From "Beetle Monoculture" to the "German Model": the Transformation of , 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 '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 thecontext of 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 lines of 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- 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 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 thetime of Nordhoffs resignationbecause of ill health in 1967, there was little sign of anythingbetter on the way. When 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 theroads entirely" [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 theUS 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 theunions powerfully 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 theearly 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 to overseas investment and production- and to do all this without losing their valuableco- operativerelationship with theirworkforce.

The Transition to a New Model: Product Development

Probably the most crucial element of the turnaroundwas Volkswagen'sability to successfullyrenew its productrange and to movefrom its narrowdependence on theBeetle to its deploymentof thebroader and more diverse Golf//Passat range on whichit has foundedits successsince the mid 1970s.This transitionrequired a fundamentalbreak in thecompany's "etched-in psyche" of the Beetle erafocused on an engineeringtradition of incrementalimprovements to a 1930sdesign [Wood, 1983, p. 47; Lotz, 1978, p. 109]. As we StevenTolliday / 116 have seen,the first stepswith the 411 and Super-Beetlewere not auspicious.But between 1968-74 a total reconstructionof the company'sproduct portfolio was carried through. The untidyand contradictory history of productdevelopment in this periodis crucial.Early strategicdecisions had a profound impact.Right at thebeginning of theprocess, the new Chairman, Kurt Lotz, decided to make a fundamental shift from an air-cooled rear engine to a water-cooledfront engine as the basis for a modern, lightweight,compact, and fuel-efficient range of carsfor the 1970s, a configurationthat 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 smallcar to competeagainst the 500, Renault 4, and Citroen Dyane. Volkswagen'splanners decided that this segmentof the marketwould remain relatively small and intensely competitivecompared to a medium-sizedcar, and that a small car wouldnot thrivein the UnitedStates. Lotz andhis plannersdecided to developnot just a singlecar but an integratedrange of carswhich wouldbe simplerto build thanthe Beetleand which would reduce costsby useof commoncomponents across the range [Lotz, 1978]. But the developmentof this wholly new 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 mistakesthat HenryFord hadmade with the Model T in the 1920s, whenthe best-sellingcar in historyhad been rejected by the market andFord had founditself without a successorproduct. In the 1920s Fordhad to go througha traumaticprocess of closure,loss of 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 improveand developthe existingrange of Beetle-based vehicles,even though this wouldresult in a numberof short-lived carswhich would have to be writtenoff very quickly[Lotz, 1978,p. 101]. Simultaneously,the companyworked intensivelyon the developmentof its new modelrange. TheTransformation of Volkswagen, 1967-1991 / 117

In pursuitof radicalproduct innovation the companyset up threeindependent design teams to work simultaneouslyon different and possiblyrival productconfigurations. Volkswagen engineers at Wolfsburg would explore front-engine, rear-wheel drive configurations;engineers from the newly-acquiredAudi subsidiary woulddevelop front-engine, front-wheel drive projects; and engineers,working under contract,would developmid-engined projects.This did notexhaust the range of productdevelopment. Latz alsorushed a newcar from NSU (anothernewly acquired subsidiary), theK-70, throughdesign and development as a furtherindependently engineeredmiddle-sized car with a water-cooledengine "in orderto get the public usedto this changeof technologyat Volkswagen" [Latz, 1978,p. 105].The car had numerous problems and never sold well andit resultedin heavylosses because it hadbeen put into a new plant at Salzgitter specially constructedfor it (partly under governmentpressure for regionalemployment creation). This proliferationof developmentprojects was very costly, requiringa peakfinancing of asmuch as DM2 billionin a singleyear, andcut into profits.Senior management recognised that even if the domesticmarket remained strong and US profitsheld up, profits would shrink almost to zero before the new models could be launched around1974. In fact, actualprofits collapsed to a lossof DM 807m in 1974 [Volkswagen,1974]. Many in the companysaw Latz's "doublestrategy" simply as confusionand lack of direction.Serious quarrels broke out with factionsforming on the ExecutiveCommittee and the Supervisory Board and in a confusedepisode Lotz was fired in September1971 after only two and a half yearsin office, amidst allegationsof an "excessivelyauthoritarian attitude" [Thimm, 1976, p. 98]. Rudolf Leidingcame in asCEO andproceeded to reduceand channel Lotz's multiple projects.He cancelledthe Porscheproject and put the independentNSU work (whichlater formed the basisof the 50 and Polo) on hold. At the sametime, he backed off from the idea of a wholly integratedmodel programbecause of the huge costsof simultaneousdevelopment. Instead of anall-new larger version of the StevenTollida), / 118

