Bad Business in the U.S.: Volkswagen Facing Yet Another Crisis

On an unusually sunny day in the middle of October, Pablo Di Si is standing on the steep and narrow Lombard Street in San Francisco. Behind Di Si, the president and CEO of Volkswagen Group of America, a line of colorful buses is winding down the street, well-known from a number of Hollywood car-chase scenes. The auto executive posts the photo on LinkedIn. It is, after all, a big day for the company. VW is celebrating the release of the electric minivan ID.Buzz in the U.S., and in interviews, Di Si reflects on the largest sunroof that Volkswagen has on offer. It is to be a new beginning.

In truth, the Argentinian is on his farewell tour. The top North American executive for the second-largest automobile company in the world is likely on his way out, with the executive board soon expected to present the supervisory board with a potential successor. Di Si would be history.

At VW headquarters, Di Si is seen as being partially culpable for the company’s biggest crisis since the diesel scandal. The fact that the company is terminating its in-house wage agreements for its sites in western Germany and is on the verge of closing plants in Germany for the first time in its history is also linked to the company’s missteps in the U.S.

More than a billion euros of expected earnings from North America will be missing by 2025, with Thomas Schäfer, the CEO of VW’s passenger car operations, having to scrounge up that money elsewhere. Chairman of the Board Oliver Blume, who declared success in North America to be a company priority, now has to begin looking around for a new executive for the region after just two years.

A Mountain of Problems

No matter who ends up taking over from Di Si, he or she is certain to find a mountain of problems waiting for them at U.S. headquarters in Reston, a suburb of Washington, D.C. Volkswagen operations in North America could slide into the red next year for the first time since 2020. Just as in Europe, the company is facing possible penalties for excessive fleet-wide CO2 emissions.

Di Si failed in the face of a monumental task: He was to use the shift to electric cars as a springboard to making Volkswagen a relevant player in North America. VW hoped that the strategy would enable the company to shake off a reputation sullied by its diesel deception and rake in billions in profits – in a market where Volkswagen has experienced very little success since the days of the VW Bus and the Beetle.

In comparison to the markets in Europe and China, the VW presence in America is tiny. But since 2021, the region has been consistently generating profits, and its returns have also been consistently ahead of the average for the rest of the world over the last two years. After many years of generating multibillion-dollar losses, the VW brand was able to send around a billion dollars to headquarters in Wolfsburg in 2022, from total sales of almost $20 billion.

Di Si took the helm in September 2022, a profitable moment for automakers. Semiconductor shortages and supply bottlenecks had tightened up supply in the dealerships, thus driving up prices and allowing manufacturers to focus on their most profitable models. Everything was being snapped up anyway, even in the U.S.

The new executive awakened expectations back in Wolfsburg that the pandemic-era profits would continue to pour in. A mistake. “You get such a job when you make big promises,” says a company executive who asked not to be identified. “And you lose it again because you are unable to fulfill them.”

Inaccurate forecasts from the U.S. executive have purportedly poisoned the relationship between Di Si and Schäfer. “They are like fire and water,” says someone who has seen the two together.

Even people from Di Si’s orbit say that the Argentinian, who came to the U.S. on a soccer scholarship he earned through his prowess on defense, was rather abrasive with his superiors back in Wolfsburg. They say that Di Si brusquely dismissed Schäfer’s warning that his plans were too optimistic. But the disagreements went beyond merely the tone of debate. The U.S. executive and his team, complains a Wolfsburg executive, rarely had solutions to offer, but have always been good for a problem.

The biggest one stretched back to before Di Si’s tenure: VW’s all-in wager on electric cars proved to have been massively misguided. The German company is making profits in North America with gas-guzzlers like the huge SUV Atlas, a vehicle which – at five meters in length and 1.8 meter high – is clunkier than any SUV the company sells in Europe. By contrast, sales of purely electric cars like the ID.4, which VW builds in its Tennessee plant, have been relatively slow.

VW’s CO2 Problems

But the administration of U.S. President Joe Biden has stiffened the rules regarding how much gas a passenger car is allowed to burn, starting next year. The situation promises to be particularly challenging for VW in California, the largest car market in the U.S., where the rules are even stricter than in the rest of the country: Starting with model year 2026, which begins about a year from now, 35 percent of carmakers’ sales will have to be so-called Zero Emissions Vehicles (ZEV), or they will have to buy pollution certificates from electric-only companies like Tesla. Currently, VW is roughly 10 percentage points from the 35-percent target.

