Business

Deception: A German Tradition (Part 1)

Back in the 1930s, cars were relatively rare in in Germany while in the United States, Henry Ford built cars cheaply that everybody could afford. There were far more middle class people in the U.S. who had automobiles than in Germany, and that bothered the Nazis because they were supposed to be superior. Therefore, Hitler hooked up with Ferdinand Porsche and his idea of a people’s car. Porsche went to Ford on several occasions and brought workers to Germany in order to build the Volkswagen factory. It was consciously modeled on Ford, but the Nazis wanted it to be the biggest factory in the world – which it eventually became after the war.

‘I am pleased that, at the skilled hands of a brilliant design engineer and his staff, preliminary designs for a German Volkswagen have been completed, and the first models will finally be tested by the middle of the year.’

Wolfsburg as a city did not exist at the time. Everything visible in Wolfsburg today is grown up around the original factory. Although VW’s acquired brands like Audi, Seat, and Skoda are successful in Europe, Volkswagens’s road to global dominance has always led through America.
In the 60s, sales hit new highs when the VW Beetle populated American streets in its thousands. The unique and unconventional design of the Beetle perfectly matched the new revolution and ensured that peace, love and freedom found their way to even the remotest corners of the USA. The car designed for Hitler became a symbol of the counter culture. But VW did not innovate and keep up with time. As the counter culture gave way to the Reagan era, VW sales dropped as fast as the quality of its cars and led the manufacturer to the brink of bankruptcy. The rescuer of VW appeared in the former head of Audi, Ferdinand Piëch, a grandson of Ferdinand Porsche. Personally and professionally very productive and ambitious, the brilliant and dangerous man infused VW with a new culture of aspiration and success.

Piëch came just in time to turn the company around and introduced a strategic large-scale thinking. He had the idea of producing small Diesel engines. TDI® – a diesel that was fun to drive, powerful and clean. It was a huge success in Europe. However, the exhaust was not really clean. Nitrogen oxide (NOx) causes air pollution and damage to health. The infamous NOx filled smog in southern Califormia and major cities in the US in the 70s was not only damaging to plants, it caused asthma, cardiac problems, cancer, and premature death. Therefore the much more strict NOx standards in the US than in Europe. To keep efficiency on Diesel but to cut down on NOx, manufacturers like VW tried to create “NOx traps” that caught and burnt the stuff before it left the tail pot. But the special parts needed were expensive and had to be replaced every few thousand miles. Yet they were the only way to meet the NOx standard set in the US. Solving that problem was critical for the “Strategy 2018” set by Martin Winterkorn and Ferdinand Piëch: VW’s big game for world domination. They wanted Diesel cars for the United States (at the time the world’s largest market), but everyone knew this was incredibly hard to achieve. Pressure on workforce to succeed and increase sales became unbearable. On its mission to become the biggest automobile manufacturer in the world, Volkswagen created Diesel cars that could cheat emissions tests while pumping 40 times more NOx into the air than they claimed to. With the opening of a new plant in Chattanooga, Tennessee, the CEO boasted about his new found corporate responsibility.

VW’s “solution” to the Diesel problem caught the attention of a group focused on clean transportation. They studied VW Diesels – not to see if they were bad, but why they were so good and whether they could serve as a model for the US. It was also unclear why they came out clean in the US and not in Europe, so there was a missing piece of data. But what they found in 2013 did not add up.

‘The International Council on Clean Transportation (ICCT) provided the results of its measured “off cycle emissions” and its (comparison) values detected in parallel in the FTP test to VW Group of America (VWGoA) EEO and requested comments on the high exceedances. In a conference call, the California Air Resources Board (CARB) authority also announced further investigations; specific questions of the authority with respect to the regeneration strategy of the NOx storage catalyst and the UREA dosing strategy in the SCR system in the Volkswagen R4 TDI vehicles have already been received by the EEO.
A thorough explanation for the dramatic increase in NOx emissions cannot be given to the authorities. It can be assumed that the authorities will then investigate the VW systems to determine whether Volkswagen implemented a test detection system in the engine control unit software (so-called defeat device) and, in the event a “treadmill test” is detected, a regeneration or dosing strategy is implemented that differs from real driving conditions.’
(VW Quality Manager Frank Tuch in an email to CEO Martin Winterkorn)