Golf thecompany introduced the Passat, based on theAudi 80, which easeddevelopment problems but compromisedthe commonization programand, to someextent, cannibalized Audi 80 sales.Bowing to financialconstraints and bottlenecksin the supplyof toolingand assemblyequipment, Leiding also retireetabled the programto avoid introducingmore than one all-new model in anysingle model year. Most importantly,Leiding (a formerchief of Audi) decidedto focus on the projectfor the front-engined,front-wheel drive car that Latz hadplaced in thehands of theAudi engineers.This projecthad been only oneof manyunder Latz butwas now brought to centerstage for the wholeorganization. The outcomeof thiscomplex and confusing process was the introductionof theGolf-Jetta range of carsfrom 1974.• The range embodiedsome fundamental design and engineering innovations and essentiallycreated a new paradigmfor car designfor a decadeor more. The leadershipof the Golf was basedon three design cornerstones.The Golf was one of the first carsto take advantageof computer-stressingtechniques which enabled designers to exploitthe full weight-savingpotential of front-wheeldrive [Daniels, 1985]. Secondly,the enginewas modernand efficient. It was basicallyan adaptedAudi 80 engine.It wasa relativelysophisticated engine for a mediumsize volumecar, with greatpotential to 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 examplemade up some40% of all Rabbitsales in 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 technologyfrom the up-market Audi rangeinto Volkswagen'svolume cars.The productrenewal would hardly have been possible without this.Audi hadbeen acquired by Nordhoffin the late 1960sas an up-

IVW carswere sold with different names in theUSA: Audi 80 = Fox;Passat = Dasher;Golf = Rabbit. The Audi 50/Polo was not sold in the USA. TheTransformation of Volkswagen, 1967-1991 / 119 marketmarque to beginthe process of extendingVolkswagen's model range,but it hadhad few linkswith themain body of the companyat first.The transferof technologythat did takeplace was not as simple and obviousa processas it might appear.In BL, for example,the transferof technologyfrom up-marketranges, such as Rover and Jaguar in the 1970s, into the volume cars was never seriously considered.In fact, it was not believedthat the sortsof technology requiredin thetwo segmentscould be compatibleor thattransfers of elementsof technologyfrom the oneto the othercould be donecost effectively. It was also feared that transfer would lead to homogenizationand debasementof the up-marketproduct. In the Volkswagencase the transferwas successfullyachieved, yet in the processAudi retained its identity (and a significantdegree of autonomywithin the Volkswagenorganization) and, despite periodic problemsin relationto largerVolkswagen cars, the identityof the Audi marquehas been successfully preserved.

