Brand image and reputation: VW pays dearly for #Dieselgate

Please read Updates about Mitsubishi, Opel, GM, VW in the comments below.

Summary: VW intends to repurchase 480,000 vehicles in the US. Estimates put the final bill in excess of €45 billion. But how much damage will this cause to their:

– brand
– image (e.g., the image of the VW or Audi brands), AND
– reputation (e.g., reputation of the brand or company)?

Volkswagen has an interesting portfolio consisting of luxury brands as well as truck and low-cost car brands, as shown below.

1. Defining the terms

In daily life we may talk about brand, image and reputation interchangeably, without drawing a line between them.

But we cannot truly appreciate the value of something, if we do not unterstand what it is we are examining. And Jeff Bezos may have thought he was talking about brand, when he was actually talking about the reputation of the Amazon brand with its clients:

Your brand reputation is what people say about you after you have left the room.

We need to define brand, brand image and brand reputation. Only then can we be sure that we share the same vocabulary, which is the basis for understanding each other.

You need a great product. Your image of offering great design or R & D does not hurt the company either (for example, Apple). Crowned with a reputation for offering great client services (e.g., your neighbourhood grocer), you should do well in the market place.

Table 1. Defining brand
The word brand originated with the practice of putting a hot stamp on the bodies of young livestock to indicate ownership (i.e. branding calves). In the corporate world, a company’s logo or the lettering used for write its name may similarly serve as a stamp. It brands the firm.

The cattle brand helps one separate stock from Ranch A and Ranch B. In turn, the company’s brand or its logo help us recognize the product on the shelf.

The brand symbolizes what we stand for in the minds of people that we are trying to reach, influence and move to action (see Deborah Maue, 2015).

Brand is what the corporation tells the public or its investors, the news it shares about itself or the product, and most importantly, what it wants and aspires to be.

This gives the brand manager some control over the brand.

A brand helps reduce uncertainty for a client. The customer knows what they get, such as a hotel chain’s rooms offering the same features (make-up mirror, good hair dryer) as standard around the globe.

But these days, mistakes can damage a brand’s image and consumer trust in the brand may evaporate as well.

For instance, in a 2016-04-20 media briefing Mitsubishi Motors president Tetsuro Aikawa tried to take responsibility for the manipulated fuel-economy test data. It affects 4 mini-car models sold in Japan, about 625,000 vehicles since 2013.

In just three trading days, the fuel-economy scandal has destroyed 42 percent of Mitsubishi Motors’ market value.

As the above research illustrates, with increasing market complexity, consumers may fall back on such factors as price, instead of focusing on quality.

Hence, as BP’s Deepwater Horizon disaster suggests, Mitsubishi Motors can hope that people will forget that the company abused customer trust by falsifying fuel economy test data.

If that happens, customers may no longer focus on this disaster. Instead price or options offered with its cars may be most important in the decision-process to buy or not to buy a Mitsubishi Product.

Table 2. Defining brand image

A brand’s image tells us the qualities of the company or its products. Image is based on how much effort a company spends on getting its message across and its target audience to believe it (e.g., just do it – Nike).

Advertising is about image.

For instance, green advertising helped BP recover from the Deepwater Horizon oil spill. This means the visual, the look, the controlled viewpoint about an issue the company cares about, such as the environment, makes up the corporate or brand image.

As the video clip below shows, with the help of TV spots Volkswagen was trying to portray itself as producing cars running on “clean” diesel engines. Until September 2015 when the fuel emission scandal began, consumers believed this story.

Advertising can be used to improve a corporate image or try to portray a greener image than one might otherwise have in the public’s eyes.

Watch this humorous VW commercial aired in the US.

Defining brand or corporate reputation: An experience-centric concept.

Attitude denotes the subjective, emotional, and cognitive based mindset (see Schwaiger, 2004, p. 49), which implies splitting the construct of reputation into affective and cognitive components.

The cognitive component of the construct can be described as the rational outcomes of high reputation. Examples include high performance, global reach and one’s perception of the company (e.g., great employer, wonderful customer service).

The affective component of reputation is the emotions that respondents have towards a company. Thus, people talk about these things with friends (word-of-mouth). Media coverage can also influence how we feel toward a company.