VW’s only answer was to stall for time. Following 16 months of investigation and the revelation that Volkswagen had embedded defeat devices in its software calibrations for all of its 2009–2014 Diesels in Europe and 2009–2015 Diesels in the US, regulatory agencies have taken various measures to force VW to remedy the problems. However, VW did not fix the problems – in contrary, they fixed the defeat device to make it even better at cheating. With VW’s announcement in the United States of a recall and a “fix” for various Volkswagen Group models, regulators have defined required emission system modifications for almost all VW Diesel engines in the US market.

Winterkorn denied any knowledge of a defeat device, but he was forced to resign the day after giving this statement. Nobody believed the fairy-tale brought up by Michael Horn and Martin Winterkorn that a small group of engineers at VW did something on their own. The state of New York launched a civil suit proclaiming fraud by VW. Along with various sanctions, VW was forced to pay over 25 billion in fines and to buy back over 550’000 vehicles from angry owners. The data continues to support earlier findings that enforcement in the United States is far more effective and stringent than in Europe. The German government enables cheating by regulation, allowing calibration strategies implemented through defeat devices. This is called “protection of the engine”. The German government cares more about protection of the engines than protection of human beings. Additionally, the German government has a stake in the partially state owned car industry. Should they harm their national car industry? It means jobs and taxes, after all. To this day, VW and the other German brands are selling dirty cars throughout Europe and the world. In order to fight back and show “the benefits of clean Diesel cars”, the German car companies and particularly VW embarked in a plan to do their own tests on monkeys and humans. They established a phony research company called EUGT to study the effects of Diesel exhaust. EUGT paid a company called Lovelace Respiratory Research Institute (LRRI) to conduct a study in order to show that the “new” Diesel technology was environmentally friendly. It involved research monkeys and inhale pipes.

A couple of days after the news broke of the monkey experiments in the US, a report in the Stuttgarter Zeitung accused the big three carmakers of also conducting emissions tests on humans.

Gas – a German tradition.

We’ll be Run by Morons Pretty Soon!

“You look at the active value of the companies that you buy the stocks in. And it becomes a little more complex, but basically you look for a company that is cheap and the reason that they’re really cheap. And the major reason is often and usually very poor management.”

“So in a sense, it’s like an arbitrage. You go in, you buy a lot of stock in the company, and you then try to make changes at the company. […] We’re trying to get them to change the structure of the company. We think the board is very poor, and we’re trying to change what happens. The thing about corporate America is that most people in America don’t realize how poorly most of our companies are run in this country. With many exceptions. And when you get inside the companies, you realize it. The real reason is, there’s no accountability, there’s no corporate democracy. And I’ve been saying that, proselytizing it, writing about it. And the reason that we can make so much money when we go into one of these companies is – I’m not even a manager. I never took a course in management and I wouldn’t profess to really know much – but I don’t micromanage. I put in a very good manager. They cut the heck out of cost, but they changed the structure of the companies. And this is the problem in America today, in my opinion:
That we are basically under-managed. We can’t compete, because the best and the brightest don’t get to be at the top of the corporate ladder. And I, I have a sort of a metaphor that’s a little facetious, but not completely: I call it anti-Darwinian. And that means a guy goes to college and he’s the guy who gets to be the CEO. And he’s the kind of guy that was the president of the fraternity. Now all these presidents of fraternities aren’t bad guys, but basically, the normal guy that I remembered at college was always there at the fraternity of the eating club. And he’s always there to be there, if you have a bad day, you walk over to the club. And you’re feeling bad, your girlfriend left you, you did bad on a test score, or whatever. And you go over there, he’s always there. He buys you a drink, and you sit around with him. He commiserates with you. You play a little pool, or whatever. And he tells you whatever it is, yeah, my girl left me, yeah well, they’re all no good, usual conversation back and forth. And what would happen would be you liked the guy, you can’t help but like him. You used to wonder a little bit, when the hell did he ever do any work? But you know, he was always there for you. And he never made many waves. He would never said anything too obtrusive or he never showed too much intelligence. But he was a good guy. He goes, that same guy, out into corporate America. And he’s politically, he’s astute. He knows how to get along with people. And it’s he never really rocks the boat. He never comes up with any great ideas. He’s not a threat to his superior. And as a result, he moves up the ladder because in corporate America, there’s really very little accountability. So he moves up that ladder.”