In an effort to limit the approaching penalties and ensure that profits at least remain above zero, VW’s U.S. headquarters in Reston have begun calculating which combustion automobiles they will have to limit without sacrificing too much profit.

The list includes the Golf R. Imported from Wolfsburg, it is the more powerful version of model that has become a top seller in Germany. The vehicle is extremely popular in the U.S., but when it comes to fuel efficiency, “it’s a catastrophe,” says an executive in Reston.

Yet until recently, VWs rising sales numbers were Di Si’s pride and joy. On LinkedIn, the executive recently rejoiced that the brand had further increased its sales in the past quarter despite a shrinking market overall. That, though, was partially thanks to generous rebates that VW was relying on to prop up turnover.

Initially, the company had only intended to spend around $1,000 per car on promotional prices, discounted leasing rates and other incentives, around 30 percent less than before the pandemic. Instead, though, the VW discounts are currently around $1,300 or more.

Volkswagen’s competitors find themselves facing similar concerns. The more serious problem is a rather vexing paradox: Volkswagen’s fleet in the U.S. is currently extremely dirty, a function of the company actually trying to make it extremely clean. Under Blume’s predecessor, Herbert Diess, the man who installed Di Si in his current post just before being pushed out himself, set VW on a path toward purely electric cars – in the shadow of Tesla.

The Stagnating Electric Market in the U.S.

That was a mistake. The share of electric vehicles in the U.S. has stagnated at a level much lower than on this side of the Atlantic. Range concerns and a shortage of charging stations are more relevant limitations than in Europe. When compared to the vast emptiness of Montana or Wyoming, the wilderness outside of Wolfsburg is a pulsating metropolis.

In May, Di Si’s team presented Blume with an alarming forecast for the electric car market. Predictions to that point had held that every second new car sold in 2030 would be purely electric, but newer prognostications had lowered that figure to 40 percent.

Plug-in hybrids, meanwhile, were predicted to make up 20 percent of new car sales by the end of the decade. Such vehicles, which have both a medium-sized battery and a combustion engine, also help producers adhere to the ZEV regulations in California. In the coming years, however, VW will not have a single plug-in hybrid model on the U.S. market. “The cupboards are bare,” says a top executive.

Only in model year 2028 will a plug-in version of the SUV Tiguan be introduced, the U.S. version of which will, of course, be larger than its European namesake. As a next step, the North American branch of VW intends to create a hybrid version of the Atlas, its most profitable model, but that wouldn’t likely hit the market until 2030.

In Wolfsburg, executives are wondering whether the hybrid trend in the U.S. may have dissipated by then. Either way, the American branch brought the troubles on itself; in Europe, VW has a broad palette of such vehicles.

While that may be true, it is more the fault of Diess and Di Si’s predecessor, who is currently using billions of dollars from Wolfsburg to develop Scout, the electric pickup brand with its own factory in South Carolina. Di Si, for his part, asked for an evaluation as to whether the Tiguan could also be offered as a plug-in almost immediately after taking office. It was, as a spokesperson said a year ago, “one of the first things he did.”

“Wolfsburg Speed” instead of “China Speed”

Nevertheless, the hybrid is only coming five years from now. “Wolfsburg speed,” a U.S. executive says derogatorily, a reference to the “China speed” that Blume has recently propagated as the company’s goal. When Di Si was asked in a late September interview about the plug-in hybrid, he responded defiantly: “I’ve been fighting (for hybrids) – fighting is the right word.”

To finance the development costs, the American branch has given up on a purely electric SUV, which would have been a bit smaller than the ID.4. In the current landscape, creating an image as an electric forerunner is no longer a priority.

The only mantra now is: Remain profitable, despite the penalty payments. That, at least, was the message sent by VW’s new CFO and the company’s head of sales to U.S. executives during a trip to the region in early October.

In its desperation, the leadership team in Reston is beginning to consider what tricks they might be able to employ to limit the CO2 penalties the company will have to pay. One plan envisions only offering SUVs like the Tiguan or the smaller Taos with all-wheel drive instead of front-wheel drive. Under U.S. regulations, all-wheel drive SUVs could be classified as light trucks instead of passenger vehicles, and thus be subject to less stringent CO2 emissions standards.