From
"German
"Beetle Monoculture"
Model":
to the
the Transformation
of
Volkswagen, 1967-1991
Steven Tomday
Departmentof Economicand SocialHistory,
Universityof Leeds,UK
The German automobile industry, and particularly the
Volkswagencompany(VW), hasbeena crucialpart of Germany's
post-warmanufacturing
success
story.In the 1980s,VW is oftencited
as an epitomeof the successfactorsin this area. Writers suchas
Wolfgang Streeck, Lowell Turner, and Kathleen Thelen have
examined its institutional relationshipsas embodimentsof
"microcorporatism,"
"socialpartnership,"or "co-operativeconflict
resolution"[Streeck,1989; Turner, 1991; Thelen, 1991]; otherssuch
as Ulrich Jurgens,Thomas Malsch and Knuth Dohse, and Ben
Dankbaar, have examined its use of automation and new forms of
work organization
in thecontextof a relativelysuccessful
alternative
formof production
organization
to theJapanese
or "leanproduction"
models[Jurgens,Malsch andDohse,1993; Dankbaar,1993]. What
is lessclearin thesewritings(which arenot primarilyhistoricalin
focus) is the extent to which the "model" causedthe success.This
articleis a preliminaryexplorationof someof the issuesinvolvedin
suchan analysis.
The startingpoint is that the institutionaland production
structuresof VW have not evolved smoothlyand continuously
throughthe postwaryears.In fact, therehave beentwo periodsof
institutionalandproductivesuccess
andstability,with a periodof
crisis and transformation in between. From the late 1940s to the late
1960s,VW succeeded
on thebasisof relentless
massproduction
of
a single-model("Beetlemonoculture"),
in a mannerthat madethe
company
almost"moreFordistthanFord."Thefactorywasorganized
BUSINESS AND ECONOMIC
HISTORY, Volume 24, no. 2 Winter 1995.
Copyright¸1995 by the BusinessHistoryConference.ISSN 0849-6825.
Steven
Tolliday/ 112
alongthelinesof a minuteTaylorizeddivisionof labor,pacedby the
assembly
line.Modelvarietywasrigorously
eschewed
andinnovation
neglected.Laborwasgenerallyco-operativebut clearlysubordinate,
contentto takeits sharein the fruitsof prosperity.And, with a few
exceptions,cars were made in Germany and exported to other
markets[Tolliday, 1995]. From the late 1970s,the secondwave of
success
cameunderverydifferentconditions.
The companyproduced
a rangeof models,featuringquality,hightechnology
andinnovation.
Work organizationcombinedfeaturesof high automationand a
highlyskilledworkforce.Laborwasinvolvedwith a powerfulvoice
in all levelsof corporate
decisionmaking
("microcorporatism").
And
VW becamea complexglobalmultinationalwith severalimportant
international
production
bases.In otherwords,VW success
in thetwo
periodswasbasedon two very differentinstitutionalandproduction
systems.
What drovethe transition?
Did the new "Germanmodel"
producethe successes
of the 1980s,or was it co-producedby the
success itself?.
The Crisis of Beetle Monoculture, 1966-75
VW thrived during the 1950s and did not experience
significantdirectcompetition
in the domesticmarketuntil the 1960s
whendemandbeganto movetowardslargerandmorecomfortable
carswhereFordof GermanyandGM-Opel werewell-entrenched
and
investingheavily. Then, from the mid 1960s the continuously
expandingseller'smarket came to an end as car salesfailed to
increase in 1966 for the first time since the War
and thereafter
advancedmuchmoreslowly[Ludvigsen,1975,pp. 69-71]. VW had
to adjust to rapidly changingcircumstances.In particular, its
commitmentto a single-modelpolicy,the sourceof so muchof its
success
sincetheWar, becamea majorliability.As lateas 1960,92%
of VW productionwas Beetlesand it was still 68% in 1968. VW's
domesticmarketshareslippedfrom 45% in 1960to 33% in 1968and
26% in 1972.VW becameprecariously
dependent
on exportsalesto
sustainits volume.In 1968 VW sold70% of its outputabroad,40%
TheTransformation
of Volkswagen,
1967-1991
/ 113
in the United States.Franz-JosefStrausspublicly accusedVW in
1967 of having"toomanycarsandtoo few ideas"andasked"what
happenswhen the Americansstopbeing amusedby the Beetle?"
[Nelson,1970,pp. 272-82].
The companydid not developany clear responseto these
changingcircumstances.
Initially HeinrichNordhoff,the Managing
Directorof VW, simplytinkeredwith the Beetle,introducingmore
powerful versionsor faceliftingit, while US safetyregulationsalso
forcedextensive(andcostly)modifications
on theBeetle.The result
wasa plethoraof confusingengineering
changes.
Thiswascarriedso
far that the authoritativecatalogueof Beetle design-changes
states
thatonlyonedetailof theoriginalBeetleavoidedmodification- the
crosssectionof the metalchannelthat holdsthe rubberstripto seal
the bonnetandboot [Etzold, 1988,p.6]. One resultof thiswasthat
the Beetlebecameincreasinglycomplexandcostlyto build.
Attemptsto graftnewmodelson to theBeetledesignformula,
suchasthe411 or the Super-Beetle,
werenot successful.