The Transformation of Governance

The developmentof newmodels did not come quickly enough to avert a severe financial crisis in 1974-5. The Golf and Passat were launchedin 1974,but theymade a slowstart because of the oil shock and recession,while salesof the old modelscontinued to slump. Hence, product-ledrecovery did not really get underway until the Springof 1975. In the meantime,a major crisisof management organisation,governance, and labor relations came to a head.Product renewalhad come almostdespite internal management crises and faction-fighting.But the crisisof the early 1970salso provided the occasionfor a fundamentalreform of VW management. Before the crisis, the defects of the structure of decision- makingin the companyhad beenbadly exposed.Under Nordhoff, whetherthe companyhad been state-owned or partiallyprivatized, ultimate control of the company rested in the hands of the government. But after various vicissitudes in the 1950s, the governmentfor themost part was content to allowNordhoff to acton StevenTolliday / 120 its behalfin a quasi-trusteerole [Tolliday,1995]. Nordhoff's demise, however,triggered a rancorousand factionalperiod. From 1969, when the Lower state governmentwas captured by a Socialist-Liberalcoalition, the SupervisoryBoard had an effective 12:9majority of WorksCouncillors, trades unionists, or delegatesof SPD-led federal and regional governmentsclosely allied to the unions.The presscommonly described this as a "red"majority or spokeof "over-codetermination"at Volkswagen [Thimm, 1976,p.95; Streeck,1984, p. 44]. The SupervisoryBoard did little to avertthe Beetle crisis in the late 1960s. Instead it became an arena for "politicizedintriguing" and horse-trading, particularly centered on IG Metall'sstrategy to useVW as a pacesetterfor wagesbetween 1968 and 1971 asit began,for the first time sincethe War, to bargainmore aggressivelyto win a shareof Germanprosperity for its members. The wage questionbrought sharp clashes between both Lotz and Leiding and the unions,and, in part to repair this damage,Lotz agreedto build a costlynew plant for the NSU K-70 at Salzgitter, which supportedemployment in the region. By December1974 the companywas in financialcrisis and Leidingwas deadlocked with IG Metall andthe VolkswagenWorks Council.The programof new investmentwas largelycomplete, the Beetle was rapidly being phasedout, and the new modelswere coming on stream.But it seemedquite possiblethat recessionand cash-flowcrisis could bring the company down before the long-term program of product-ledrecovery could take effect. Short-term survival and cost cutting seemedto require drastic workforce reductionsand it wasclear that Leiding had little chanceof carrying throughsuch a programwithout acute conflict with the unions. In thissituation of internalparalysis it wasdirect intervention by thegovernment that provided a wayout. The Federalgovernment wasboth the largestshareholder in VW andwas also acutely aware of the significanceof eventsat VW for its wider political and economicpolicies. A major crisisat VW coulddamage the wider economyseriously and involvemassive subsidies and disruptthe government'swider promotion of "socialpartnership." The Finance TheTransformation of Volkswagen, 1967-1991 / 121

