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VW Makes a Mistake for the Ages

Beelte 2My company has a small office in Germany. I travel to the country regularly. And my respect for German manufacturing and engineering takes a back seat to no one.

But I have to tell you, the people at Volkswagen behind the decision to install software that allowed the company’s diesel engines to beat emissions tests in the U.S., while allowing them to then spew large quantities of pollutants (up to 40 times more than the federal standard) under normal driving conditions, made a decision that in a best case scenario might merely result in few hundred million dollars in fines. But in reality, those German execs so outsmarted themselves, and so proved to be tone deaf to the American market, they may just have literally killed their company in the process.

VW TDIBecause now, we’re no longer looking at an executive decision that may take down VW. According to the latest reports, the scope of the EPA probe has been expanded to include both Audi and Porsche diesel engines as well (both of which are manufactured by VW). As a result, this horribly calculated gamble may end up being responsible for doing irreparable harm to not one, but three, iconic car brands.

And should you think I’m just overreacting or simply blowing smoke, consider. Many people forget that VW is a car with its roots in, of all places, Nazi Germany, or that the company was launched under a personal directive from Hitler himself. All most know is that in the 1960s the VW Beetle emerged as a marketing phenomenon, if not a cultural icon. And while some of that was a result of that funny looking little car being embraced by the counter culture, the bulk of it owed to the fact that the Beetle became the centerpiece of what the editors of Advertising Age once called the single most brilliant and successful ad campaign in the history of Madison Ave.

VW NazisSo it’s not, in other words, like VW in an U.S. company with its roots squarely planted in the early days of American industry, much less the American psyche. To the contrary, its roots trace back to a guy we equate with evil. As a result, all the brand equity VW has spent nearly 60 years creating could be taken away like that.

And as far as Audi and Porsche go, while terrific cars and status brands, in this country both remain niche products for niche audiences. For that reason, their demise, while making an impact on the world economy, would likely only cause a whimper up and down Main Street America.

Estimates are that, since the diesel engine in question cannot be effectively retrofitted, a total recall could cost VW anywhere between $7.5 billion and $40 billion – and those were the figures that industry experts were bandying about before the news about Audi and Porsche broke this past week.

greenwashingConsider this immediate fallout, all of which has happened within a few weeks of the scandal breaking:

  • VW’s stock priced has dropped almost 10%.
  • Citing the company’s betrayal of the public trust and its corresponding loss in consumer confidence, Moody’s has downgraded VW, which will further hamper its ability to secure the kind of credit necessary to execute the extensive recall undoing this mess would require.
  • While VW sales figures actually rose 1% in September from the year prior, most auto manufacturers saw double-digit growth following the news, with the industry average for all manufacturers being just north of 16%.
  • Even though it is only weeks after the news broke, already dozens of lawsuits have been filed against VW, most of them class action suits, whose cause range anywhere from the environmental damage being done by cars driven by people who bought them under the premise they’d offer up to 97% fewer emissions to the fact that the average resale value of a VW diesel vehicle has deceased over $5,000 in a month’s time.

Time will tell how this will play out, but a few things seem clear even at this early juncture.

VW ProtestFirst, American consumers are a lot greener than many manufacturers want to believe.

Second, for all the talk about bureaucracy and inefficiency, it is clear the U.S. federal government still carries a ton of weight in the marketplace and can be relentless when it unearths something that seems even slightly fishy. (And, for what it’s worth, the EPA has notified all carmakers it intends to extend its probe into emissions and mileage figures to other models and companies.)

Piech WinterkornAnd finally, as important it is for us manufacturers to understand our products, it’s equally as important we know our customers. In fact, for years Ferdinand Piech, a VW advisory board member had been telling his fellow members now-ousted CEO posed a liability for the company.

Why? Because as Piech said to the VW advisory board time and time again, “He doesn’t understand the U.S. market.”

Manufacturing’s Good/Bad News: the Rules Keep Changing

SmokestackThe short answer is this: manufacturing is no longer a world of belching smokestacks, countless rail cars, and factories filled of mindless repetitive jobs. Nor is it your father’s idea of how things get made in this country. Today, in fact, whatever rules you may have been taught, or may think you know about the process by which the U.S. makes, distributes and sells durable goods here and abroad may already be obsolete.

Consider these two recent (and, at least on the surface, inconsequential) news items I stumbled upon over the last few weeks, each from opposite sides of the industrial spectrum.

First, Etsy, a boutique online marketplace specializing in limited-quantity, high-quality handcrafted goods recently started putting together its online retailers with small-capacity manufacturers around the globe. The former, often mom-and-pop sellers who have found themselves suddenly overwhelmed with unexpected demand for items they’ve put on Etsy, are now able to contract with the latter, who then work hand in glove with those retailers to ensure high quality workmanship is brought to a higher-quantity production process.

EtsyMany purists have balked, saying the arrangement stands in direct contrast to the very principle upon which Etsy was built. But as the U.S. economy becomes more and more fueled by niche concepts, niche demand, and niche processes, this story may just hold implications that go far beyond a handful of artisan craftsmen and need-filling suppliers.

Can you imagine how that concept might play itself out in the industrial world in which many of us operate, where niche customers and factory owners could potentially meet online and develop relationships built on highly specific demands and necessary and available production capabilities? The prospects are either terrifying or exciting, depending, I suppose, on your relationship with change, your working knowledge of the online world, and your shop’s readiness for the future.

UPS 3DThen there’s this: UPS, the giant granddaddy of all freight delivery services, is now openly and actively seeking to answer an important and tremendously salient question. What impact will applied manufacturing (or 3D printing) have on to America’s supply chain – and, by extension, the very business model upon which UPS has built the bulk of its business?

