24 Sep 2015

When sorry is not enough

Richard Merrin – Managing Director at Spreckley

Volkswagen CEO Martin Winterkorn has bowed to pressure and resigned less then two days after the diesel emissions scandal broke. He is unlikely to be the only one. As the company’s Executive Committee said yesterday it is “expecting further personnel consequences in the next day.”

The resignation itself marks a U-turn for the chief executive who only this week issued a video statement saying he would do “everything necessary to win back trust, step by step.”

Is the fat lady singing yet?

She could be as this is one of the biggest corporate scandals ever. Starting in the US where regulators claimed Volkswagen cheated on environmental standards by programming engine management software in some diesel cars to turn on emission controls only when being tested. U.S. regulators said the German company had programmed some 500,000 vehicles to emit lower levels of harmful emissions in official tests than on the roads. Internal investigations then found significant discrepancies in 11 million vehicles worldwide.

Volkswagen was ordered to recall the vehicles, and the company is halting sales of some cars in the U.S. The models affected include the VW Jetta, Beetle and Golf from 2009 through 2015, the Passat from 2014-2015 as well as the Audi A3, model years 2009-2015.

Here in plain black and white is the true financial cost of the PR disaster:

  • Volkswagen could in theory face fines of up to $18 billion in the U.S. alone
  • The company has already set aside 6.5 billion euros ($7.3 billion) to cover the cost of recalls and other efforts to limit the damage, its profit forecast for the year is now as dead as a dodo
  • Shares plunged 17% on the second day, after suffering a similar crash Monday. About a third of the value of the group has been wiped out in two days
  • Add into that mix the fact that the auto industry accounts for about 20% of German exports, and employs 775,000 people directly in Germany and you can see the fall out is not just one of confidence in a company, but an entire industry

This is more than just a classic to be taught on PR courses in ten years time. This is something the PR industry has yet to come to terms with to my mind. It has the potential to completely destroy one business employing thousands here in Europe and the U.S. on top of which it could engulf the entire European car manufacturing business and if reports are to be believed, it could even lead to a possible political scandal.

The resignation of one man, or even the entire board of the company, is simply not going to cut it. Germany is fighting to protect this iconic brand, but when consumers, regulators and governments alike have been allegedly lied to systematically over years there is no PR escape route.

For business the message is clear: don’t lie, don’t cover up and don’t think short-termist. VW probably thought it could save a bit here and a bit there. Looking at what is was reportedly doing in the past year in the U.S. also indicates they knew there was an issue and that something was being done, more as a possible cover up, than addressing the core issue.

Sorry cannot cut it and now VW joins the list of corporate giants being forced to apologise as the former management team topples like ninepins.