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Why did it take three years for Volkswagen to recall?

Money or face? So goes one of China’s cross talk comedian Guo Degang’s teasing lines. In a commercial society the choice often poses a delemma for a business.

For Volkswagen, the brazen quest for profit has in recent years taken away its core “engineering culture.” For three years Volkswagen dragged its feet trying to avoid a recall of its problematic vehicles with DSG transmissions made in China.

Recalls of Volkswagen vehicles in Europe and North America due to the DSG malfunction were made long time ago. The damage to consumer interests in China would have continued if Volkswagen did not make a recall in Taiwan, considered part of China by the mainland. The Taiwan recall embarrassed China’s quality watchdog, the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), which failed to act last year. In the wake of the CCTV 3.15 program, the AQSIQ on March 16 ordered Volkswagen to recall its problematic vehicles, 380,000 in total, equipped with the 7-speed drive DSG transmissions.

The DSG technology has been rated as Volkswagen’s killer technology against competitor Toyota Motor. The 7-speed DSG (codenamed DQ200) launched in 2008, which was low-cost and small in size, was a hit for the latest dual-clutch technology. In order to corner the market, Volkswagen in the same year invested to build a factory in Dalian. Confident that the new investment would promise fat returns in China, Volkswagen refused to invite partners FAW and SAIC in the investment and made the transmission plant a wholly-owned venture. Money came first.

Despite constant complaints over the past three years from Chinese consumers, the quality authority and the media, Volkswagen first reaction was that the DSG did not have design problems. It later agreed to extend vehicle warranty. I had all along believed that the belated response from the German carmaker was probably due to its “big company disease” – bureaucracy. But reading in-depth analyses published recently in the media and on the Internet I suddenly realized that I was wrong. The determining factor behind Volkswagen’s decision not to recall its problematic vehicles in China was money. The so-called “TD golden powertrain assembly” utilizing the DSG technology helped drive Volkswagen sales from 1.4 million in 2010 to 2.8 million in 2012.

The first consumer complaint about the DSG dual-clutch transmission was reported in 2010. Advanced technologies often come with certain deficiencies. We cannot argue that “the Chinese were treated as guinea pigs” in the DSG case, but it was a fact that Volkswagen China failed to properly address a growing number of consumer complaints and requests for a vehicle recall until the Spring of 2012. Volkswagen China’s warranty and tech departments failed to even properly collect the data of vehicle failures in China, let alone coming up with an appropriate solution.

Some foreign media complain that Volkswagen’s recall of 380,000 vehicles in China amounts to a possible loss of $618 million. But this would be a small amount compared with its fat operating profit over the past three years. In 2012 alone, Volkswagen China (including its JVs) realized an operating profit of €8.424 billion ($10.86 billion). The actual loss and “opportunity cost” would be much greater if Volkswagen decided to recall its vehicles two years ago, according to an analysis published in Jingji Guangcha Bao (Economic Observer).

The repeated delaying in recalling its vehicles gave the company the much needed time for rapid market penetration, effectively making China its largest money-printing machine. Profit was Volkswagen’s “bottom line.” The slogan that “Volkswagen grows hand in hand with China’s automobile industry” has turned out to be rubbish.

Volkswagen’s priority concern has been money and profit. The few ladies and gentlemen in corporate communications in Wolfsburg and Beijing are hardly concerned about the company “face.” Volkswagen China’s PR response was strangely fast on the night of the CCTV 3.15 program. But the response failed to mention quality defects of the DSG technology. Instead, its two JVs, FAW-Volkswagen and Shanghai-Volkswagen, were implicated, falling victim of the problematic DSG transmission made at Volkswagen’s wholly-owned factory.

Days later, a Q&A about the DSG technology was published on Volkswagen China’s official website. Under “why a recall,” the Q&A fails to admit to the “potential safety danger,” which warrants a vehicle recall. Instead, it talks about how drivers can conveniently turn the steering wheel, apply the brakes and safely stop on the road side after “disruption of power.” This statement reads like a Taichi move that blocks off AQSIQ’s major finding and ruling for a vehicle recall.

According to professional analysis, power disruption is a deadly hidden problem and one of the many troubles of the Volkswagen 7-speed dry transmission resulting from defective design and manufacturing. The problem is similar to a child congenial heart disease, which may break out at an unknown age. But when it happens, it becomes dangerous. Even by recalling the millions of vehicles in China, Volkswagen does not seem to have yet found a fundamental cure. The proof is that the vehicles given extended warrantee and upgraded software since last June are also among those recalled.

When a company is carried away, it would soon tumble – such has been the reason for Volkswagen rise and fall over the past 30 years in China. The company was carried away by the two good years in China. Newly arrived Germans from Wolfsburg have attributed hot sales in China to “Volkswagen’s top technology” to the negligence of huge contributions in R&D, manufacturing and sales and distribution from JV partner FAW and SAIC. When problems emerged with the DSG transmission made by its wholly-owned factory, Volkswagen started to blame poor driving habits of Chinese consumers. It has been most difficult in trying to convince the square-headed Germans in admitting to their own failures.

Earlier, the overbearing Toyota made a big blunder in the global market also in the pursuit of profit. President Akio Toyoda painfully admitted to the problems and decided to “go back to square one” – to the days 80 years ago when the company was founded and rejuvenated the goals of Toyota. With great efforts Toyota has won back consumer respect.

Four years ago, Volkswagen and Volkswagen China focused on its core business and successfully created a corporate image and a heritage of an “engineering culture,” surviving the global financial meltdown. In the past two years, however, Volkswagen behaved differently. It arrogantly denied vehicle quality problems in face of repeated consumer complaints.

It is time that Volkswagen and Volkswagen China learn from Toyota and “return to square one.

(Rewritten by Wayne Xing based on author’s blog on sina.com.cn)

 

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