The 411 has
beendescribed
by criticsas a "grotesque
symbolof VW's fumbling
inabilityto replacetheBeetle";otherscalledit the "deformedsonof
theBeetle"[Brenner,1989].It wascompletelyinadequate
to confront
its contemporaryrivals suchas the Renault 16, Opel Rekord, or
AustinMaxi. The Volkswagenengineers
seemedto havelosttheir
touch.One roadtestat the time notedthat the locationof the engine
was so bad that the car could have its oil changed"only by an
asbestos-coated
octopus"["RoadTest," 1968]. Only 226,000 were
soldin fouryearsbeforeit waswithdrawn.By thetimeof Nordhoffs
resignationbecauseof ill health in 1967, there was little sign of
anythingbetteron the way.When Kurt Lotzjoined the companyas
vice-chairman
in 1967he "askedfor newdevelopments
whichwere
in the drawers
......To my greatsurprisethe drawerswere empty.In
addition,new technicalconceptions
were not even in discussion"
[Lotz, 1978,p.97].
VW's positionin theUS marketwasthe decisivepointof the
company's
fortunes.Fromthemid 1960stherewasa loomingthreat
thattheAmericanpublic'slonglove-affairwith "thebug"mightcome
StevenTolliday/ 114
to an end.It hadbeenpilloriedfor its safetydefectsby RalphNader
whodubbedit "themosthazardous
carcurrentlyin use"on American
roads,"sounsafethatit shouldbe removedfrom theroadsentirely"
[Nader,1971,pp.i-vii. At thesametimeitspreviously
uniquemarket
segment
wasattacked
by newJapanese
challengers,
especially
Toyota
and Honda, who targetedVW head-onand offered a variety of
distinctiveandinnovativemodelsin thissegment[Rader,1980,pp.
37, 42, 76]. The truevulnerability,however,becamefully apparent
oncethe traditionallyundervalued
Deutschmark
beganto be forced
upwardsfrom 1969.In 1969theexchange
ratewasDM 4 to the$; by
1975it hadmovedto DM 2.5. Revenuepercar plummeted.In 1974
VW lost moneyon everycar sold in the United States(a lossof
DM200m on its US operations)[Thimm, 1976, p. 100]. Plunging
salesraisedthepossibility
of a break-upof VW's distribution
network
in theUS asdealersdefected,particularly
to Japanese
firms[Streeck,
1984,p.82].
Volkswagensalesin the United Statesfell from 570,000 in
1970 (35% of all VW sales)to 334,000 in 1974 and 203,234 in 1976
(16% of totalsales).Salesof theBeetlemeltedawayfrom354,000to
27,000. Largelyasa resultof thedisasters
in theUSA, Volkswagen's
globalouputfell from 1.6 million vehiclesin 1971 to 1 million in
1975. Volkswagen'scrisis in face of the appreciationof the
Deutschmarkand changingmarketsat this time were a striking
contrastto the performance
of mostof the restof Germanindustry
whichgenerallymetrisingcoststhroughincreased
productivityand
innovation,with the resultthat the overall Germantrade surplus
increased from DM
16 billion in 1970 to DM 37 billion in 1975.
In theearly1970sVolkswagen's
deteriorating
positionlooked
almostirretrievable.
Profitstumbledand,despitebeingableto draw
on reserves,thecompanyrecordedlossesof DM 807min 1974and
DM 157min 1975.Nor wasit apparent
thatVW hadthecapabilityto
turn itself around.The companyhad no trackrecordof successful
model development,its corporate decision-makingstructures
appeared
cumbersome
with theunionspowerfullyensconced,
andits
dependence
onanundervalued
Deutschmark
waspainfullyexposed.
TheTransformation
of Volkswagen,
1967-1991/ 115
It wasby no meansobviousthatVW wasmorelikely to recoverthan,
for example,British Leyland, anothermajor Europeancompany
undergoinga severecrisis at the time. BL at least had a strong
traditionof productdevelopment
andinnovation;in thepastfifteen
yearsit had broughtto marketboth the Mini and the Maxi, eachof
which had pioneered new market segments and product
configurations.
BL alsohadmuchmoreexplicitcommitments
from
its government
to fundrecoverythanVW had.Yet twentyyearslater
BL had disappeared
as a majorplayerfrom the autoindustrywhile
VW had advancedto numberone in Europe.How did this come
about?
The comparisonwith BL shouldnot be overdrawn.Firstly,
Volkswagenhadcertainresidualstrengths
whichBL lacked.Long
yearsof uninterrupted
profitabilitygavethema financialcushionand
resources
to fundchangethatBL lacked.They alsohadhighquality
factoriesandcapitalstockwhichcouldbe adaptedto newuses.And
they had a further income cushionin revenueflows from their
overseas
operations,
whichhelpedto bufferthemin theearly 1970s.
But in the mid 1970sthey hadto go througha majortransformation
which involvedthe development
of new productsand production
processes,
the reconstruction
of top management,
majorworkforce
reductions
and a new
orientation
to overseas investment
and
production- and to do all this without losing their valuablecooperativerelationshipwith theirworkforce.
The Transition to a New Model: Product Development
Probably the most crucial elementof the turnaroundwas
Volkswagen'sabilityto successfully
renewits productrangeandto
movefrom its narrowdependence
on theBeetleto its deploymentof
thebroaderandmorediverseGolf/Jetta/Passat
rangeon whichit has
foundedits success
sincethe mid 1970s.This transitionrequireda
fundamental
breakin thecompany's
"etched-in
psyche"of theBeetle
erafocusedon anengineering
traditionof incremental
improvements
to a 1930sdesign[Wood, 1983, p. 47; Lotz, 1978, p. 109]. As we
Steven
Tolliday/ 116
have seen,the first stepswith the 411 and Super-Beetlewere not
auspicious.But between 1968-74 a total reconstruction
of the
company's
productportfoliowascarriedthrough.
