Volkswagen (VW) is currently facing several major challenges that have put the company in a difficult position. From falling sales and poor electric vehicle (EV) performance to operational inefficiencies, the automaker’s problems are multifaceted. These issues have led to significant restructuring efforts, including potential plant closures and job cuts unprecedented in VW’s history. While the company is now taking drastic measures to stabilize its finances, stronger governance, risk management, and compliance (GRC) practices could have helped prevent these issues or mitigate their severity.
The Core of VW’s Current Issues
- Declining Sales and Over-Reliance on China
VW has experienced a sharp decline in sales, particularly in Europe and China. The company’s dependence on China – where up to 40% of its sales came from in the past – has become a serious liability. Increasing competition from domestic automakers in China has reduced VW’s profits by 20% in 2023 and a further estimated 40% in 2024. This heavy dependence on one market, combined with lower demand in Europe, has left the company vulnerable to external shocks.
- Difficulties in electric vehicles
VW has invested heavily in electric vehicles in response to global sustainability trends, but its electric vehicle range has underperformed. The end of government subsidies in Germany has significantly slowed the adoption of electric vehicles, leading to a 16.4% decline in sales. This has put additional financial pressure on VW, especially as its competitors have overtaken the company in the electric mobility market.
- High production costs and low capacity utilization
In Germany, VW is struggling with high labor and energy costs, which have hurt its profitability. The company has a large workforce and numerous production facilities, yet many of these plants are operating well below capacity – some as low as 20-30%. This inefficiency contributed to VW’s profit margin falling to just 2.3% in the first half of 2024, compared to much higher margins at competitors like BMW and Mercedes
How better GRC could have helped
Improved governance: strategic oversight and alignment
Volkswagen’s governance structure is complex and involves multiple stakeholders, including the state of Lower Saxony, which has significant influence over key decisions. While this governance model has enabled stability in some areas, it has also made the company slow to adapt to market changes. Stronger governance practices that foster strategic agility could have helped VW better align its leadership and operations with the evolving needs of the EV market and the risks associated with over-reliance on China. A more dynamic governance framework would have enabled faster responses to external challenges such as changing consumer preferences and regulatory changes in key markets. For example, VW could have diversified its market focus earlier, reduced its dependence on China and better prepared for the decline in demand for internal combustion engine vehicles in Europe.
Risk management: Proactive identification and mitigation
A robust risk management system would have identified key risks earlier, particularly the company’s over-reliance on a single market and the challenges in the electric vehicle sector. Better risk assessment would have enabled VW to anticipate increasing competition in China and diversify its revenue streams, thus mitigating the financial impact of declining sales there. In addition, VW’s heavy investments in electric vehicles without a full understanding of market risks – such as the possibility of reduced government subsidies – reflect a deficit in risk management. With more proactive risk strategies, VW could have prepared by adjusting its product portfolio and scaling its investments in electric vehicles to align with more predictable market growth.
Compliance: Staying ahead of regulatory changes
Compliance violations have contributed to some of VW’s problems, particularly in the electric vehicle market. The abrupt end of subsidies for electric vehicles in Germany has surprised VW and has slowed sales of electric vehicles A well-implemented compliance framework would have anticipated such regulatory changes and allowed the company to advocate for more incremental changes or adjust its product pricing and marketing strategies in advance. In addition, compliance mechanisms could have helped VW adapt to the broader regulatory environment in Europe, particularly with regard to sustainability and emissions standards. Early adaptation to these regulations could have facilitated the company’s transition to electric vehicles and better positioned it against competitors who have made this transition more successfully.
Cultural and operational risk: Foster flexibility
VW’s rigid organization, corporate culture heavily influenced by unions and political stakeholders, has made it difficult to implement necessary operational changes. Failure to address long-standing issues related to workforce size and productivity has left the company with bloated costs. Strong GRC practices that foster cultural flexibility would have facilitated a smoother transition to a leaner, more efficient operating model and allowed VW to make adjustments before the crisis reached its current magnitude. Better governance structures could have fostered an environment where operational risks were addressed through earlier cost-cutting measures rather than drastic restructuring efforts that have led to internal resistance and public outcry.
Conclusion
Volkswagen’s current problems, from falling sales and poor electric vehicle performance to operational inefficiencies, underscore the need for stronger GRC practices. While the company is now taking significant steps to restructure and stabilize, better governance, risk management and compliance could have helped VW avoid or at least mitigate these problems. A more agile and proactive GRC framework would have enabled VW to anticipate market changes, diversify its risks and respond more effectively to regulatory changes. This may have prevented the company from experiencing the severe financial and operational difficulties it faces today.
For VW, a renewed focus on GRC could be critical to ensuring the company remains competitive in an increasingly complex and rapidly changing automotive landscape.