Volkswagen: When a German Company Plays With Fire

When Americans think of German products and German business, “exciting” isn’t the first word that comes to their mind. But neither does “fraud,” certainly not “systemic fraud.”

Outside observers would have said that a business practice of relying on fraud is positively anti-German – until now, that is.

“Solid” — even “rock solid” — is what they generally view as a synonym for Germany.

In one fell swoop, (now former) CEO Martin Winterkorn and the VW Group have tarnished the operating slogan of much of German industry — “German Engineering.”

In order to recognize the true extent of the irritation – and outright shame brought down on all of Germany — in the United States, one just has to ask this question: What was the last case when U.S. authorities felt compelled to go after a more or less European-run business?

That case was none other than that of Sepp Blatter and FIFA, which by now is revealing itself ever more as a criminal organization rather than a football management body.

One has to wonder about the management practices of Volkswagen’s top echelon for a host of reasons. This is especially true with regard to what happened (or rather did not happen) after U.S. authorities formally raised doubts.

Playing dumb is not the solution

Any legal department worth its salt must know what needs to happen then: If one has been caught, moreover at such a catastrophic fraud as Volkswagen (VW), the key step is to start cooperating with U.S. authorities.

Of course, the natural inclination at that moment is to stall, to play dumb and play for time. But the underlying hope – that the challenge may go away overnight – is not only naïve but also child-like. It is as if one could go to bed one night and wake up the next morning, with the monster gone.

To be sure, cooperating with authorities is a cultural challenge for non-Americans. In their legal systems, they are not used to being able to cut deals, say, with prosecutors if they volunteer information.

Another preferred avenue to reduce penalties against oneself – helping prosecutors to finger others who may have perpetrated the same illegal acts – is also culturally bewildering.

But even though these legal tactics may have been unfamiliar to European executives a couple of decades ago, the same is no longer true.

In the aftermath of the financial irregularities that triggered the global financial crisis, U.S. authorities have often more heavily punished European banks for the same faulty business practices than their US competitors.

This outcome was not due to any improperly applied sense of patriotism, shielding the domestic corporations from the reach of U.S. law.

Rather, lower penalties were due to the fact that the U.S. corporations know that one better be proactive in confessing, rather than stall.

It is inconceivable that VW did not know this. Its lawyers must have advised the executives executives that they should not stall, or play naïve, once U.S. authorities had formulated their initial suspicion.

Importance of American markets

That any of this happened in the first place is all the more incomprehensible and unpardonable, as the VW Group’s top management had repeatedly pointed out how crucial the battle to increase its success in the American market was – and is — for the future of the Group.

No carmaker can be strong globally if its presence in the U.S. market – other than with the niche label Porsche and the medium luxury brand Audi – is weak. The United States is all the more critical for VW as the company’s once rather phenomenal success in the Chinese market has ebbed off.

The realization that VW’s entire U.S. strategy, which also brought a massive advertising effort with it, was built on feet of clay still begs disbelief.

The VW episode also isn’t the only case in recent times that will get a very prominent German firm into major legal tangles in the United States, including the assessment of massive damages.

Another case this year is Lufthansa, via its budget airline subsidiary Germanwings. That company showed an incomprehensible pattern of neglect in letting a pilot fly who should have never gotten a pilot’s license, certainly not for any commercial passenger transport.

A long legal battle ahead

But it will be VW in particular that will now get to feel the full load of U.S. legal wrath. And as harsh as that will be, the company really is in no position to protest that because it brought all these things upon itself.

The massive loss in stock market valuation is only the beginning of what’s now going to unfold. There will be class action lawsuits and massive financial claims by U.S. investment funds.

They will claim that VW’s top management either engaged in, or condoned, or did not stop fraudulent practices that caused U.S.-based investors to lose money on their VW holdings.

Jail time for the managers who were in charge of this practice, certainly the ones who oversaw U.S. operations is likely.

Beyond U.S. environs, the culturally interesting question is this: On the face of it, VW’s former CEO Martin Winterkorn has a good chance to end up in a German jail — for securities fraud.

Why? Because the valuation of the firm depended on its products and the representations the company made with regard to them. And those representations were certainly not what they were supposed to be.

The Swiss involvement

The fascinating development on this front is that the Swiss are now effectively throwing down the gauntlet to the Germans.

While it was Loretta Lynch, the U.S. Attorney General, who initially pointed her mighty finger at Sepp Blatter and FIFA, Swiss authorities who for a long time were not known to “defile” one of their own, have just announced that they have filed criminal charges against Blatter.

That is an unmistakable message in the direction of German prosecutors. The road to true redemption requires a real clean-up on the home front, if for no other reason than to improve the “sanitary” environment in which business is conducted.

Against that challenge, the market reality that German carmakers have now become even cheaper for Silicon Valley firms to buy – should they decide to need large manufacturing plants to really get into the car business – almost pales by comparison.

Psychologists would call probably this an act of willful self-mutilation.