The untidyandcontradictory
historyof productdevelopment
in this periodis crucial.Early strategicdecisionshad a profound
impact.Rightat thebeginning
of theprocess,
thenewChairman,Kurt
Lotz, decided to make a fundamental shift from an air-cooled rear
engine to a water-cooledfront engine as the basisfor a modern,
lightweight,compact,andfuel-efficientrangeof carsfor the 1970s,
a configuration
that did in fact becomethe standardfor European
small and medium cars in the 1970s and 1980s. He also decided to
position the Beetle replacementas a middle-sizedrather than, as
manypreferred,
a smallcarto competeagainsttheFiat 500, Renault
4, and Citroen Dyane. Volkswagen'splannersdecidedthat this
segmentof the marketwouldremainrelativelysmallandintensely
competitivecomparedto a medium-sizedcar, andthat a smallcar
wouldnotthrivein the UnitedStates.Lotz andhis plannersdecided
to developnotjusta singlecarbutan integrated
rangeof carswhich
wouldbe simplerto buildthantheBeetleandwhichwouldreduce
costsby useof commoncomponents
acrosstherange[Lotz, 1978].
But the development
of thiswhollynew productline would
take at least four to five years,and the Beetle and its derivatives
would be dead in the water before then. Lotz was hauntedby the
mistakesthatHenryFordhadmadewith theModel T in the 1920s,
whenthebest-sellingcar in historyhadbeenrejectedby the market
andFordhadfounditselfwithouta successor
product.In the 1920s
Fordhadto gothrougha traumatic
process
of closure,lossof market
share, and restart to introduce its successormodel. As Lotz later
describedit "in order not to make the same mistake (as Ford) we
pursueda tdoublestrategy'."On the one handthe companywould
continueto improveanddevelopthe existingrangeof Beetle-based
vehicles,eventhoughthis wouldresultin a numberof short-lived
carswhichwouldhaveto be writtenoff veryquickly[Lotz, 1978,p.
101]. Simultaneously,the companyworked intensivelyon the
development
of its new modelrange.
TheTransformation
of Volkswagen,
1967-1991
/ 117
In pursuitof radicalproductinnovationthe companysetup
threeindependent
designteamsto work simultaneously
on different
andpossiblyrival productconfigurations.
Volkswagenengineersat
Wolfsburg would explore front-engine, rear-wheel drive
configurations;
engineers
from the newly-acquired
Audi subsidiary
woulddevelopfront-engine,
front-wheeldriveprojects;andPorsche
engineers,working under contract,would developmid-engined
projects.Thisdidnotexhausttherangeof productdevelopment.
Latz
alsorusheda newcarfromNSU (anothernewlyacquiredsubsidiary),
theK-70, throughdesignanddevelopment
asa furtherindependently
engineered
middle-sizedcarwith a water-cooledengine"in orderto
get the public usedto this changeof technologyat Volkswagen"
[Latz, 1978,p. 105].Thecarhadnumerous
problemsandneversold
well andit resultedin heavylossesbecause
it hadbeenputintoa new
plant at Salzgitter specially constructedfor it (partly under
government
pressurefor regionalemploymentcreation).
This proliferationof development
projectswas very costly,
requiringa peakfinancingof asmuchasDM2 billionin a singleyear,
andcutintoprofits.Seniormanagement
recognised
thatevenif the
domesticmarketremainedstrongand US profitsheld up, profits
would shrink almost to zero before the new models could be launched
around1974. In fact, actualprofitscollapsedto a lossof DM 807m
in 1974 [Volkswagen,1974].
Many in thecompanysawLatz's "doublestrategy"simplyas
confusionand lack of direction.Seriousquarrelsbroke out with
factionsformingon the ExecutiveCommitteeandthe Supervisory
Board and in a confusedepisodeLotz was fired in September1971
after only two and a half yearsin office, amidstallegationsof an
"excessivelyauthoritarianattitude"[Thimm, 1976, p. 98]. Rudolf
Leidingcamein asCEO andproceeded
to reduceandchannelLotz's
multiple projects.He cancelledthe Porscheproject and put the
independent
NSU work (whichlaterformedthe basisof the Audi 50
and Polo) on hold. At the sametime, he backedoff from the idea of
a wholly integratedmodel programbecauseof the hugecostsof
simultaneous
development.
Insteadof anall-newlargerversionof the
Steven
Tollida),/ 118
Golf thecompanyintroduced
thePassat,
basedontheAudi 80, which
easeddevelopment
problemsbut compromised
the commonization
programand,to someextent,cannibalized
Audi 80 sales.Bowingto
financialconstraints
and bottlenecks
in the supplyof toolingand
assembly
equipment,
Leidingalsoretireetabled
theprogramto avoid
introducing
morethanoneall-newmodelin anysinglemodelyear.
Mostimportantly,Leiding(a formerchiefof Audi) decidedto focus
on the projectfor the front-engined,
front-wheeldrivecar thatLatz
hadplacedin thehandsof theAudi engineers.