“There’s a good show “How to Succeed in Business” that was out many years ago – that sort of sums it up. If a genius has an idea in corporate America, they give him an idea to resign.”

“And so the guy moves along the ladder, and he gets up slowly to the top. And he has three attributes: He’s likable, he’s politically astute, and he’s a survivor. And he knows when he’s threatened. These are the attributes of today’s CEOs for the most part, with exceptions. You know, he doesn’t ruffle feathers, he doesn’t get the board upset. And as he moves up the ladder, he finally gets to be number two to the CEO. Now the CEO has the same same attributes where he doesn’t want to be threatened and is a survivor. So the CEO will never let anybody be number two who’s smarter than he is. By definition, the assistant of the CEO is a little dumber than the CEO. Now this guy now is the assistant, and the board likes him. The CEO eventually retires and they make this guy the new CEO. The fraternity president we’re talking. Now he’s the head guy. And he’ll bring in a number two guy that’s a little dumber than he is, because he doesn’t want to be threatened. So by definition, we’ll be run by morons pretty soon. And we’re not too far from that point right now in our economic history.”

[Carl Icahn, 2011]

Stocks are not Shares

People think of stocks as all the same thing. But different stocks look very different. Suppose a company decides to issue a lot more shares. And with the proceeds of the shares, invest in bonds. If they do that really aggressively, what are you owning when you buy the stock? Well the original business was diluted down to – the share issuance is aggressive enough – to negligible proportions. That’s dilution. At the same time, the stock is now really represented by the bonds the company owns.

Or in reverse, a company can do the opposite of that. They can borrow money and buy back shares. And then that’s the opposite of dilution. Then the company becomes leveraged. And it becomes riskier than most stocks because it is kind of an amplified stock. What is the essence, what is this thing called stocks? They are an essential element of a modern capitalist economy for the functions they fulfill. Some people think they own a part of a company if they buy their shares. But it is not the case. The right of shareholders to contest the appropriation of the company’s assets – it was the key issue in a leading case in corporate law, Short Vs Treasury Commissioners, and the shareholders cost. Their Lordships went on to say, in unequivocal terms, ’shareholders are not, in the eyes of the law, part owners of the company’.”

Technology Influence in Business Strategy

There is a spectrum of attitudes towards technology that is found in different organisations:

1 2 3 4 5
Technology as a tool for efficiency Technology as a tool for achieving business strategy Technology as a function alongside finance, marketing, HR, etc., typically called R&D (product technology) or operations (process technology) Technology strategy influences business strategy in a bottom-up manner Technology strategy leads the business, effectively determining business strategy

Table 1: Degrees of technological influence on business strategy (Source: Fowles, 2005)

Technologies mean different things to different people at different times in the sense of how they are interpreted. Rural customers of the Ford Model T used it for ploughing. Farm tractors evolved as a response. Lacking electricity, the same customers used the car as a source of power to drive farm machinery and even domestic tools such as a washing machine. Nor is it only customers who interpret a technology in various ways. The maker’s technology strategy decides on resource allocation. The decisions of one strategy are closely intertwined with those of the other. By asking to what they allocate resources it is possible to tell them apart.

How to Rob a Bank (or a Whole Country), Part II

Besides “liar’s loans” there are more tricky tactics that lead to an excavation of money from banks. In this engaging interview, Andrew S. from Texas, a bank employee with a university degree who came to Switzerland some 15 years ago, reveals the dramatic changes within UBS and the scams applied by American management – with very little public notice. Probably a more fitting title for this interview might have been “How to Destroy the Value of a Company”.

Editor: Andrew S., thank you for taking this time for an interview. I understand that you have worked in many countries and for many firms in the whole wide world. What were your impressions when arriving the first time to Switzerland?