Ministry, acting in concertwith the big banks, thereforeused its power to reshuffie the SupervisoryBoard and bring in a new Chairmanof the SupervisoryBoard and a new ManagingDirector, Tony Schmucker, who had acted for the government in the rationalizationof the steel industrybut who also had the strong supportof IG Metall [Streeck,1984, p. 65]. Schmucker'sinstallation was a highlyvisible signal that the companywould be managedin consultationand co-operation with IG Metall andthe WorksCouncil, a rejectionof the approachof Lotz and Leiding.The SupervisoryBoard, which was the level at which theunions had their greatestinfluence, became in effect "thecentral policy-makingbody of thecompany, acting on matterswhich in other companiesthe managementwould have been careful to reserveto itself"[Streeck, 1984, p. 67]. Comingat a time whenmajor national legislationfor extendedco-determination was under discussion, these developmentsat VW werea significantresponse to traditionalunion demands and ran into much criticism from business interests. On the otherhand, precisely because of theirpolitical salience, IG Metall was at firstvery anxious to usetheir new power"responsibly" so as not to jeopardisewider political advances. It was one thing for the government,the unions, and top managementto embracethe principleof co-operativemanagement; it was anotherto find solutionsthat bothparties would approve.In Britain, the nationalizationof British Leyland in 1974 saw the putative adoptionof related corporatistideas, but the principles quicklybroke down in faceof crises.At Volkswagenthe new system immediatelyfaced a very severecrisis and came through it not only intactbut actuallystrengthened. The crucial terrains of compromisewere, firsfly, that Schmuckerwas preparedto guaranteethat, though redundancies of some 25% of the total workforcewere required,he would only implementthem with the consentof the union. In its turn, IG Metall acceptedthe principalthat employment levels should be 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."Wolfgang Streeck [1984] also stresses the importance of the solidaristicstrategy of IG Metall. IG Metall'shistoric orientation was to avoid the developmentof "sectional"pressures within the workforcewhich could prove intolerablewithin its multi-industry structure.Accordingly, they were preparedto reject any "special protection"for particulargroups of workers,such as government subsidiesto to supportVW employmentwhich would be paidfor out of the taxes of IG Metall members in other industries. There is some truth in this in a generalsense, yet Streeck exaggeratesthe role of encompassingand solidaristic elements in IG Metall'spolicies at thiscrucial moment. More importantwas the fact that the proposedredundancies fell largely on the shouldersof relatively marginal groupingswithin the union. In the 1974-5 redundanciessome 40,000 workerslost their jobs (almost30% of the workforce).But a detailedanalysis by Rainer Domboisshows that 67% of theseworkers were foreignworkers, particularly Tunisians andItalians, and that a highproportion of the restwere old workers or young female workers.Employment remained largely stablefor male German workers with more than five years seniority in the companywho were well protectedby contracts,seniority, and the interestrepresentation of the Works Council.The companyavoided the useof compulsoryredundancies and instead relied on voluntary quitsor paid severancecontracts, but the structureof pressuresand incentivesin thesecontracts was suchthat they were hardto refuse, especiallyfor the moremarginal workers [Dombois, 1982, pp. 432- 463]. The resultwas that the burdenwas disproportionatelycarried by thoseoutside the core workforce defended by theWorks Councils. In thiscrisis the continuityof "solidadstic"union policies was made possible,and confrontation avoided, by thefact that under the banner of "nospecial protection" a largepart of theworkforce found itself de facto outsidethe protectionof the union.In Britain, a differentunion ideology,not so averseto sectionalism,paradoxically meant that their defenceof workers'jobs was much more 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 adopted a "middle-line" employment policy, essentiallyrestricting hirings in upturnsby usinghigh levels of overtime and thus being able to minimise redundanciesin economicdownswings. In return the unionscontinued to offer high levelsof internaljob flexibility,the absenceof localjob controls,and co-operativemanpower planning. The generaltrend of this was to encourageintensive rather than extensive use of humanresources and force attentionto continuoustraining and the developmentof workforceskills within the company.Many observershave argued that this pattern of manpowermanagement (external rigidity but internalflexibility) became a majorcomponent of VW's effectiveuse of flexible automationin the 1980s,probably a beneficialunintended consequenceof theoriginal policy [Kohlerand Sengenberger, 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 greatly easedby unexpectedlyrapid recovery from the crisis. Within months market revival and the impactof the new productrange boosted sales and VW soonfaced problemsof relativeshortages of bestquality labor. From mid 1975 to the late 1970sVW enjoyedone of its biggestbooms ever and profitssoared. Though VW experiencedfurther problems in theearly 1980s, market successlargely continuedthrough the 1980s. One result was that employmentin VW's German operationsactually increasedover the courseof the 1980s [Volkswagen, 1980-90]. Continuallygrowing demand meant that increased productivity did not requirethe job lossesso commonelsewhere in the European automobileindustry.

