marked by a culture of fear and control. Known for his ruthless decision-making, he frequently dismissed managers he deemed inadequate. His infamous retort to unresolved challenges—“I know the name of your successor”—created an environment where risk-taking often bordered on recklessness. This culture contributed to the dieselgate scandal, as managers felt pressured to deliver results at any cost.
In the wake of the scandal, Volkswagen’s leadership has sought to foster a more open and decentralized corporate culture. Yet, cultural change is notoriously slow, and the company’s financial and strategic crises leave little room for patience.
The Road Ahead
Volkswagen faces a daunting array of challenges: declining revenue from China, an uncompetitive electric vehicle lineup, unresolved liabilities from dieselgate, and a governance structure riddled with inefficiencies. The company must not only reinvent its strategy but also transform its internal culture and streamline its operations—a herculean task by any measure.
Despite these hurdles, Volkswagen’s fate is deeply intertwined with Germany’s national identity. Just as General Motors once symbolized American prosperity, Volkswagen embodies German industry’s resilience and ingenuity. For all its flaws and contradictions, Volkswagen remains a symbol of German ambition—a mythic entity striving to reclaim its legacy.
