From "Beetle Monoculture" to the "German Model": the Transformation of Volkswagen, 1967-1991 Steven Tomday Departmentof Economicand Social History, Universityof Leeds,UK The German automobile industry, and particularly the Volkswagencompany (VW), has been a crucialpart of Germany's post-warmanufacturing success story. In the 1980s,VW is oftencited as an epitome of the successfactors in this area. Writers such as Wolfgang Streeck, Lowell Turner, and Kathleen Thelen have examined its institutional relationshipsas embodimentsof "microcorporatism,""social partnership," 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 organizationin the contextof a relativelysuccessful alternative form of productionorganization to theJapanese or "leanproduction" models[Jurgens, Malsch and Dohse, 1993; Dankbaar,1993]. What is lessclear in thesewritings (which are not primarilyhistorical in focus) is the extent to which the "model" causedthe success.This articleis a preliminaryexploration of someof the issuesinvolved in suchan analysis. The starting point is that the institutional and production structuresof VW have not evolved smoothly and continuously throughthe postwaryears. In fact, there have been two periodsof institutionaland productive success and stability, with a periodof crisis and transformation in between. From the late 1940s to the late 1960s,VW succeededon thebasis of relentlessmass production of a single-model("Beetle monoculture"), in a mannerthat madethe companyalmost "more Fordist than Ford." The factory was organized BUSINESS AND ECONOMIC HISTORY, Volume 24, no. 2 Winter 1995. Copyright¸1995 by the BusinessHistory Conference. ISSN 0849-6825. StevenTolliday / 112 alongthe linesof a minuteTaylorized division of labor,paced by the assemblyline. Model variety was rigorously eschewed and innovation neglected.Labor was generally co-operative but clearly subordinate, contentto take its 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 successcame under very differentconditions. The companyproduced a rangeof models,featuring quality, high technology and innovation. Work organizationcombined features of high automationand a highlyskilled workforce. Labor was involved with a powerfulvoice in all levelsof corporatedecisionmaking ("microcorporatism"). And VW becamea complexglobal multinational with severalimportant internationalproduction bases. In otherwords, VW successin thetwo periodswas based on two very differentinstitutional and production systems.What drovethe transition?Did the new "Germanmodel" producethe successesof 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 significantdirect competition in the domesticmarket until the 1960s when demandbegan to movetowards larger and more comfortable carswhere Ford of Germanyand GM-Opel werewell-entrenched and investing heavily. Then, from the mid 1960s the continuously expandingseller's market came to an end as car salesfailed to increase in 1966 for the first time since the War and thereafter advancedmuch more slowly [Ludvigsen,1975, pp. 69-71]. VW had to adjust to rapidly changingcircumstances. In particular, its commitmentto a single-modelpolicy, the sourceof so muchof its successsince the War, becamea majorliability. As lateas 1960,92% of VW productionwas Beetlesand it was still 68% in 1968. VW's domesticmarket share slipped from 45% in 1960to 33% in 1968 and 26% in 1972.VW becameprecariously dependent on exportsales to sustainits volume.In 1968 VW sold70% of its outputabroad, 40% TheTransformation of Volkswagen, 1967-1991 / 113 in the United States.Franz-Josef Strauss publicly accusedVW in 1967 of having"too many cars and too few ideas"and asked "what happenswhen the Americansstop being amusedby the Beetle?" [Nelson, 1970, pp. 272-82]. The companydid not develop any clear responseto these changingcircumstances. Initially HeinrichNordhoff, the Managing Directorof VW, simplytinkered with the Beetle,introducing more powerful versionsor facelifting it, while US safetyregulations also forcedextensive (and costly) modifications on the Beetle.The result was a plethoraof confusingengineering changes. This wascarried so far that the authoritativecatalogue of Beetle design-changesstates thatonly one detail of the originalBeetle avoided modification - the crosssection of the metal channelthat holdsthe rubberstrip to seal the bonnetand boot [Etzold, 1988,p.6]. One resultof this was that the Beetlebecame increasingly complex and costlyto build. Attemptsto graftnew modelson to theBeetle design formula, suchas the 411 or the Super-Beetle,were not successful.The 