Mark Ritson: VW is fighting for its corporate survival, not its reputation

Why are marketers worried about VW’s brand and the impact of its diesel engine crisis on corporate reputation? That is the least of the beleaguered German company’s worries right now.

Brad Pitt
What is the problem?

Just because Brad Pitt is a dreamboat does not negate his status as a great actor. My favourite ever scene is the two-minute discussion from Moneyball when Pitt, playing baseball coach Billy Beane, interrogates his coaching staff on their strategy for the season ahead. Again and again the staff suggest potential recruits and Pitt berates them with the same repeated line, “What’s the problem?” “What’s the problem we have to solve?”.

Pitt’s point is that his coaches are merely proposing replacements for the players lost to higher paying competitor clubs, rather than confronting the larger, confounding challenge of beating bigger, better funded rivals.

It’s a great scene to re-watch if you are a marketer talking balls about VW and the damage that has been done to its brand since the diesel engine crisis began two weeks ago. I must have read a hundred different articles, columns and blogs wanking on about the damage to VW’s reputation, brand equity and trust. It takes a lifetime to build trust but only one bad decision to blah blah blah.

I have yet to meet a single marketer that get’s the real issue at the heart of the VW case, or to misquote the inestimable Mr Pitt, anyone who understands what the real problem is.

Money.

Not brand.

First you have the recall costs of eleven million cars needing either a software upgrade that will allow them to perform as advertised with low emissions (and incredibly crappy fuel consumption and driving performance) or a more likely fix involving a urea-based engine upgrade. That will cost about £4,000 per car. So that’s £44bn accounted for. Gulp.

Now let’s move to legal liabilities. The VW company knowingly committed fraud when it sold those 11 million “clean diesel” cars when they were no such thing. The value and resale of those cars has now been significantly diminished and customers will expect compensation. Over a hundred class action law suits have already been filed and many are aiming at the £3,000 premium that customers paid for the clean diesel technology in their new car. The liabilities also stretch to VW dealerships that are looking at a bleak future and compensation from VW as their route to survival. Let’s assume a global liability of £25bn.

Next up are the pollution liabilities that VW face. Houston, Texas was the first city to sue VW for $100m (£66m) citing the pollution in and around its metro area. Other cities will follow suit and so they should. VW cars have been pumping out up to forty times more Nitrogen Oxide (NOx) than they were supposed to. That equates to around 200,000 tonnes of the stuff each year or the equivalent of 20 coal-fired power stations driving up and down the motorway. NOx is nasty stuff and, if we use the data from the Environmental Protection Agency (EPA) , could potentially leave VW open to claims it contributed to between 74 and 404 premature deaths each year. Let’s agree on 200 and multiply it by five for each of the years these fraudulent, over-polluting cars operated. BP paid out around £5m per fatality caused by the Gulf of Mexico disaster, based on 1000 fatalities VW could be looking at a bill for £5bn.

Next we have all the fines that VW are liable for. The US environmental protection agency has already announced that VW could be penalised by up to $18bn (£12bn) for fraudulently cheating their emission tests. The European Union and major Asian countries are likely to follow suit and that’s just the fines for emissions testing, don’t forget the potential penalties for false advertising and fraudulent corporate practice. Expect global fines totalling £25bn.

I make that £100bn. The VW group is currently worth £50 billion. They don’t have time to worry about brand or reputation, that is small potatoes. This is about corporate survival or, as their new Chairman Hans Dieter Poetsch describes it, avoiding “an existence–threatening crisis for the company”.

Of course my numbers are very, very loose. But you get the idea. And I’m not even going to mention the enormous organisational costs involved in handling all this legislative activity for the next five years or the opportunity costs that VW will experience as money that should have been channeled into new product development is diverted to cover the costs of the various international court cases.

Yes, VW’s brand and reputation are important. Yes, they have been severely damaged by the diesel scandal. But that is not the problem. The problem is staying alive long enough to be able to worry about reputation five years from now.

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Comments
  • Pirmin Seßler 8 Oct 2015 at 10:05 am

    Mark, I generally agree with your reasoning. Nonetheless, in order for Volkswagen to still exist in 5 years time they have to keep selling cars. For people to turn up at the dealerships again, Volkswagen has to regain lost trust. Primarily this is an engineer’s job, to find solutions to amend existing cars and make sure future generations of cars live up to the highest of environmental standards. However, marketing needs to accompany these efforts through communication and help the brand to stay afloat in the difficult years ahead.

  • Mihir Nayak 11 Oct 2015 at 12:34 pm

    Mark,

    I have to say that I agree with Pirmin here.

    Yes, the money you mention (give or take a few million here or there) is huge. Twice the amount that VW is worth.

    But VW will be given time to pay off its fines. Time that it might not have, if the damage to its brand is that extensive that fewer people enter its showrooms and buy its cars.

    Like with other brands in the past, we have seen that once the tipping point is reached, people leave the brand like a sinking ship. Think of carmakers like Daewoo, social media like Orkut or MySpace.

    In order for Volkswagen to still exist in 5 years time they have to keep selling cars. And in order to do that, what they will need is Brand, not (just) Money!

  • Richard 11 Oct 2015 at 3:56 pm

    I find myself in the unusual position of disagreeing with you, Mark. At present analysts appear to be valuing the damage at about 30bn or less, with a notable increase in investor confidence over the last week. The business manufactures cars all over the world, so plenty of governments have a direct interest in seeing it survive this. The history of the automotive industry is peppered with classics from Volkswagen, and it is a well-loved and well regarded brand, current circumstances notwithstanding. Of perhaps most significance though, is that, sadly, people are likely to be surprisingly ambivalent about harming something as nebulous and communally owned as ‘the air’, and are likely to consider this a fairly victimless crime. After all, look at how many people are willing to drive 3 tons of Range Rover around, without a second thought for the gratuitous harm that this does to the environment. VW is a fundamentally well-run and cash generative company, and a lot of rich, powerful people have a direct interest in seeing this continue. This will be quickly forgotten.

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