God’s representative on earth listens to it, and so does the governor of the second-oldest central bank on the planet. The Vatican and the Bank of England both turned to McKinsey when they felt the urgent need to change. But Volkswagen’s Wolfsburg castle headquarters is now proving much harder to storm.
A riot among unions forced VW to axe McKinsey as a consultant in a clash over a crucial cost-cutting programme, Reuters reported on Aug. 7 citing three sources with knowledge of the matter. Europe’s largest carmaker urgently needs to address a mounting cost problem in its core brand, VW passenger cars. While accounting for 57 percent of all sales, the biggest brand only generates a fraction of the group’s automotive profit. Despite a recovering European car market, its core brand operating margin slipped to a measly 2.1 percent in the first half of 2014.
Chief Executive Martin Winterkorn wants to cut annual costs at VW passenger cars by 5 billion euros. He turned to McKinsey for help, as VW has done in the past, but apparently forgot to consult the unions beforehand. Workers were up in arms, fretting about McKinsey’s presumed obsession to slash the headcount in production. This fear could be overdone – Volkswagen has clearly ruled out job cuts and wants to optimise procurement, distribution and R&D.
The successful union revolt against McKinsey is a bad omen for Volkswagen and the wider German economy. Volkswagen is the holy grail of Germany’s “Sozialpartnerschaft” or cosy industrial relations between unions and management. Volkswagen workers are better paid than their colleagues at other industrial employers, and enjoy above-average social perks. The flipside is that wage costs at VW have outrun productivity in recent years.
Volkswagen’s management is right in addressing that problem. But when the Vatican and the Bank of England are more willing to accept home truths than one of the country’s biggest private employers, it is time to start worrying.