411 has beendescribed by criticsas a "grotesquesymbol of VW's fumbling inabilityto replacethe Beetle"; others called it the "deformedson of theBeetle" [Brenner, 1989]. It wascompletely inadequate to confront its contemporaryrivals such as the Renault 16, Opel Rekord, or AustinMaxi. The Volkswagenengineers seemed to havelost their touch.One road test at the time notedthat the locationof the engine was so bad that the car could have its oil changed"only by an asbestos-coatedoctopus" ["Road Test," 1968]. Only 226,000 were soldin fouryears before it waswithdrawn. By the timeof Nordhoffs resignationbecause of ill health in 1967, there was little sign of anythingbetter on the way. When Kurt Lotz joined the companyas vice-chairmanin 1967he "askedfor newdevelopments which were in the drawers...... To my greatsurprise the drawerswere empty.In addition,new technicalconceptions were not even in discussion" [Lotz, 1978, p.97]. VW's positionin the US marketwas the decisivepoint of the company'sfortunes. From the mid 1960sthere was a loomingthreat thatthe American public's long love-affair with "thebug" might come StevenTolliday / 114 to an end.It hadbeen pilloried for its safetydefects by RalphNader whodubbed it "themost hazardous car currently in use"on American roads,"so unsafe that it shouldbe removedfrom the roadsentirely" [Nader,1971, pp. i-vii. At thesame time its previouslyunique market segmentwas attacked by newJapanese challengers, especially Toyota and Honda, who targetedVW head-on and offered a variety of distinctiveand innovative models in this segment[Rader, 1980, pp. 37, 42, 76]. The true vulnerability,however, became fully apparent oncethe traditionallyundervalued Deutschmark began to be forced upwardsfrom 1969.In 1969the exchange rate was DM 4 to the $; by 1975it hadmoved to DM 2.5. Revenueper car plummeted.In 1974 VW lost moneyon every car sold in the United States(a loss of DM200m on its US operations)[Thimm, 1976, p. 100]. Plunging salesraised the possibility of a break-upof VW's distributionnetwork in the US asdealers defected, particularly to Japanesefirms [Streeck, 1984, p.82]. Volkswagensales in 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). Sales of theBeetle melted away from 354,000to 27,000. Largelyas a resultof the disastersin the USA, Volkswagen's global ouputfell from 1.6 million vehiclesin 1971 to 1 million in 1975. Volkswagen'scrisis in face of the appreciationof the Deutschmarkand changingmarkets at this time were a striking contrastto the performanceof mostof the restof Germanindustry whichgenerally met risingcosts through increased productivity and innovation,with the result that the overall Germantrade surplus increased from DM 16 billion in 1970 to DM 37 billion in 1975. In theearly 1970s Volkswagen's deteriorating position looked almostirretrievable. Profits tumbled and, despite being able to draw on reserves,the companyrecorded losses of DM 807m in 1974 and DM 157min 1975.Nor wasit apparentthat VW hadthe capability to turn itself around.The companyhad no trackrecord of successful model development,its corporate decision-makingstructures appearedcumbersome with the unionspowerfully ensconced, and its dependenceon an undervaluedDeutschmark was painfully exposed. TheTransformation of Volkswagen,1967-1991 / 115 It wasby no meansobvious that VW wasmore likely to recoverthan, for example,British Leyland, anothermajor Europeancompany undergoinga severecrisis at the time. BL at least had a strong traditionof productdevelopment and innovation; in the pastfifteen yearsit had broughtto market both the Mini and the Maxi, each of which had pioneered new market segments and product configurations.BL alsohad much more explicit commitments from its governmentto fundrecovery than VW had.Yet twentyyears later BL had disappearedas a majorplayer from the autoindustry while VW had advancedto numberone in Europe.How did this come about? The comparisonwith BL shouldnot be overdrawn.Firstly, Volkswagenhad certainresidual strengths which BL lacked.Long yearsof uninterruptedprofitability gave them a financialcushion and resourcesto fundchange that BL lacked.They alsohad high quality factoriesand capital stock which could be adaptedto new uses.And they had a further income cushionin revenue flows from their overseasoperations, which helped to bufferthem in the early 1970s. But in the mid 1970sthey had to go througha major transformation which involvedthe developmentof new productsand production processes,the reconstructionof top management,major workforce reductions and a new orientation