In September, the Environmental Protection Agency discovered that certain models of Volkswagen cars contained "defeat device" software able to detect when the vehicle is being tested for emissions. The device engages environmentally friendly settings during the test, improving emissions results. But on the road, the device can turn off these settings to improve drive performance. When West Virginia University researchers road-tested VW models equipped with the 2-liter turbocharged 4-cylinder diesel engine, some cars emitted almost 40 times the legal levels of nitrogen oxides, The New York Times reported last month.
The deception has massive environmental and health implications. Increased levels of nitrogen oxides emissions can be deadly, as shown by a study conducted by MIT which found that the excess pollution emitted by affected Volkswagen models in the U.S. will lead to approximately 60 deaths 10 to 20 years premature.
Volkswagen owners affected by this scandal number in the tens of millions worldwide, and the projected costs of litigation and compensation are between $18 billion and $21 billion. In early November, the German automaker announced that additional models from the Porsche and Audi brands in their portfolio also contained the cheat software, although no plans or recalls have been announced and no discernible marketing strategy has been implemented.
Johns Hopkins Carey Business School professor and marketing expert Sylvia Long-Tolbert has a unique perspective on the emotional aspect of the car-buying experience: a longtime Audi brand devotee, she discovered that her newly purchased pre-owned Audi was defective when she received a text message from her dealership. "Just unloaded another defective Audi," read the message, which was intended for the dealer's supervisor.
Needless to say, Long-Tolbert has some thoughts on the consumer-brand relationship. The Hub reached out to her for some perspective on the Volkswagen scandal and what the company can do to recover.
Where does VW go from here to resuscitate the brand? With the billions of dollars set aside for reimbursement and legal settlements, is it possible for the brand to recover?
I think it's possible to recover in the U.S., though I think it's a long horizon for the VW brand itself. You have to look at it from two perspectives: that of existing car owners of the VW and Audi brands, and that of the prospective buyers, where there was untapped market opportunity that you can't really quantify at this point.
I think the nature of the breach—the cheating—suggests an underlying character flaw or problem within the organizational culture. I don't think people will be able to readily understand what led to the cheating in a way that will make them feel comfortable in the short term going with a company that has misled consumers and been dishonest about its dominant core competency—innovation.
They failed to deliver on innovation, and I think this is particularly relevant because maybe two or three years ago, they started building this market positioning around clean diesel technology, and people recognized them as being a market leader. Their inability to deliver on this CO2 emissions promise or benefit seems to suggest there may be something else amiss—either it's a character flaw, or they don't have the technological wherewithal to address the problems of a clean energy vehicle. That would have really important implications for consumers who are highly eco-friendly and feel that that is an important functional attribute for them during the purchase decision process.
Are there generational differences in how different types of customers will interact with the brand?
I think there are, to some degree. There is the older baby boomer who really loves the VW brand for nostalgic reasons. The resurgence of the VW Beetle "Bug" was one of the things that re-established the VW consumer-brand relationship for U.S. consumers. And that nostalgic group continues to be avid car buyers with significant purchasing power. They provide some financial stability for brands like VW that were popular during their formative years and were symbolic of freedom and other defining values of a counterculture movement. I think that's where you may see it.
The other part that's very generational is that many consumers that are eco-friendly are probably in the 24-35 age group, give or take. I think that's where you may see some of the generational differences.
The nostalgic group may be more forgiving because it's an emotional attachment to the brand, and that is what has solidified the consumer-brand relationship over the decades. They may have a little bit more tolerance and patience with the VW brand to the extent that some of them may have ended up with a car with diesel technology in it, not for eco-friendly reasons—it wasn't so defining to the purchase decision. We love our cars, and we think of them as family members. Despite their disappointment with VW's dishonest practices, these car owners are unlikely to abandon their beloved cars.
But then there's another group that think of the car-owning experience in purely financial and utilitarian terms. They're most concerned about the resale value. And that's where VW is really going to get hit hard, because there's a loss in resale value immediately for those cars. Even though the emissions rigging doesn't appear to be a safety issue, people aren't going to feel very confident in buying that car in the resale market, and I think that's going to be a big issue. These owners are also likely to doubt claims about the car's safety and long-term performance and will have persistent thoughts about what they've lost or sacrificed as a VW car owner.
Volkswagen has released which models have been affected: 11 million cars total, 8 million of those in Europe and half a million in the U.S. They stress that the cars are safe to drive, and they apologize, but they have yet to announce a solution. Is that an effective strategy: radio silence for the time being?