The Transformation of Strategy

The rapid recoveryof the late 1970smade it easierto resolve the acutesituation in the UnitedStates. Volkswagen's multinational operationsstretched back for manyyears, and by 1970 12.5% of its StevenTolliday / 124 global outputof 2.2 million vehicleswas producedby its overseas subsidiaries,mainly in Brazil, Mexico andSouth Africa. As domestic sales and exportsto the US declinedin the early 1970s overseas productionplayed an importantrole in cushioningthe company.In 1972, for example,domestic production fell by 16% while foreign productionrose by 46%. By 1975 37% of VW's globaloutput was producedabroad, and the contributionto cashflow wasa vital lifeline for the company[Volkswagen, 1975]. Nevertheless,though foreign investmentwas extensive(and an importantpart of Volkswagen's successstory which it is not possibleto explore in this paper), it involvedalmost solely investment in marketslike Brazil andMexico that were effectivelyclosed to importsand therefore could not have been sourcedfrom Germanyeven if the companyhad wishedto do SO. By 1974Volkswagen management had reached the conclusion thatthe US marketcould only be retainedby buildinga plantthere to escapethe hazardsof exchangerate fluctuation.Maxcy calls the decision"the classic case of defensiveinvestment to preventthe loss of a major export market" [Maxcy, 1981, p. 136]. Once the redundancycrisis was resolvedand domesticsales were reviving, Schmuckerwas able to win the agreementof IG Metall to a path- breakingsettlement on a major investmentin the US, wherebythe union not only consentedbut was drawninto an activerole in the developmentof investmentpolicy [Streeck, 1984]. This was facilitatedin partby thecatastrophic nature of the declinein salesin the US. There was a broadconsensus that thoughinvestment in the US might costjobs in the short-term,failure to investthere would also result in the lossof thosejobs in the long-term.IG Metall was thereforeprepared to acceptthe constructionof 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 first issuethe companywas ready to makeconcessions since, followingthe redundancies, workforce numbers had been cut back to the core:on the secondissue, despite hostility to suchan extensionof union jurisdiction among other 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,and the actual decision to investwas probably less crucial for thefuture of thecompany than it appearedat the time or shortly afterwards.Perhaps more important was its demonstrationand confidence-buildingeffect for later decisionson overseasinvestment, most strikinglyin the caseof the acquisitionof SEAT in the mid 1980s.