Thisprojecthadbeen
only oneof manyunderLatz butwasnowbroughtto centerstagefor
thewholeorganization.
The outcomeof thiscomplexandconfusingprocesswasthe
introduction
of theGolf-Jetta
rangeof carsfrom1974.• Therange
embodiedsomefundamental
designandengineering
innovations
and
essentiallycreateda new paradigmfor car designfor a decadeor
more. The leadershipof the Golf was basedon three design
cornerstones.
The Golf wasone of the first carsto take advantageof
computer-stressing
techniques
whichenableddesigners
to exploitthe
full weight-savingpotentialof front-wheeldrive [Daniels, 1985].
Secondly,the enginewasmodernandefficient.It wasbasicallyan
adaptedAudi 80 engine.It wasa relativelysophisticated
enginefor
a mediumsize volumecar, with greatpotentialto be stretchedor
adapted. One result was that in the late 70s VW could take
advantageof this to carve out a new market segmentof "hot
hatchback"
Golf GTIs (whichfor examplemadeup some40% of all
Rabbitsalesin theUS) [Hutton,1985,p. 19].Thirdly,its suspension
was simple but advanced,embodying important innovations
developedat Audi.
In all of these features one crucial factor was the transfer of
technology
fromtheup-marketAudirangeintoVolkswagen's
volume
cars.The productrenewalwouldhardlyhavebeenpossiblewithout
this.Audi hadbeenacquired
by Nordhoffin thelate 1960sasan upIVW carsweresoldwithdifferentnamesin theUSA: Audi80 = Fox;Passat= Dasher;Golf
= Rabbit. The Audi 50/Polo was not sold in the USA.
TheTransformation
of Volkswagen,
1967-1991
/ 119
marketmarqueto begintheprocess
of extendingVolkswagen's
model
range,butit hadhadfew linkswith themainbodyof thecompanyat
first.The transferof technology
thatdid takeplacewasnot assimple
and obviousa processas it might appear.In BL, for example,the
transferof technologyfrom up-marketranges,suchas Rover and
Jaguar in the 1970s, into the volume cars was never seriously
considered.In fact,it wasnot believedthatthe sortsof technology
requiredin thetwo segments
couldbe compatibleor thattransfersof
elementsof technologyfromtheoneto the othercouldbe donecost
effectively. It was also feared that transfer would lead to
homogenizationand debasementof the up-marketproduct.In the
Volkswagencasethe transferwas successfully
achieved,yet in the
processAudi retainedits identity (and a significantdegree of
autonomywithintheVolkswagenorganization)and,despiteperiodic
problemsin relationto largerVolkswagencars,the identityof the
Audi marquehasbeensuccessfully
preserved.
The Transformation
of Governance
The development
of newmodelsdidnotcomequicklyenough
to avert a severe financial crisis in 1974-5. The Golf and Passat were
launchedin 1974,buttheymadea slowstartbecauseof the oil shock
and recession,while salesof the old modelscontinuedto slump.
Hence, product-ledrecoverydid not really get underway until the
Springof 1975. In the meantime,a major crisisof management
organisation,
governance,
andlaborrelationscameto a head.Product
renewalhad comealmostdespiteinternalmanagement
crisesand
faction-fighting.
But the crisisof the early 1970salsoprovidedthe
occasionfor a fundamental
reformof VW management.
Before the crisis, the defects of the structure of decision-
makingin the companyhad beenbadlyexposed.UnderNordhoff,
whetherthecompanyhadbeenstate-owned
or partiallyprivatized,
ultimate control of the company rested in the hands of the
government. But after various vicissitudes in the 1950s, the
government
for themostpartwascontentto allowNordhoffto acton
Steven
Tolliday/ 120
itsbehalfin a quasi-trustee
role [Tolliday,1995].Nordhoff'sdemise,
however,triggereda rancorousand factionalperiod.From 1969,
when the Lower Saxony state governmentwas captured by a
Socialist-Liberalcoalition,the SupervisoryBoardhad an effective
12:9majorityof WorksCouncillors,
tradesunionists,or delegatesof
SPD-led federal and regionalgovernmentsclosely allied to the
unions.The presscommonlydescribedthis as a "red"majorityor
spokeof "over-codetermination"
at Volkswagen[Thimm,1976,p.95;
Streeck,1984,p. 44]. The Supervisory
Boarddid little to avertthe
Beetle
crisis in the late
1960s.
Instead
it became
an arena for
"politicizedintriguing"andhorse-trading,
particularly
centeredon IG
Metall'sstrategyto useVW asa pacesetter
for wagesbetween1968
and 1971 asit began,for the first time sincethe War, to bargainmore
aggressivelyto win a shareof Germanprosperityfor its members.
The wage questionbroughtsharpclashesbetweenboth Lotz and
Leiding and the unions,and, in part to repair this damage,Lotz
agreedto build a costlynew plantfor the NSU K-70 at Salzgitter,
which supportedemploymentin the region.
By December1974 the companywas in financialcrisisand
Leidingwasdeadlocked
with IG Metall andthe VolkswagenWorks
Council.The programof new investmentwaslargelycomplete,the
Beetle was rapidly being phasedout, and the new modelswere
coming on stream.But it seemedquite possiblethat recessionand
cash-flowcrisiscouldbringthecompanydownbeforethelong-term
program of product-ledrecoverycould take effect. Short-term
survival and cost cutting seemedto require drastic workforce
reductions
andit wasclearthatLeidinghadlittle chanceof carrying
throughsucha programwithoutacuteconflictwith the unions.