I think for an immediate reaction, that is an appropriate response. People want companies to acknowledge that a problem exists, and to hear from the company I think at this time is an important step in the recovery for the long term. It doesn't stop the damage, but I think it's appropriate to take some time to come up with a well-conceived recovery plan, keeping in mind there are so many stakeholders affected by this—consumers, employees, dealerships, investors.
Current car owners should be their primary concern, assuring them of the safety of their vehicles. Secondly, prospective car buyers and employees now are caught in the snare. I think to say something immediately, to calm down the press and the viral nature of the news, is important.
What they've done subsequently is come out with financial compensation for existing car owners, because I do think that's the priority group. The $1,000 gift card arrangement that they've just announced is an interesting strategy. It doesn't resolve the deception, but what it does is begin to build different and hopefully positive associations related to the issue. Having a gift card allays some of the fears of 'How am I going to absorb the costs of any repairs?' Even though they say repairs aren't needed.
What I think is most unusual about the current strategy is that $500 of the money is intended as purely goodwill spending. So imagine you spend your $500 on your Thanksgiving dinner. Now Volkswagen becomes associated with that in your memory. In addition to recent missteps or dishonesty, this unexpected extra $500 becomes another aspect of the VW brand experience, and you start to diminish the negative brand associations. I think that's fairly effective. $500 comes right back to the dealership for any type of repairs or services needed, whether they're related to the emissions problem or not, but the other $500 gives consumers latitude to indulge themselves, and I think that is probably going to have positive emotional outcomes for consumers who see it as a windfall or bonus, especially around the holidays.
The other important aspect of the arrangement is that people who accept the $1,000 don't forgo their ability to participate in class action lawsuits if we subsequently find out that there is a safety hazard or other unexpected mechanical problems. It seems like an aggressive and fair arrangement. I think VW recognizes in that context that car ownership is an emotional experience for many people. It's not so easy to tell people who thought they were driving a clean energy car, "Go buy a new one."
Secondly, if they were to do so at this point in time, as a knee-jerk reaction, you lose the value of your car. Goodwill spending is an appropriate recovery strategy to say 'we're going to stand by you.' We haven't seen a lot of organizations do that without contractual or legal obligations to get the $500, so I think that recognizes the emotional undercurrents of the deception problem.
The other interesting thing that plays to the favor of the VW brand is that we've seen these problems before. This comes right after the GM flawed ignition switch problem, which resulted in I think 39 million people having faulty ignitions that could indeed pose serious safety hazards. The Volkswagen debacle relative to GM makes the Volkswagen problem not look so bad.
Is deposing or getting rid of a C-level employee an effective way to redirect negative attention on the brand?
I don't think so, given where we are as a culture in our exposure to a variety of corporate ethical breaches that have had consequences for consumers. And you can probably attribute some of that to social media and the short memory for information that has been created as a result of the 24/7 media cycle. I think the average consumer is more sophisticated in understanding that it's the collective efforts of a subset of players in an organization that drive and enact these sorts of decisions. Unless you find a specific executive on video or in an undercover sting operation that shows him revealing intentions to deceive or harm consumers, most consumers understand that one individual can't bear the total responsibility for these sorts of trust violations. It's an organizational culture issue, and there are multiple people to be held accountable.
Speaking of company culture—do you expect to see employees running for the hills from Volkswagen?
Well, we know jobs are in limited supply. But because employees are the face of the brand and their trustworthiness and integrity are now in question, Volkswagen will have an issue with internal branding. Rebuilding confidence and trust in this brand is going to have to start from inside the organization.
Volkswagen probably has a lot of employees working in earnest who now understand that a handful of people made a decision that jeopardizes the jobs of 30,000 or 40,000 people, and it's about integrity. If the employees had perceived themselves to work for a company of integrity that was innovative and looking to be on the cutting edge of automobile technology, they're now rethinking that.
Finding another job isn't as easy as it sounds, so I think employee morale and the notion of employees as brand ambassadors are things Volkswagen is going to have to address as well. In the last couple of weeks, they offered—for lack of a better term—a "snitch" program for employees to come forward without any retribution to tell management how problems like this happen. For me, that signals that the corporate culture is a problem.
The big thing for me is really putting the emphasis back on the character of the brand itself and how it spreads into the sub-brands, Audi and Porsche, and some of the other brands in the portfolio are going to have to shoulder the burden in the short term. Focusing on building the brand from the inside out is going to be critical. The trust violation is tremendous because you can't come up with one compelling reason why or how this happened other than greed, poor ethics, or both.