VW and the German Model in the 1980s

Thus,in thespace of a few years,both the institutions and the strategyof the companywere transformed.Yet, in the late 1970s manycommentators argued that German companies like VW would be disadvantagedin internationalcompetition by the growing institutionalrigidities that resulted.In fact, duringthe 1980s,while the workplacerole of organizedlabor continuedto expand(union densityincreased from 68% in 1970to 86% in 1981)[Koch,1987, pp. 155-165],the Germanautomobile industry prospered. According to WolfgangStreeck, this successwas an exemplarydemonstration of the competitivenessof the "socialpartnership" embodied in the "German model" [Streeck, 1989]. In this view, VW's revival was basedon anability to developdiversified high quality products which respondedflexibly and quickly to demand.Crucial to thiswere co- operative labor/managementrelations which made possiblethe maximumutilization of highly-developedlabor skills at home,at the sametime as permittingthe pursuitof globalinvestment strategies. A stableand skilled workforce effectively forced firms like 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 processautomation as the principal route to increasedproductivity and lower costs(an idea StevenTolliday / 126 widely sharedin Germanyat the time) [Jurgens,Malsch andDohse, 1993]. Many in the companysaw this approachas a distinctand successfulalternative to Japanesemethods [for example,Dankbaar, 1993],particularly those who interpretedToyotism simply as a form of speed-upthat German workers would not accept[Dohse, Jurgens and Malsch, 1985]. Volkswagen'semphasis on technology and automationwas distinctive in theEuropean automobile industry. The focus was on utilizing institutionalizedlabor/management co- operationto operatea "humanized"Taylorism, running at resonable speeds,and relyingon technology-orientedsolutions to production problems.Work cycleswere longer and the work slower paced, while increasedemphasis was placedon hard technologymanaged by skilled workersto controlcosts and raise quality [Jurgens,Malsch and Dohse, 1993]. Symbolicof the strategywas the automationof Hall 54 (the huge central trim and final assemblyfacility at Wolfsburg) and complementaryfacilities in otherplants, linked to the introductionof the Golf 1I rangefrom 1983-4. Despiteits dramaticinnovations in automation,the plant remainedclassically Fordist, focusedon a narrowrange of products,with minutesubdivision of tasks,detailed preplanningand line balancing,and a continuinggulf betweenskilled indirectand unskilled direct labor. There was little placefor teamand group-workpractices that were increasinglypopular elsewhere. The Works Council played a key role in supportingthe "technologystrategy" and determining the shape of workorganization within it. In particular,they were reluctant to abandonthe traditional distinctionbetween highly qualifiedskilled workers (Facharbeiter) usuallyin indirectareas, and ordinary low-skilled production workers in directtasks. [This was in sharpcontrast to the Japaneseemphasis on reducingthe distinctionbetween direct and indirectworkers and homogenizingskill levels.] Their main priority, therefore,was to createnew rolesfor skilledproduction workers controlling complex productionequipment (the Anlagenfuhrer)and to insiston intensive and continuousin-house training. One result of this was the accumulationof "excess"skills in theplant, with younghighly trained TheTransformation of Volkswagen, 1967-1991 / 127 workerslacking challenging tasks and further increasing pressure on managementto introducemore complex automation to allow them outlets for these skills. Alongside this, the role of the Works Council was significantlyextended and enhancedin 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 continuoustraining and retraining rights[Brumlop and Jurgens, 1986; Brumlop, 1986; Turner, 1991]. These agreementsare often described as a trade off of increasedjob and pay securityin return for the more flexible allocationof laborby management.In factthis is onlypartly true. In comparisonto theUnited States there were few job classificationand seniorityrules to bindmanagement. However, in practice,after 1979 all new time standardsand all work assignmentsrequired advance approvalby theWorks Council. What wasmost distinctive was not the absenceof job controlsbut the patternof speedydaily joint resolutionand quick implementation of thesematters [Turner, 1991, pp. 94-5; Thelen, 1992] During the 1980s the Works Council extendedits reach still further.Most notablewere the acquisitionof extensiverights to informationand consultation on planningin the early 1980s,and the acceptanceof co-determinationon theintroduction of newtechnology from 1987,which gave the WorksCouncil real influenceon plant designand work 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 Qualifikationsoffensivedemands, but alsoon extendedbreak times, shorterworking week, educational leave, and time-off in exchangefor overtime [Streeck, 1989; Thelen, 1991; Turner, 1991]. Simultaneously,building on the success of theAmerican plant in thelate 1970s and early 1980s, Hahn continued to pushforward the processof internationalizationof the company, and generally received a highdegree of consensusand support from the union in theprocess. StevenTolliday / 128