At this point, no one knows. But it’s not hard to imagine a day when sprawling warehouses become all but obsolete, and where the lean manufacturing that has become so commonplace in our sector becomes leaner still. And in such a scenario, it’s not hard to imagine a supply chain in which the need to ship large quantities of raw materials and/or finished goods even relatively short distances gets reduced to the barest of minimums.

Etsy MfgTo that end, UPS recently purchased 100 such 3D printers and is now going to spend the weeks, months and even years ahead measuring, testing and analyzing the extent to which additive manufacturing changes our country’s supply chain and both the nature and volume of their commercial business.

What does it mean to manufacturing? Your guess is as good as mine. But I do know this. The game has changed – or at least it’s rapidly changing, along with the players in it. And anyone who earns a paycheck in our sector would do well to wake up to that fact and plan accordingly.

Lee WestwoodIs it the end of the world? Not by a long shot. In fact, my sense is many of the same manufacturers we have today will still be the players of tomorrow. But the rules of how and when we manufacture things are changing so dramatically and so swiftly it can make your head spin. What’s more, those rules are going to continue to evolve as they become more and more reliant on technologies that, frankly, we still don’t fully understand.

It’s going to be a challenge, no doubt. But it’s going to be fun as well. And it’s going to create some exciting new business opportunities – especially for entrepreneurs, venture capitalists and manufacturers prudent enough to see an opportunity and strike those slivers of time when the iron is hot.

Amazon HandmadeOh, and if you want to get a sense of just how fast the rules and the players are changing, consider: just weeks after Etsy announced it was marrying retailers and manufacturers, the biggest, most powerful retailer on the block – namely, Amazon –announced it was launching an all-new service specializing in homemade and hand-crafted items, clearly in response to Esty’s internet dating site for small retailers and manufacturers.

Roller CoasterMeanwhile, just days after UPS announced its experiment with 3D printers, FedEx said it too would be buying 3D printers. But unlike UPS, FedEx was going to be putting its printers directly into their trucks. That’s right; into its trucks.

Fasten your seatbelts, my friends. I may not be a genius, but I’m not sure it takes one to realize this ride is not only going to be wild, but it’s just now getting started.

Throwing the Baby Out With the Bathwater

BoeingWe’ve all heard the news. Boeing announced last week it had just lost two major international satellite contracts, which could impact thousands of American manufacturing jobs, and force the company to start looking offshore to fulfill certain aspects of its production. General Electric, meanwhile, announced a few days ago it would send some 500 American jobs overseas. And other industrial giants, such as Caterpillar, have likewise voiced concern and are now openly questioning the viability of certain aspects of their domestic operations.

CaterpillarSeriously? Weren’t we in this exact same place just a few decades ago? Has the cycle really repeated that quickly? And didn’t all those lean years and all that job bleeding teach us anything?

The problem, of course, is the death of the federally backed Export-Import Bank, a government agency designed to spur new business initiatives and foster international trade. The agency was officially shuttered July 1 when Congress, fueled by a torrent of Tea Party rhetoric about – what else? – small government and no debt, voted to stop funding the Ex-Im Bank, effectively killing it.

Ex-ImA couple of weeks ago I wrote about how clueless those fringy right Tea Partiers are (a bunch of head-in-the-sand zealots who, much to the Democrats’ delight, have completely hijacked the GOP). I wrote how some debt is actually good for a company, and how borrowing capital from a bank to buy a new machine or build a new, state-of-the-art factory is actually a sign of strength; an investment in – and bullish statement on – one’s future.

What’s more, a government works best when it works hand-in-glove with industry to make it stronger, while at the same time policing it so that it operates in a manner that is environmentally, socially and morally responsible.

Debt negotiationsBut these yahoos are so utterly convinced that by simply reducing our debt it will somehow restore the luster to our economy, as if the thing needs fixing. Look, my company is living proof that American manufacturing has spent the past two decades in full-scale hyper-growth mode, achieving production levels and a kind of chest-beating pride it has not known for over half a century.

Time Tea PartyBut all that growth, re-shoring, and reclaimed pride are now threatening to come to a screeching and painful halt. Why? Because a bunch of idiots, a vast majority of whom have never run a business in their lives, or operated even a lemonade stand in the open marketplace, just opted to throw the baby out with the bathwater.

Those creepy Kool Aid drinkers so hate President Obama, so want to embarrass, short-circuit and even emasculate him, and so believe in the holy righteousness of their own cause, that apparently they would rather destroy the very thing they profess to love, if doing so somehow proved them right.

But you know what? They’re not right. In fact, not by a long shot. And now we have real-life manufacturers and real-life job-creators like Boeing, GE and Caterpillar to prove just how wrong they are.

Obama jobsAs Caterpillar chairman and CEO Doug Oberhelman told the New York Times, “A lot of our suppliers are small. They don’t export, but we do. And if we aren’t exporting, they aren’t selling to us.” He then added, “I find it staggering that we would put highly paid export-oriented jobs at risk.”

Why would the far right do that? Who knows? But it reminds me of the old story of the frog and the scorpion. You know that one, right?

Frog-and-a-ScorpionThe scorpion wants a ride across the river on the back of a frog, who balks, believing the scorpion will bite him. “That’s crazy,” says the scorpion. “If I bite you, we’ll both drown.” So the frog relents, only to be bit by the scorpion halfway across. “But why?” asks the poisoned frog as he’s about to go under. “I can’t help it,” says the scorpion, he too about to go under for one final time. “It’s in my nature. It’s what I do.”