In thissituationof internalparalysis
it wasdirectintervention
by thegovernment
thatprovideda wayout.The Federalgovernment
wasboththe largestshareholder
in VW andwasalsoacutelyaware
of the significanceof eventsat VW for its wider political and
economicpolicies.A majorcrisisat VW coulddamagethe wider
economyseriouslyand involvemassivesubsidies
and disruptthe
government's
widerpromotionof "socialpartnership."
The Finance
TheTransformation
of Volkswagen,
1967-1991
/ 121
Ministry, acting in concertwith the big banks,thereforeused its
power to reshuffiethe SupervisoryBoard and bring in a new
Chairmanof the SupervisoryBoardanda new ManagingDirector,
Tony Schmucker, who had acted for the governmentin the
rationalizationof the steel industrybut who also had the strong
supportof IG Metall [Streeck,1984,p. 65].
Schmucker's
installationwasa highlyvisiblesignalthatthe
companywouldbemanagedin consultation
andco-operation
with IG
Metall andthe WorksCouncil, a rejectionof the approachof Lotz
and Leiding.The Supervisory
Board,whichwasthe level at which
theunionshadtheirgreatestinfluence,becamein effect"thecentral
policy-making
bodyof thecompany,actingonmatterswhichin other
companiesthe managementwould have beencarefulto reserveto
itself"[Streeck,1984,p. 67]. Comingat a time whenmajornational
legislationfor extendedco-determination
wasunderdiscussion,
these
developments
at VW werea significant
response
to traditionalunion
demands and ran into much criticism from business interests. On the
otherhand,precisely
because
of theirpoliticalsalience,
IG Metall was
at firstveryanxiousto usetheirnewpower"responsibly"
soasnotto
jeopardisewider politicaladvances.
It was one thing for the government,the unions,and top
managementto embracethe principleof co-operativemanagement;
it was anotherto find solutionsthatbothpartieswouldapprove.In
Britain, the nationalizationof British Leyland in 1974 saw the
putative adoptionof relatedcorporatistideas,but the principles
quicklybrokedownin faceof crises.At Volkswagenthenew system
immediatelyfaceda very severecrisisandcamethroughit not only
intactbut actuallystrengthened.
The crucial terrains of compromisewere, firsfly, that
Schmuckerwaspreparedto guaranteethat,thoughredundancies
of
some 25% of the total workforcewere required,he would only
implementthemwith the consentof the union.In its turn, IG Metall
accepted
theprincipalthatemploymentlevelsshouldbe dictatedby
the needs of the market and confined the area of debate to what was
the minimum
level of redundancies consistent with
"economic
StevenTollida),/ 122
reality."WolfgangStreeck[1984]alsostresses
theimportance
of the
solidaristic
strategyof IG Metall. IG Metall'shistoricorientationwas
to avoid the developmentof "sectional"pressureswithin the
workforcewhich couldproveintolerablewithin its multi-industry
structure.Accordingly,they were preparedto reject any "special
protection"for particulargroupsof workers,suchas government
subsidies
to to supportVW employment
whichwouldbe paidfor out
of the taxes of IG Metall
members in other industries.
There is sometruth in this in a generalsense,yet Streeck
exaggerates
theroleof encompassing
andsolidaristicelementsin IG
Metall'spoliciesat thiscrucialmoment.More importantwasthe fact
that the proposedredundanciesfell largely on the shouldersof
relatively marginal groupingswithin the union. In the 1974-5
redundancies
some40,000workerslosttheirjobs(almost30% of the
workforce).But a detailedanalysisby Rainer Domboisshowsthat
67% of theseworkerswere foreignworkers,particularlyTunisians
andItalians,andthata highproportionof the restwereold workers
or youngfemale workers.Employmentremainedlargely stablefor
male German workers with more than five years seniorityin the
companywho were well protectedby contracts,seniority,and the
interestrepresentation
of the Works Council.The companyavoided
the useof compulsory
redundancies
andinsteadreliedon voluntary
quitsor paid severance
contracts,but the structureof pressures
and
incentivesin thesecontractswas suchthattheywere hardto refuse,
especiallyfor the moremarginalworkers[Dombois,1982,pp. 432463]. The resultwas that the burdenwas disproportionately
carried
by thoseoutsidethecoreworkforcedefended
by theWorksCouncils.
In thiscrisisthecontinuityof "solidadstic"unionpolicieswas made
possible,andconfrontation
avoided,by thefactthatunderthebanner
of "nospecialprotection"
a largepartof theworkforcefounditselfde
facto outsidetheprotectionof the union.In Britain,a differentunion
ideology,notsoaverseto sectionalism,
paradoxically
meantthattheir
defenceof workers'jobs was muchmore all-encompassing
- a fact
that left noneof the room for compromisethat was so importantin
the VW
case.
TheTransformation
of Volkswagen,
1967-1991
/ 123
The trade-off, however, was very favorable to the residual
workforce. After 1975 VW adopteda "middle-line" employment
policy,essentiallyrestrictinghiringsin upturnsby usinghigh levels
of overtime and thus being able to minimise redundanciesin
economicdownswings.In returnthe unionscontinuedto offer high
levelsof internaljob flexibility,theabsence
of localjob controls,and
co-operativemanpowerplanning.The generaltrendof this was to
encourage
intensiveratherthanextensiveuseof humanresources
and
force attentionto continuoustraining and the developmentof
workforceskillswithin the company.Many observershaveargued
that this pattern of manpowermanagement(external rigidity but
internalflexibility)becamea majorcomponent
of VW's effectiveuse
of flexibleautomationin the 1980s,probablya beneficialunintended
consequence
of theoriginalpolicy[KohlerandSengenberger,
1983;
Hoff, 1983].