Reputation is hard-earned and generally long-standing. Nevertheless, it can be harmed by a new product that is shabbily put together or a big product recall as Toyota experienced with Prius in 2010 in the US and elsewhere.

Reputation is temporal, meaning for example that bad customer service will result in bad customer testimonials on webpages or blogs (what is called earned and social media).

Reputation is primarily based on my experience (i.e. cognitive) and what my friends say (affective). Hence, a bad experience may get me to write a bad product review or a post on Facebook. Good and bad press about a brand is also shared with one’s friends…

Interesting: Fiske, Rosanna (2011-01-26). Image vs. Reputation: Which Reigns Supreme? Advertising Week, retrieved April 24, 2016 from http://www.adweek.com/news/advertising-branding/image-vs-reputation-which-reigns-supreme-125527?page=2

General Motors learned the temporal nature of reputation in 2014, after managing to deflect most of the blame for a 30 million vehicle recall on the habits of the old guard of the company, prior to a massive government bail-out. Never mind that GM knew all along about the ignition switch issue that caused up to 169 preventable deaths.

On February 1, 2010, Apple co-founder Steve Wozniak claimed that he had experienced a ‘software-related acceleration problem’ with his Prius, that causes the car to go wild under certain conditions when cruise control is engaged.

This and his comment that, “This is software. It’s not a bad accelerator pedal. It’s very scary, but luckily for me I can hit the brakes,” spread like wildfire via newswire, Twitter and others.

In early 2010 I wrote:

“We all remember when Audi (Volkswagen) faced unintended acceleration problems with its 5000 model in the US in the mid-1980s. Its initial response was to run advertisements of its top executives talking about its vehicles’ mechanics.

Audi was vindicated eventually but its effort to regain customers’ trust flopped amid perceptions that it built bad cars and was not taking the problem seriously. It took Audi 10 years to recover from this public relations debacle…”

Of course, one can only hope that #dieselgate will not hurt Volkswagen and its brands for another 10 years. But the share price drop as well as the compensations to be paid to US car owners whose models are affected suggest that it will be worse (see chart below for more information).

2. Bottom line

Arguing which has greater influence — image or reputation — is likely a moot point.

Nevertheless, the two are linked, as the BP Deepwater Horizon oil spill suggests. At the time, many Americans called for BP boycotts and sales took a hit despite the fact that BP was still selling the same fuel it was selling before the crisis.

In essence, BP’s negative reputation caused consumers to perceive BP’s brand differently.

Reputation, then, is best used as a way for companies to differentiate themselves from other organizations with the same brand.

It takes plenty of money and effort to build a great image. But one mistake can cost a company dearly. For instance, Nike and TAG Heuer ditched Maria Sharapova, the world’s highest paid female athlete, after she revealed she had failed a drugs test at the Australian Open in January 2016. Both brands felt it was too risky to continue sponsorship.

Although the two brands avoided a fall out from Maria Sharapova’s problems, the athlete’s marketability as an image ambassador was severely damaged.

Two intangibles VW and Mitsubishi Motors and competitors have to face.

  1. The effect on sales over the next couple of years, AND
  2. The effect of tighter regulations on future margins of car manufacturers.

How do VW car owners feel about the option of being offered a buy back or going for the fix and getting paid for it? We do not know if they will prefer getting $5,000 on top of the $1,000 they already have, or returning their car at market value. However, how owners perceive these options (positive or negative) and how VW handles European regulators and customers will affect its reputation.

As far as Volkswagen’s image is concerned? The damage may pass. However, regulator fines, compensating customers and losing sales will continue affecting the firm’s bottom line for a while yet.

Nevertheless, both VW and Mitsubishi have not had their last chance to hurt their reputation. How they handle their respective scandals from here, and whether they reform their corporate culture, will matter. Moreover, the possibility, not yet addressed, of the scale of lawsuits from aggrieved U.S. dealers and individual U.S. states for VW’s possible fraudulent advertising should worry shareholders.

What VW’s #dieselgate and Mitsubishi Motors’ falsified test results says about these companies’ internal procedures and ethics is another chapter in this saga.

3. Have your say – join the conversation

Source: Brand image and reputation: VW pays dearly for #Dieselgate

What is your opinion?