The Works Council acknowledgedthat wagesand conditionsin Germanyinevitably meant relatively high cost production. This was, however,to be offsetby thequality and flexibility of productionand a focuson highervalue-added products. With certainreservations, therefore,they accepted that labor-intensive production and bottom of the rangemodels would be shiftedto low costlocations outside Germany [Jurgens,1992]. In the early 1990s the Works Council gradually accepted that effective low-cost production of Volkswagen'ssmaller and technicallysimpler cars could only be accomplishedoutside Germany, even if thisinvolved a substantial relocationof productionto Spainand East Germany. Crucially, however, during the 1980s, the continuous expansionof globalsales meant that this could be donewithout loss of jobsin Germany.As longas foreign plants led to increasedsales of Germanproducts (via valuablecomponents exported to those plantsfrom Germany)they actuallyresulted in a net increasein Germanoutput. For a time at leastthe results of this"model" were impressive. At home managementand labor allied behind a strategyfor productivesuccess which also allowed a continuingextension of the rights and authorityof worker interestsin the governanceof the company.Abroad, some of thecosts of thisstrategy were absorbed by internationalizationand relocation of productionwhich, for a time at least, seemedto have few costsfor the German workforce. But underlyingproblems gradually asserted themselves. Firstly,the resultsof the "technologystrategy" were disappointing (though they were considerablybetter than GM's comparable technology-ledefforts in the USA at the sametime) [Keller, 1989]. Automationdid not, in fact, solvethe quality problem,and VW's processesn•ded to be extensivelybuffered by costlyextra labor and rework. Hall 54 was subjectedto someof the strongestcriticism of the highly esteemedInternational Motor Vehicle Project (IMVP) studyin the late 1980sand early 1990sand was labelled "the fattest productionsystem in the world."According to Dan Jonesof IMVP, "theplant wasexpending more effort to fix the problemsit hadjust TheTransformation of Volkswagen, 1967-1991 / 129 createdthan Japanese plants required to makea nearlyperfect car first time" [The identityof the plantsis disguisedin Womack,Jones and Roos, 1990; but see Keller, 1993, p. 175 for some less discreet comments].In particular,the criticsfocused on the extensiveuse of craftsmen to fix the defective work of robots. Moreover,while the Germanmodel continued to positsome sortof trade-offbetween quality and efficiency, during the late 1980s most automobile executives came to be persuadedthat "lean production"offered the possibilityof combininghigh quality and product flexibility with low costs and rationalization. The Volkswagensystem also implied a notionthat marketscould be segmentedbetween a high-qualitylow-competition segment (where the "German model" would dominate) and a low-price high- competitionsegment which could be left to the Americansand Japanese.But by the end of the decadesuch notions had become outmodedas a resultof rapidchanges in quality,costs and product developmentby US and Japanesecompanies. By the late 1980sthe underperformanceof automationand rising labor costswere creatinginternal discontent in the company, andplanners began to retreatfrom ambitiousautomation targets. The depthof the difficultiesand the extentof the productivityproblem, however,remained concealed by risingmarket shares until the crisis thatstruck the company in theearly 1990s[Williams, Haslam, Johal andWilliams, 1994,pp. 171-5].The time bombof risingcosts came to a headwith the "profitlessprosperity" of the early 1990sand the huge lossesof 1991-2 during a period of recordoutput. In 1991 Volkswagenlost DM 770m duringthe biggestcar boom Germany had ever experienced[Volkswagen, 1991 ]. The internalrevolution in the companytriggered by these eventsis still playing itself out. It resultedin a proliferationof strategic new departuresincluding a dramatic accelerationof production in low-cost locations (Skoda, SEAT, Mexico, East Germany,China), a rethinkabout the value of internal"Japanization," and the re-emergencefor the first time for almosttwenty years of plansfor domesticrationalisation, cost-cutting, and even workforce StevenTollida¾ / 130 reduction,symbolized by thereplacement of Hahnby thenew regime of FerdinandPiech and his "hard-man"Inacio Lopez, controversially head-hunted from GM. Nevertheless, even these moves have so far beenaccepted with a high degreeof consensusby IG Metall and the Works Council.

Conclusion

VW's recovery from the crisis of the mid 1970s and its successesin the 1980s are often associatedwith the companies adoptionof the "Germanmodel." This articlehas demonstrated that the linkages between the success and the model are not straightforward.In certain respects,broader market, productand cyclicalchanges provided conditions in which the "model"could thrivefor a time despiteserious shortcomings which were later to be exposed. Nevertheless,it wouldbe unwiseto write off the Volkswagen approach to production systemsas fundamentally flawed and inevitably destined to give way to a superior practice of "lean production"modelled on Japaneselines. Whatever its faults, the "Germanmodel" at VW madepossible a durablesystem of conflict resolutionbetween the interestsof labor and management(even on issuesas sensitiveas internationallocation and job controlat plant level) that is rare in advancedindustrial nations. Attempts to link advanced automation and the accumulation of flexible worker skills have thus far been less successful.But, as Japaneseautomobile producersbegin to experiencea new rangeof difficultiesin the late 1980sand early 1990s[Fujimoto, 1994], andas more doubts are cast on thenotion that "leanproduction" represents "the end of history"in the managementof production,analysts may well returnto VW's "Germanmodel" as a subjectof continuinginterest.

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