For the company and IG Metall the negotiationof the
redundancy crisis became a symbol of "co-operative crisis
management."Its path was greatlyeasedby unexpectedlyrapid
recovery from the crisis. Within months market revival and the
impactof the newproductrangeboostedsalesandVW soonfaced
problemsof relativeshortages
of bestqualitylabor.From mid 1975
to the late 1970sVW enjoyedone of its biggestboomsever and
profitssoared.
ThoughVW experienced
furtherproblems
in theearly
1980s, market successlargelycontinuedthroughthe 1980s.One
result was that employmentin VW's Germanoperationsactually
increasedover the courseof the 1980s [Volkswagen, 1980-90].
Continuallygrowingdemandmeantthatincreased
productivitydid
not requirethe job lossesso commonelsewherein the European
automobileindustry.
The Transformation of Strategy
The rapidrecoveryof the late 1970smadeit easierto resolve
the acutesituationin theUnitedStates.Volkswagen's
multinational
operationsstretched
backfor manyyears,andby 1970 12.5%of its
StevenTolliday/ 124
global outputof 2.2 million vehicleswas producedby its overseas
subsidiaries,
mainlyin Brazil, Mexico andSouthAfrica. As domestic
salesand exportsto the US declinedin the early 1970s overseas
productionplayedan importantrole in cushioningthe company.In
1972, for example,domesticproductionfell by 16% while foreign
productionroseby 46%. By 1975 37% of VW's globaloutputwas
producedabroad,andthecontribution
to cashflow wasa vital lifeline
for the company[Volkswagen,1975]. Nevertheless,
thoughforeign
investmentwas extensive(and an importantpart of Volkswagen's
successstorywhich it is not possibleto explore in this paper), it
involvedalmostsolelyinvestmentin marketslike Brazil andMexico
that were effectivelyclosedto importsandthereforecouldnot have
beensourcedfrom Germanyevenif the companyhad wishedto do
SO.
By 1974Volkswagenmanagement
hadreachedtheconclusion
thatthe US marketcouldonlybe retainedby buildinga plantthereto
escapethe hazardsof exchangerate fluctuation.Maxcy calls the
decision"theclassiccaseof defensiveinvestmentto preventthe loss
of a major export market" [Maxcy, 1981, p. 136]. Once the
redundancycrisiswas resolvedand domesticsaleswere reviving,
Schmuckerwas able to win the agreementof IG Metall to a pathbreakingsettlementon a majorinvestmentin the US, wherebythe
union not only consented
but was drawninto an activerole in the
developmentof investmentpolicy [Streeck, 1984]. This was
facilitatedin partby thecatastrophic
natureof the declinein salesin
the US. There was a broadconsensus
that thoughinvestmentin the
US might costjobs in the short-term,failure to investtherewould
alsoresultin the lossof thosejobs in the long-term.IG Metall was
thereforepreparedto acceptthe construction
of a US plant and
negotiateon the basis of improvedjob securityfor its German
members and an enhanced role for itself in such investment decisions.
On the firstissuethe companywasreadyto makeconcessions
since,
followingtheredundancies,
workforcenumbershadbeencutbackto
thecore:on the secondissue,despitehostilityto suchan extensionof
union jurisdictionamongother sectorsof the German business
TheTransformation
of Volkswagen,
1967-1991
/ 125
community,the extensionof involvementfor "responsibility"
was
seen as well worthwhile.
The US investmentwas, in fact, never very profitable or
successful,
andtheactualdecisionto investwasprobablylesscrucial
for thefutureof thecompanythanit appeared
at thetimeor shortly
afterwards.Perhapsmore important was its demonstrationand
confidence-building
effectfor laterdecisionson overseasinvestment,
most strikinglyin the caseof the acquisitionof SEAT in the mid
1980s.
VW and the German
Model
in the 1980s
Thus,in thespaceof a few years,boththeinstitutions
andthe
strategyof the companywere transformed.Yet, in the late 1970s
manycommentators
arguedthatGermancompanieslike VW would
be disadvantagedin internationalcompetitionby the growing
institutionalrigiditiesthatresulted.In fact, duringthe 1980s,while
the workplacerole of organizedlaborcontinuedto expand(union
densityincreased
from 68% in 1970to 86% in 1981)[Koch,1987,pp.
155-165],the Germanautomobileindustryprospered.
Accordingto
WolfgangStreeck,this success
wasan exemplarydemonstration
of
the competitiveness
of the "socialpartnership"embodiedin the
"German model" [Streeck, 1989]. In this view, VW's revival was
basedonanabilityto developdiversified
highqualityproducts
which
responded
flexiblyandquicklyto demand.Crucialto thiswerecooperativelabor/management
relationswhich made possiblethe
maximumutilizationof highly-developed
laborskillsat home,at the
sametime aspermittingthe pursuitof globalinvestmentstrategies.
A stableandskilledworkforceeffectivelyforcedfirmslike VW into
more demanding,and in the long-ran,more successfuladjustment
strategies.
