The Cost of Losing Trust
Why the Volkswagen scandal really matters and how it may totally destroy the company
Volkswagen, once the leading car manufacturer in the world, ahead of rival Toyota, is now in a tailspin following the discovery and then admission of the diesel emissions rigging where “device defeat” software had been fitted to as many as 11 million diesel vehicles worldwide.
In its action VW was negligent, culpable and criminal. Negligent in that it willfully added to the global pollution problem, culpable in that it willfully lied to customers who made purchasing decision based on the belief that they were being environmentally conscientious and, in the process, further affected public health in cities and towns where NOx emission levels are already critical. It was criminal in that it used the now-rigged results it achieved from its “device defeat” outfitted diesel vehicles to take advantage of the Federal Energy Policy Act of 2005 essentially stealing money from the US Government and the US tax payers.
In doing so VW crossed a lot of trust lines. It broke the social trust that consumers generally reserve for large institutions (in this case car manufacturers) tainting an entire industry and standing as yet another example of the failure of self-certification and self-policing (much like the Libor scandal did).
It broke the trust that the brand had developed over years with its customers where it promised reliability and great performance for a price that was competitive only within the value of the brand promise. A recent post on G+ of VW announcing that it was pegging its fate to electric cars was met with derision and inside jokes.
Volkswagen also broke the direct trust that a large, seemingly reputable company enjoys with its customers when it promises to sell them a product that does something very specific, like in this case, diesel engine cars that were environmentally friendly.
Trust is a Framework
The thing about trust is that is it a framework. On its own, when you have it, it is extremely difficult to quantify and very easy to simply ignore. But try doing business without it and what you realize is that suddenly, in the absence of trust you have its opposite: distrust. And that comes with its own, unique set of actionable steps none of which feel good when you’re on the receiving end of them:
- Volkswagen history and governance suddenly came under scrutiny.
- Italian police have raided VW offices in Verona and Lamborghini offices in Bologna and Germany’s automotive watchdog told VW to recall 2.4 million domestic cars.
- The EU Bank could demand its loans, made on the basis of environmentally friendly engines, back from VW.
- VW shares have lost 20% of their value, some $28 billion and counting since the story of the emissions scandal broke out.
- China, is launching a separate investigation into VW vehicles and emissions in its territory.
- Standard & Poor downgraded Volkswagen’s credit rating citing the long term uncertainty over its future following the emissions scandal, and making it more expensive for the company to find credit.
- Volkswagen stock has been removed from the Dow Jones Sustainability Index.
- Volkswagen announced that they would reduce investment in its brand by $1.14 billion a year (to offset the financial damage it has suffered with the tarnishing of its reputation) — at a time when car manufacturers are looking to innovation to deliver them a competitive advantage.
The list goes on. It gets more expansive and the mounting dollar value more expensive. The stakeholders affected more and more.
In the interdependent European economy the potential value of the fallout as the structure around the VW brand collapses is $493 billion (433 billion Euros).
The Sinkhole of Distrust
It is wrong to think that in every situation where we face the question of whether we should extend trust or not the approach is proportionate and even-handed between trust and distrust. Trust is not just the extension of a personal belief system towards a better world but also a means of simplifying the complexity of the world at large and an articulation of hope towards its predictability and safety.
To illustrate the point consider that when your best friend tells you a fib you’re faced with two choices:
A. Call him out. Tell him he’s lying and the betrayed the sacred bond of your friendship.
B. Go with it, using your awareness that it is a fib to limit any potential fallout.
Logically A should be the only plan in play but if that’s what you do here’s what happens next:
A. You lose a life-long friend, ruining a relationship you both had invested a lot in.
B. You may start a feud with someone you used to be friends with and who presumably knows some of your own weaknesses and strengths.
C. You may now need to watch your back (and guard your reputation).
D. You may have no other friend to replace him
In calling him out in a way that put trust on the balance, that action has not really resolved the first situation and it has created additional complications which now need more time, effort and energy to deal with.
Trust therefore does not just act as a counterweight to distrust, it forms a framework which supports many other sorts of actions, each of which would be impossible otherwise.
In the absence of trust you get an ever widening sense of distrust. Without the framework of trust to provide a structure and boundaries for things to occur within, distrust spreads like an ever widening sinkhole, its damage as unpredictable as its reach.
Should the VW scandal affect the German economy it will then have repercussions for the fragile recovery of the EU as a whole:
“It’s unusual for events in a single company to become a driver of global markets, but that’s what is happening now with Volkswagen,” Kit Juckes, a global strategist at Societe Generale SA in London, wrote in a note. -Bloomberg
Nations with fragile recoveries like Spain, Portugal, Ireland and France will teeter and fall back into the abyss of another recession. Outlying economies like Greece and former Eastern Europe countries may not recover for the best part of a decade or more. A fragmented and sinking European economy can lay waste to the EU dream of open borders, synchronized economies and fiscal union.
What usually stops all this from escalating (and what will also stop it this time) is the fact that each of us has more invested in the world in terms of trust than its opposite. This forms a natural bastion to the contagion that begins when trust is broken in such fundamental way. As with the Watergate scandal, Enron and, more recently, the Libor, each time the system adjusts and hardens itself against further, breaches of trust of a similar nature.
Founded in 1937, Volkswagen is 78 years old. It should be able to weather the scandal and learn from it, but it is slow in reacting. It is not in control of the events happening to it. As a result it may have to be sacrificed in order for trust to be restored. Germany, the EU and car buyers worldwide will recover from this blow and find ways to restore trust in the system. Volkswagen on the other hand may not.
My latest book, The Tribe That Discovered Trust, is now available from bookshops and Amazon. It details how trust works, how it can be established and how it can be regained, if lost.