Andrew S.:

“I arrived here in October 1998 and I was really amazed. After three months, at the end of December I went home to the U.S., and I have a very big family, they asked me “so how do you like it?” I said “guys, you won’t believe this! We take full hour lunches, the employee canteen is a real restaurant that serves fresh hot food on real plates with real silverware – not eating a slice of cold pizza with one hand while working with the other hand!” I was amazed of what is available to the employees: space to work in, ergonomically designed chairs for the comfort and safety of the employees – not tiny cubicles with tiny little desks. There was no such thing as a one-person job. Every function had a team taking care of it. So if somebody gets sick and another person is on vacation, there are still members of the team to take care of the business. In the U.S. I was alone in charge of so many different things, and whenever I took a tiny little vacation and came back, I had two weeks worth of work waiting for me to catch up within a couple of days so the vacation is screwed right there. Nobody else was there to jump in.”

Editor: Sounds very familiar, like today’s common practice. What else have you discovered when starting with your new job here in Switzerland?

Andrew S.:

“Compensation was tremendously higher than in the U.S. for the same function and every employee got either a 13th month salary or in my case at UBS they had a bonus system which really recognized every one every year. The compensation got to those people who actually did all the work. I remember one time there was an article in the papers about members of the board of directors getting eight million Francs bonus. I was with a bunch of Swiss colleagues and they were arguing about it. The talk was like “what do they do to deserve eight million?” I said “guys, eight million is pocket change for American management. Where I worked in the U.S., those guys get hundreds of millions. Eight million is like a birthday party or something. These guys won’t take anything under a hundred millions. So don’t complain about eight million, that’s nothing.” They stared at me with blank faces. They were sure I was exaggerating or lying. Who would get that kind of compensation just for being upper management? Well, Jack Welch walked away from GE in 2001 with almost $300 million in equity profits and a pension worth $96 million; or nine million a year for the rest of his life. After he retired from General Electric it wasn’t until a divorce settlement forced the disclosure of his retirement benefits package that anyone took any notice. Since then, multi-million dollar severance and other separation packages, commonly referred to as ‘walk-away’ packages, have become so commonplace for CEOs that when HP fired Leo Apotheker with a $12 million guaranteed cash payment it barely registered. And these are, again, just their departing packages on top of the many millions they were getting every year, while in the mean time these so-called managers were laying off employees; just throwing people on the street, destroying the livelihood of thousands of families – not just persons.”

“And I started using the term “modern slavery”, because in the old days in the U.S. slaves were beaten to force them to work. These days nobody beats you, but they do something much worse to you, they threaten you with your family’s livelihood: housing, food, healthcare, and happiness all tied to your job. And if you don’t slave away for them, you are out on the street. You are just a number, it doesn’t take much for a top manager to throw a bunch of people out on the street. In the U.S. it is literally slavery: you are getting paid a minimum to survive on while you are doing all the work. It is the masses honing that big machine and those guys are standing in their ivory towers just watching and every now and then they sign a piece of paper saying “kick out five or ten thousand people on the street, we don’t need them. Our bonuses are getting below a hundred million.” It is horrible and when I looked around in the beginning when I came to Switzerland I thought I was in paradise. It was hard to believe all these wonderful things happening, as far as the pay, the comfort, the nature of work, the openness of management. You could walk up to management and chat with them or ask them something almost any time.”

Editor: So, in the beginning, how was management organised and what was their attitude towards staff here in Switzerland? How would you describe the climate at the time?

Andrew S.:

“The organisational climate at the time was fantastic. The ranks were organized in a way which resembled a military hierarchy, which means there was a person called the “team leader” in your work area you could just run to and say, “hey boss, I have a situation!”, and he was right there with you. You had a problem, you needed a lead, you needed help or escalation – he was right there to provide you with whatever you needed. Management was always among the “troops”. I remember this one Dr. P. who was unbelievable. I have never worked in my entire life with a manager like him – and I have worked in many countries in the world – he was always literally sleeves rolled-up. If there was a problem, you could expect him within minutes right there. Not to investigate, not to push for the problem to be solved, but to say “guys, do you have it under control or do you need resources?”. I remember one instance in which I was directly involved; we had a major disaster when our entire environment crashed. I told him it is a hardware problem. He got on the phone and flew two hardware engineers form London to Zurich, right on the spot. Within hours they were here and replaced specialized hardware. That is the kind of manager that you look up to and respect – he was a managing director. But because he was at the employees’ side, they demoted him. American top management demoted him later because he kept pushing for employee rights.”