UnderCarl Hahn,Volkswagen's
CEO from 1982to 1991,the
focuswas the so-called"technology
strategy."Hahn regardedthe
introductionof new technologyand processautomationas the
principal route to increasedproductivityand lower costs(an idea
Steven
Tolliday/ 126
widelysharedin Germanyat the time) [Jurgens,Malsch andDohse,
1993]. Many in the companysaw this approachas a distinctand
successful
alternativeto Japanese
methods[for example,Dankbaar,
1993],particularlythosewhointerpreted
Toyotismsimplyasa form
of speed-up
thatGermanworkerswouldnot accept[Dohse,Jurgens
and Malsch, 1985]. Volkswagen'semphasison technology and
automationwasdistinctivein theEuropeanautomobileindustry.The
focus was on utilizing institutionalizedlabor/management
cooperation
to operatea "humanized"
Taylorism,runningat resonable
speeds,andrelyingon technology-oriented
solutionsto production
problems.
Work cycleswerelongerandtheworkslowerpaced,while
increasedemphasiswas placedon hard technologymanagedby
skilled workersto controlcostsandraisequality[Jurgens,Malsch
and Dohse, 1993].
Symbolicof the strategywasthe automationof Hall 54 (the
huge central trim and final assemblyfacility at Wolfsburg) and
complementary
facilitiesin otherplants,linkedto the introductionof
the Golf 1I rangefrom 1983-4. Despiteits dramaticinnovationsin
automation,the plant remainedclassicallyFordist,focusedon a
narrowrangeof products,with minutesubdivisionof tasks,detailed
preplanning
andlinebalancing,
anda continuing
gulfbetweenskilled
indirectandunskilleddirectlabor.Therewaslittleplacefor teamand
group-workpracticesthatwereincreasingly
popularelsewhere.
The Works Council played a key role in supportingthe
"technology
strategy"
anddetermining
theshapeof workorganization
withinit. In particular,theywerereluctantto abandonthe traditional
distinctionbetweenhighlyqualifiedskilledworkers(Facharbeiter)
usuallyin indirectareas,andordinarylow-skilledproduction
workers
in directtasks.[This wasin sharpcontrastto the Japanese
emphasis
on reducingthe distinctionbetweendirectand indirectworkersand
homogenizingskill levels.]Their main priority,therefore,was to
createnewrolesfor skilledproductionworkerscontrollingcomplex
productionequipment(theAnlagenfuhrer)and to insiston intensive
and continuousin-house training. One result of this was the
accumulation
of "excess"
skillsin theplant,withyounghighlytrained
TheTransformation
of Volkswagen,
1967-1991
/ 127
workerslackingchallenging
tasksandfurtherincreasingpressureon
management
to introducemorecomplexautomation
to allow them
outlets for these skills.
Alongside this, the role of the Works Council was
significantlyextendedandenhancedin the 1970sand 1980s.Earlier
agreementswere consolidatedand extendedin a successionof
agreementsbetween 1978 and 1981 (known as LODI agreements)
which guaranteedhigh levels of employmentsecurity,full pay
protectionin job transfers,and continuous
trainingand retraining
rights[BrumlopandJurgens,1986;Brumlop,1986;Turner, 1991].
These agreementsare often described as a trade off of
increasedjob and pay securityin return for the more flexible
allocation
of laborby management.
In factthisis onlypartlytrue.In
comparison
to theUnitedStatestherewerefewjob classification
and
seniorityrulesto bindmanagement.
However,in practice,after 1979
all new time standards
and all work assignments
requiredadvance
approvalby theWorksCouncil.What wasmostdistinctivewasnot
the absenceof job controlsbut the patternof speedydaily joint
resolution
andquickimplementation
of thesematters[Turner,1991,
pp. 94-5; Thelen, 1992]
During the 1980s the Works Council extendedits reach still
further.Most notablewere the acquisitionof extensiverightsto
information
andconsultation
onplanningin theearly 1980s,andthe
acceptance
of co-determination
ontheintroduction
of newtechnology
from 1987,whichgavetheWorksCouncilreal influenceon plant
designandwork organization.At the sametime, VW continuedto
be thepacesetter
for IG Metall demandson workingconditions,not
only on training rights where they obtainedmost of IG Metali's
Qualifikationsoffensive
demands,but alsoon extendedbreak times,
shorter
workingweek,educational
leave,andtime-offin exchange
for
overtime [Streeck, 1989; Thelen, 1991; Turner, 1991].
Simultaneously,
buildingonthesuccess
of theAmerican
plant
in thelate1970sandearly1980s,Hahncontinued
to pushforwardthe
process
of internationalization
of thecompany,
andgenerally
received
a highdegreeof consensus
andsupport
fromtheunionin theprocess.
Steven
Tolliday/ 128
The Works Councilacknowledged
that wagesand conditionsin
Germanyinevitablymeantrelativelyhighcostproduction.This was,
however,to be offsetby thequalityandflexibilityof production
and
a focuson highervalue-added
products.With certainreservations,
therefore,
theyaccepted
thatlabor-intensive
production
andbottom
of the rangemodelswouldbe shiftedto low costlocationsoutside
Germany [Jurgens,1992]. In the early 1990s the Works Council
gradually accepted that effective low-cost production of
Volkswagen'ssmallerand technicallysimplercarscould only be
accomplished
outsideGermany,evenif thisinvolveda substantial
relocationof production
to SpainandEastGermany.
