Volkswagen Scandal Rocks Germany's Industrial Icon

Strategic Insights -

As the story of Volkswagen's alleged bribery and kickbacks emerges, comparisons are being drawn with the notorious Elf scandal that engulfed France's second-largest oil company in the 1990s. At the center of the controversy is Peter Hartz, the head of personnel and a member of Volkswagen's management board, who has offered to quit over "irregularities" and allegations of expense claims not accounted for correctly. Bernd Pischetsrieder, the VW chief executive, has dismissed bribery allegations as "absurd," but the scandal has tapped into Germany's deep-seated concerns about the labor market and the role of unions.

Key Takeaways:

  • Volkswagen's staff have been accused of receiving kickbacks from suppliers, while union leaders may have received bribes, with prosecutors in Lower Saxony investigating the allegations.
  • Two senior managers have left the company in the past month, including Klaus Volkert, the head of the VW works council, and Peter Hartz, the head of personnel.
  • The scandal has highlighted the issue of co-determination, a principle enshrined in law that gives workers in larger companies half the seats on a company's supervisory board.
  • The German union movement is under pressure as the firm struggles with weak sales and competition from Toyota in Europe.
  • Hartz is a close ally of Gerhard Schroder, the Chancellor, who appointed a commission to look into the question of co-determination.
  • Volkswagen's 18% state-owned share capital makes it a politically important company, with its actions closely watched by the German government.
  • Peter Hartz is the architect of the unpopular German labor market reforms, introduced in 2003, which have been criticized for contributing to Germany's high unemployment rate.

Statistics:

  • 11.6% unemployment rate in Germany (as of 2005)
  • 18% of Volkswagen's share capital is controlled by the state of Lower Saxony.
  • 6-figure sum allegedly not accounted for correctly by Volkswagen staff.
  • 40% increase in Volkswagen's market share in China between 2003 and 2005.

Sources:

  • "The Times," copyright (C) The Times, 2005
  • AFP / GETTY (for the photograph)
  • German government statistics (unemployment rate)
  • Volkswagen's annual reports (market share in China)