“Anyway, what I was never familiar with in any other country was the concept of “Apéro” (aperitif): once or twice a week some team celebrating – whether they finished a project, or successfully closed a big case, or simply somebody’s birthday or graduation. A bunch of people getting together with beer, wine, juices, snacks, food at the end of the day and celebrating – having a good time in the office. If you get caught in the U.S. with a bottle of beer in the office you are thrown out! No spontaneously organized gatherings in the office. Only if there is something big like Christmas…”

Editor: The manager you are describing, Dr. P. is quite different from the type of managers we see around today. What has changed and when?

Andrew S.:

“Everything has changed. I was proud to say that I work for UBS. When the subject came up, whether in the supermarket, or while commuting, or in a bar downtown, I said with a proud voice that I work for UBS. I was happy to work for UBS. I woke up happily looking forward to go to work. Even my wife was amazed saying she hadn’t met anyone who was so happy to go to work. “You really love your job that much?” I said “absolutely!”. There was no such concept like stress. We always had lots of work and we worked hard, but we had no stress – even when we had a major disaster. We had all the resources we needed. If not they were provided immediately, whether in the form of workforce, hardware, knowledge, money, equipment. And if we had to work past seven p.m. management would order in dinner for us from food delivery companies. Chinese, pizza, sushi, burgers; we ordered whatever we wanted from the menu. And of course pay was much higher if you had to work overtime. We were very well paid, and still UBS was making billions in profit per year. So my point here is that even thought they paid their employees handsomely, looked after them well, had many employees in teams, and layoffs were hardly known, they still made a lot of profit. When times were bad the company tightened the belt and they went through it with their existing employees. When things were good then they are back in good times together. So they didn’t watch the bottom line and as soon as it goes one or two percent down, fire ten thousand people so top management can secure their bonuses. “

Editor: So you are saying that management was less focused on quarterly reporting and the movement in share price that comes with it, but took better responsibility for the bigger picture of a company. What were the reasons for change?

Andrew S.:

“See, this is the thing, they treated the employees so well that the employees never stopped to do their duty. They always worked above and beyond what they needed to do. I can tell because I was one of them. I always checked and double checked if systems were healthy. I never ever left when there was the tiniest problem, and I fixed it regardless whether it was Friday evening or I had to go to a party. I know that most of employees, if not all, made sure everything was right before they left the office. The thinking was “the company is taking good care of me, so I will take care of it no matter what!”. Since management was doing it the right way and they were honest not only to the employees, but also to their customers – which is the most important element here in this picture: that is what pays our bills, what pays our salaries, the income of the bank, the employees and the shareholders. Management was not obsessed with increasing their bonuses to an almost criminal level. They were getting very good salaries and decent bonuses. Sure, not like the American management bonuses, but a few hundred thousand, a few million – plenty of money to live on very happily and even get rich.”

Editor: The picture you are presenting here makes a strong case. Indeed, evidence supports the fact that firms that take care of their customers and employees also deliver value to their owners (Hawawini and Viallet 2011, p. 3). Annual surveys (Edmans, 2008) clearly indicate that the ability of firms to crate value for their shareholders is related to the way they treat their customers, employees, and community. What resulted from the change you are describing a) for management b) for employees c) for shareholders?

