While GM and Chrysler have wallowed around in government muck and mire, Toyota has struggled to stop their steady slide toward becoming the next GM, and Ford is calculating their next employee buy out, Volkswagen has moved into first place in terms of global production levels … and now they kicked it into high gear.
I have been known to make a fairly radical prognostication from time to time and I will make one now – within few years Volkswagen will be increasing their lead over the rest, gobbling up Toyota and Ford market share, and they will emerge as the dominant auto maker of the next decade by a wide margin. While the press will attribute their success to some product or another, and the academics and economists will blather on about German culture, Volkswagen's acquisition strategies and the relative strength of the Euro, none of them will see the real impetus for the same reason they all missed the latest news from Volkswagen. There is a whole new ballgame beginning at Volkswagen that will change the rules.
"Starting next year, VW will introduce a so-called "long term bonus" plan, in which managers will be rewarded according to customer and employee satisfaction, as well as their achievements in sales and the company's rate of return. In addition, VW will no longer offer stock options." This according to Deutsche-Welle a few days ago. The article goes on to state that bonuses will be based on results in those areas over four years, rather than yearly or even quarterly stock values. Said VW Director of Human Resources Horst Neumann, "We want there to be a close relationship between bonuses and strategic objectives."
Fancy that – tying executive compensation to long term accomplishment of strategic objectives, including customer and employee satisfaction instead of having it driven solely on the basis of how much money can flow into an investor's pocket in the next couple of months.
The whole executive compensation flap that has raged over the last year missed the central point. The problem has not been how much these guys make – but what they make it for. Leaders who drive changes and improvements that create a great deal of value for all of the stakeholders – customers, employees, communities, suppliers as well as shareholders – ought to be paid a lot of money. The absurdity in the compensation systems has been the payment of outrageous bonuses and stock options to people for their short term manipulation of stock values accomplished by abusing the stakeholders – as well as the few remaining long term investors.
In one fell swoop, Volkswagen will be changing the scope of their management thinking, and taking it to a level most cannot fathom. Their managers will not only have to come up with good product ideas, but they will have to bring them to market and succeed with them in order to make money. They won't be able to simply outsource everything to some cheap place and collect a bonus- they wil have to follow through and be sure the output from the cheap place doesn't degrade the product and dissatisfy customers. They are turning the auto industry into a tortoise and the hare deal, and the smart money always goes on the tortoise.
The American business culture has long been based on image over substance. The name of the game in corporate life has been to conjure up a big idea - or embrace some superficial fad. Impress everyone with your insight and brilliance to make a splash, then collect your reward and move on long before the big idea plays out. The long term consequences of moving production to China and customer support to India have never been part of the compensation scheme. The mere announcement of such moves and rosy projections of millions to be saved can be relied upon to dupe the industry analysts (most of whom have never actually done anything in the industry) and rev up the stock values.
At the same time the Germans announced the new approach to incenting and rewarding management, a 17% stake in the company was bought by Qatar. Not too surprisingly, the common stock of VW has fallen, proving my point. You would think the average investor would be impressed – VW moves into the lead in global production, reaps a huge infusion of cash from a serious long term investor, apparently firing on all cylinders, but this is hardly a strategy to endear VW to Wall Street. Nobody is going to get rich churning VW stock in a matter of months. They have to wait years, but those willing to wait will do very, very well.
Pete says
VW had and still is struggling with product reliability and therefore value issues. With a few exceptions, they are only average according to CR surveys. The first car I ever owned was a used ’56 VW Beetle — simple, basic transportation fit for a college student. Later I owned a VW Rabbit — loved that hatchback. Now I own a VW Passat Wagon and enjoy the vehicle. Maintenance is expensive for the Passat and mine has a propensity to need oxygen sensors (there are two) just after their warranties expire. If VW ever gets reliability across the board as good as Honda and a couple other Asian brands, they will be a powerful force.
david foster says
Strikes me that this gives a lot of power to whoever develops and maintains the methodologies for *measuring* customer and employee satisfaction.
Bill Waddell says
I agree, David. Hopefully they will use some independent source and not concoct an internal measure that can be rationalized.
Dirk Fischer says
Hi,
As a German, I am happy to see positive feedback about German Business Culture and VW has entered a good way. On the other side, I can tell you, there is not much of it in Germany. We have copied too much of short term thinking management style of many US companies. Sorry, that I had to say that.
In many things VW is far behind Toyota. Mr. Winterkorn (CEO of VW) knows this. Hopefully, they will proceed in closing the Gap.
Finally a question: Is the number of cars built or the sales of a company truely a good measure for evaluating the company? Wasn´t it exactly that goal, that has maybe caused the biggest issues for our japanese friends at Toyota?
What will be the impact on the VW resources as they continue to realize their growth plans in India, China, ….?
Kind Regards
Dirk
RalfLippold says
From my past experience with talks with consultants working for Volkswagen in various plants, I get the feeling that all will around putting the obvious straight.
The deeper root causes of what the actual business is like (see the earlier comment on reliability (1)) are probably in a hierarchical organisation as Volkswagen (or any other car OEM here in Germany) not easily addressed.
Managers often are so far away from the actual Gemba or shopfloor that the “easy listening” to (lean) consultants often takes their eyes from the real issues that are underlying.
Transparency across boundaries and departmental silos pretty will be the challenge to establish;-) Sharing information and the willingness to address that things that are not working (in order change them into the money earning things of the future :-)) will be everybody’s issue (workers, middel-managers and top-managers alike).
This applies to any organization in the world – a general principle probably, only that Toyota has honed it for almost 100 years (well before the automotive times). Trying to catch up in an overheated heat will lead to not the results as intented.
Rethink your strategy and outspeak what your deeper business problems are (or is). This will lead to remarkable future outcome, profit and value to the stakeholders (not only the end customer).
If Volkswagen’s people will manage this task, they really have a change to overtake the No. 1 on the market:-)
All the best for that challenge and a Merry Xmas to all
david foster says
Also..off-topic, but WSJ today had an item on a GM plan, apparently inspired by Obama’s “experts,” to run assembly plants 24×7. Wondered what you guys think of this idea and if any of you have experience with continuous 3-shift operations.
Panu Kinnari says
I have worked in factory where 24×7 was de facto standard. Needless to say that it doesn’t leave much room for error. End result was frequent line stops due to equimpent breakdowns etc.
At my current company we are practically forced to run 24×7 at certain times of year due to seasonal nature of our business. We have found that is is doable, if prepared correctly and proper maintenance done before and after.
That being said, there is always possibility of unforseen errors and when all of your capacity is used up it is hard to catch up.
Tony says
24×7 operations are normal in the semiconductor business (at least in the fabs), and often in the hard drive business (e.g. media manufacturing). When you have a >$3 billion fab to amortize over maybe 5 years, it’s hard not to run 24×7.
What I’ve seen is four shifts: two 6AM->6PM shifts (Sun/Mon/Tue/alt Weds, alt Weds, Thu,Fri,Sat) and two 6PM->6AM shifts.
As far as VW goes, they really have to work on their reliability and service costs before I’d buy one. Partly I think this is a cultural issue — Americans tend to give their cars the minimum amount of maintenance and expect them to last forever.
I think there are many good, innovative German companies – at least the small ones I’ve dealt with, like Vision Components, Ixxat, and Wiha.
RalfLippold says
Dirk has brought up a good point:
is the number of cars built an indicator for the well-being of the company?
Whould you say that the value of a human is what he produces (tangible) from his body? Probably not I suppose.
What are the intangible values that a car manufacturer produces and that are clearly valued by the customer?
Have a nice and enjoyable Xmas