  • What do you advise a company to do when a public relations disaster is in the making?
  • Will people forget Volkswagen #dieselgate as they did the BP Horizon Deepwater disaster?
  • Did UK and French regulators do the right thing, waiting until US regulators set the stage (e.g., how much compensation per car, fines, etc.)?

The author declares that he had no conflict of interest with respect to the content, authorship or publication of this blog entry (i.e. I neither own any of these brands’ products nor are they our clients).

Urs E. Gattiker

Professor Urs E. Gattiker - DrKPI is corporate Europe's leading social media metrics expert (see his books). He continues to work with start-ups. Urs is CEO of CyTRAP Labs GmbH and President of the Marketing Club Lago, a member of the German Marketing Association (DMV).

11 thoughts on “Brand image and reputation: VW pays dearly for #Dieselgate

  • 25. April 2016 at 21:27
    Permalink

    Dear Urs,

    Please allow me to comment this very frankly and without mincing words.

    Before raising the question HOW this brand image disaster could be healed, I’m asking WHY the VW brand should be saved. Why should anyone put efforts in rebuilding a brand which destroyed its own relevance by its behavior? Who needs such a brand?

    No brand exist without trust. No trust can be gained without truth. In the tangled jungle of brands it is all about survival of the fittest. Fitness today means transparency. I believe that Vollkswagen needs to quickly and profoundly change from inside out to become trustworthy and hence relevant. Otherwise this brand – like all others – would not be worth existing and taking part in the market. Decorative distractions, colorful wallpapers or patching-up exercises won’t do.

    If I were asked for advice about the situation and its roots, I would recommend the following:
    – implement radical transparency.
    – unravel cemented power structures.
    – understand “Volkswagen” as “car for the people”: start participation and collaboration with people, install an interactive development culture.
    – dissolve interrelationships with politics.
    – establish a fast and open communications culture, name and discuss issues as what they are.
    – practice future-orientated questioning instead of protection of vested rights
    – let the common good be the guiding star and highest maxim of all activities.

    However, that’s not enough: do all this by conviction, not driven by opportunism.
    Challenges like the current ones stem from compensation issues and bonus payments. Discussions about the above issues would help solve matters in a more sustainable way.

    It is highly unlikely that we will see all this happen. But I see no other long term option for VW. Even though this huge dinosaur of course will hardly be able to create a kind of Tesla start-up feeling, if they want to survive they need to find an innovative way to become attractive for the new generation of global citizens, young and open-minded people around the world, with a less traditional but more sustainable attitude. Especially as the ideas and products from Asia become more and more sophisticated and globally relevant.

    The times of back room business and closed curtains are over. Those times are over when companies still base their business on the use of nonrenewable ressoruces, causing severe problems for nature and mankind in the mid and long term, even though individual mobility is very helpful for people in the short term.

    Future has sent out so many messengers. It is clear what needs to be done.

    I wonder how VW will behave.

    Raphael Huenig
    Brand Development & Marketing Communications

    LinkedIn: https://www.linkedin.com/pub/raphael-huenig/67/4a1/585
    Xing: https://www.xing.com/profile/Raphael_Huenig

    Reply
    • 26. April 2016 at 10:16
      Permalink

      Dear Raphael
      Thanks for this reply. I will split my reply into several replies to make it easier on readers because there is a lot of great material in your comment. Let me start quoting you:

      No brand exist without trust. No trust can be gained without truth. In the tangled jungle of brands it is all about survival of the fittest. Fitness today means transparency. I believe that Vollkswagen needs to quickly and profoundly change from inside out to become trustworthy and hence relevant. Otherwise this brand – like all others – would not be worth existing and taking part in the market. Decorative distractions, colorful wallpapers or patching-up exercises won’t do.

      Trust is an issue. This weekend I just learned that a German transport ministry probe found that Porsche and Audi (two VW brands) as well as VW cars contained the so-called defeat devices.
      Daimler has opened an investigation in the US at the request of the Department of Justice to see if things went wrong here as well. Its shares dropped 7% after the announcement.
      Opel (GM subsidiary in Germany) announced a recall 2016-03-29 in Germany, stating in its Press Release

      We at Opel strongly believe that the industry has to regain trust by increasing the transparency with customers and authorities. Opel takes this step towards RDE (Real Driving Emissions) to show it can be done”, said Opel Group CEO Dr. Karl-Thomas Neumann.