Andrew S.:

The most disturbing factor in the picture of what is different in UBS between 1998 (the early 2000) and today is the top management obsession to an almost criminal level with huge bonuses, which made today’s management like Brady Dougan from CS brake so many laws to make that massive multi-million pay-packages happen. When I learned in 2004 that the bank is having a major overhaul on their top management and that top management is going to be American, I thought “oh no, good lord please tell me you are kidding me! That cannot be true!”. My colleagues asked me why, and I said “let me tell you about American management. So many companies have these practices of hiring mostly part time employees because they get no benefits so top management can keep their massive pay packages. And they have these criminal practices like secretly buying life insurance on their employees so when the employee dies, the company gets the life insurance. You guys are screwed with American management!” They asked me how? I said:

  1. “For one, they are going to make the changes where the valuation of the company is magically going through the roof and the share prices are going to sky rocket, while they can cash in their options and get a fortune out of that.
  2. To do that, they have to save money to show more profit. Where is that money coming from? From your pocket! They are going to cut overtime pay, on-call pay, they are going to take away your 13th month salaries. And these are just the beginning.
  3. Because they are going to cut every penny they can because they know it is going to flow in their own pockets.
  4. Then they will get involved into criminal activities.
  5. And then the bank is screwed.”

“Again my Swiss colleagues thought that I was crazy. Of course I was speculating and guessing, but that was what I have seen in the U.S., my experience with American management. In a bigger context, it can be extrapolated to the later “subprime crises”, a scam created in the U.S. and then U.S. debt distributed all over the world. American bosses having a hand in it and profiting from the losses of the European and Asian banks and companies, creating a global economic recession.”

“In a small way you can compare this picture of a company and their employees, their profitability and health to a human body. If you take care of various aspects of your body, then overall you are healthy and strong. And the employees make the body of a company. I don’t even want to go as far as saying management is the head. They are just a bunch of people who got expensive degrees from Harvard or Yale and got appointed in top positions because of that, their connections, and their father’s connections; and now all they are doing is pushing this company, squeezing the hell out of it to get the most bonus they could possibly get. Once they leave the company they made such a big package that thousands of people could live on. Upon leaving the company, having already made tens or hundreds of millions, they receive yet another massive pay package called the golden parachute, the good-bye party package. It is way beyond insanity. Criminal insanity might begin to describe it in my opinion. The last thing we have seen about UBS management is that they made three billion profit. Surprise, surprise, that year they took four billion in bonuses. So the entire company, sixty thousand people worldwide contributed with more than half of their work to make bonus for top management. And at the same time top management throws those lies about taking care of shareholders. Those top managers dropped the dividends from CHF 2.20 down to 0.20 per share, and that is after causing the share price to plummet from CHF 80.- a share down to 16.-. How are they taking care of their shareholders?”

Editor: What is your assessment of today’s situation in Switzerland generally and what can we expect for the future?

Andrew S.:

“If you have a look on life in the U.S. you see a whole collection of outrageous components. For example, their jobs, the corporate greed, their taxes, the air quality, the food quality, everything about their entire existence is outrageous. Top management gets almost everything, employees get the bare minimum and then the government comes in and demands a big chunk of that. The government – that is a totally sad joke. They call it democracy? It is completely controlled by the big money. Only the illiterate, naïve, or ignorant buy this democracy scam. If mainly Europe and Asia don’t stop taking in American top managers with American corporate mentality, American tactics, and criminal corporate activities then this will be just the tip of the iceberg towards economic destruction. It is a modern form of colonialism and the scary part is not only that it is spreading like cancer but also that Europe and Asia are taking it with open arms. They are not just accepting the concept, they are taking it like it is out of style. “Use thousands of people to make money for me!” Individualism and the American nightmare. One thing I have realized about big American manufacturers having their operations moved to foreign countries like Mexico, Eastern Europe, and Third World countries where labour is very cheap, is that in the U.S. this practice leaves behind people without jobs or people with very low wages. Think about the city of Detroit, once the crown jewel of the automobile manufacturing industry, now broke while the automobile companies still thrive and their top managers get their huge pay packages. And manufacturing is just an example. Look at electronics. Or every corporation has customer support. If you are going to outsource thousands of jobs, that automatically tells you that these are missing, which in turn means that you are taking billions out of a country’s economy. Eventually it will catch up, but it is a practice to serve only a few dozen corporate aliens who want to make millions for themselves. They are not even taking care of shareholders – forget that myth! That story is dead! Again, that cancer originated in the U.S. and it is running all over the world and only the super rich benefit.”

Editor: Thank you, Andrew S. for this moving interview and let us hope that some people wake up from your call.