Crucially, however, during the 1980s, the continuous
expansion
of globalsalesmeantthatthiscouldbe donewithoutloss
of jobsin Germany.As longasforeignplantsled to increased
sales
of Germanproducts(via valuablecomponents
exportedto those
plantsfrom Germany)they actuallyresultedin a net increasein
Germanoutput.
For a timeat leasttheresultsof this"model"wereimpressive.
At home managementand labor allied behind a strategyfor
productive
success
whichalsoalloweda continuing
extension
of the
rights and authorityof worker interestsin the governanceof the
company.
Abroad,someof thecostsof thisstrategy
wereabsorbed
by
internationalization
andrelocationof productionwhich,for a time at
least, seemedto have few costsfor the German workforce.
But underlyingproblemsgraduallyassertedthemselves.
Firstly,the resultsof the "technology
strategy"weredisappointing
(though they were considerablybetter than GM's comparable
technology-led
effortsin the USA at the sametime)[Keller, 1989].
Automationdid not, in fact, solvethe qualityproblem,and VW's
processes
n•ded to be extensively
bufferedby costlyextralaborand
rework.Hall 54 wassubjectedto someof the strongest
criticismof
the highly esteemedInternationalMotor Vehicle Project(IMVP)
studyin the late 1980sandearly 1990sandwaslabelled"thefattest
productionsystemin theworld."Accordingto Dan Jonesof IMVP,
"theplantwasexpendingmoreeffortto fix the problemsit hadjust
TheTransformation
of Volkswagen,
1967-1991
/ 129
createdthanJapanese
plantsrequiredto makea nearlyperfectcarfirst
time" [The identityof theplantsis disguisedin Womack,Jonesand
Roos, 1990; but see Keller, 1993, p. 175 for some less discreet
comments].In particular,the criticsfocusedon the extensiveuseof
craftsmen to fix the defective work of robots.
Moreover,while the Germanmodelcontinuedto positsome
sortof trade-offbetweenqualityandefficiency,duringthelate 1980s
most automobile executives came to be persuadedthat "lean
production"offeredthe possibilityof combininghigh quality and
product flexibility with low costs and rationalization. The
Volkswagensystemalso implied a notionthat marketscouldbe
segmented
betweena high-qualitylow-competitionsegment(where
the "German model" would dominate) and a low-price highcompetitionsegmentwhich could be left to the Americansand
Japanese.But by the end of the decadesuchnotionshad become
outmodedas a resultof rapidchangesin quality,costsandproduct
developmentby US andJapanesecompanies.
By the late 1980sthe underperformance
of automationand
rising laborcostswere creatinginternaldiscontentin the company,
andplannersbeganto retreatfrom ambitiousautomationtargets.The
depthof the difficultiesandthe extentof theproductivityproblem,
however,remainedconcealed
by risingmarketsharesuntil the crisis
thatstruckthecompanyin theearly 1990s[Williams,Haslam,Johal
andWilliams, 1994,pp. 171-5].The time bombof risingcostscame
to a headwith the "profitless
prosperity"
of theearly 1990sandthe
huge lossesof 1991-2 during a period of recordoutput.In 1991
Volkswagenlost DM 770m duringthe biggestcar boomGermany
hadeverexperienced[Volkswagen,1991].
The internalrevolutionin the companytriggeredby these
eventsis still playingitself out. It resultedin a proliferationof
strategic new departuresincluding a dramatic accelerationof
production in low-cost locations (Skoda, SEAT, Mexico, East
Germany,China),a rethinkaboutthevalueof internal"Japanization,"
and the re-emergence
for the first time for almosttwentyyearsof
plansfor domesticrationalisation,
cost-cutting,
andevenworkforce
StevenTollida¾
/ 130
reduction,
symbolized
by thereplacement
of Hahnby thenewregime
of FerdinandPiechandhis "hard-man"
InacioLopez,controversially
head-hunted from GM. Nevertheless, even these moves have so far
beenacceptedwith a high degreeof consensus
by IG Metall andthe
Works Council.
Conclusion
VW's recovery from the crisis of the mid 1970s and its
successes
in the 1980s are often associatedwith the companies
adoptionof the "Germanmodel."This articlehasdemonstrated
that
the linkages between the success and the model are not
straightforward.
In certainrespects,broadermarket, productand
cyclicalchangesprovidedconditionsin which the "model"could
thrivefor a time despiteseriousshortcomings
whichwere later to be
exposed.
Nevertheless,
it wouldbe unwiseto write off the Volkswagen
approach to production systemsas fundamentallyflawed and
inevitably destined to give way to a superior practice of "lean
production"modelledon Japaneselines. Whatever its faults, the
"Germanmodel"at VW madepossiblea durablesystemof conflict
resolutionbetweenthe interestsof laborand management(evenon
issuesas sensitiveas internationallocationandjob controlat plant
level) that is rare in advancedindustrialnations.Attemptsto link
advanced automation and the accumulation of flexible worker skills
have thus far been less successful.But, as Japaneseautomobile
producersbeginto experiencea new rangeof difficultiesin the late
1980sandearly 1990s[Fujimoto,1994], andasmoredoubtsare cast
onthenotionthat"leanproduction"
represents
"theendof history"in
the managementof production,analystsmay well returnto VW's
"Germanmodel"as a subjectof continuinginterest.
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