      I stated at the end of my blog entry above:

      What VW’s #dieselgate and Mitsubishi Motors’ falsified test results says about these companies’ internal procedures and ethics is another chapter in this saga.

      At the moment I am not sure if Volkswagen is changing its procedures and ethics from within. It appears it is just trying to cope with a crisis. Opel tried to be a bit more forthcoming… we will see if these recalls and falsification of test results will result in any change that is worth nothing.

      Reply
    • 26. April 2016 at 10:29
      Permalink

      Dear Raphael

      You list a whole bunch of changes that should be undertaken within the organizational structure and procedures used at Volkswagen. You write:

      However, that’s not enough: do all this by conviction, not driven by opportunism.
      Challenges like the current ones stem from compensation issues and bonus payments. Discussions about the above issues would help solve matters in a more sustainable way.
      It is highly unlikely that we will see all this happen. But I see no other long term option for VW.

      I wholeheartedly agree with these things I feel that it is a kind of opportunism that with the current bonus structure allows managers to shirk responsibility. For instance, the non-binding vote by BP shareholders showed that almost 60% disapprove of a £14mio pay package for BP’s CEO Bob Dudley (including one of its biggest shareholders).
      Worst is that BP’s CEO, Bob Dudley, was offered his pay package in a year that the company made a £3.5bn loss and cut 7,000 jobs.

      But as the Copensation rules for Credit Suisse show , pay is a battle ground because bankers refuse to accept pay cuts in the post 2008 financial crisis environment. For instance, Credit Suisse shareholders have been recommended to reject the CHF36mio bonus package for its managers for 2015, after the year wound up in a loss.

      If you want to be a team that has its clients interest at heart, all of you share the fame and blame in case things go good or bad. So far, those that have been responsible at VW have not been held responsible in court. The shareholders and workers are suffering instead from this fall out as do customers.

      I learned that whilst you can delegate authority, you cannot abide responsibility. What have I missed? I thought the world abides by the mantra that shareholder value is most important including keeping clients happy?

      Reply
      • 27. April 2016 at 22:04
        Permalink

        Dear Raphael
        Sometimes tales are just too good to be true.
        Yesterday I came across another reminder… Theranos.
        Here we have a company that started in 2003, raised another $400mio that valued it at $9bn.
        It wanted to revolutionise laboratory testing for patients using “nanotainer” technology. Best, a few drops of blood was it all it took, no more painful drawing of blood needed.

        But now the regulator warns because the reliability of these tests is unsatisfactory. In fact, the regulator feels it puts patients’ life at risk.
        The regulator has now invited investors for talks to find out if the fundraising pitches did not reveal information the company privately knew about the inaccuracies of tests.
        Ethics… quo vadis, brand image damaged for sure…. because Theranos has suspended its nanotainer tests and gone back to using regular ones.
        MORE INFO: http://www.ft.com/intl/cms/s/0/e5a8dd28-0871-11e6-a623-b84d06a39ec2.html

        Reply
        • 27. April 2016 at 22:16
          Permalink

          Dear El Capitan
          Thanks for this additional material yes, sometimes too hot of an investment tip may just be too good to be true. Maybe that was the case with Theranos it was really a great start-up but if the company was not truthful in its fundraising pitches, we have a real problem.

          Federal health regulators on Monday released a lightly redacted copy of the 45-page letter they sent Theranos Inc. last month proposing stringent sanctions against the Silicon Valley blood-testing company.

          The regulators also released a new, lightly redacted copy of the inspection report detailing the major deficiencies they said that they found last fall at Theranos’s laboratory in Newark, Calif.

          Regulators proposed the sanctions outlined in the March 18 letter, which would include banning Theranos founder Elizabeth Holmes from the blood-testing business for at least two years, after deeming that the company failed to promptly remedy most of the Newark lab’s problems.

          http://www.wsj.com/articles/u-s-health-regulators-release-lightly-redacted-theranos-letter-inspection-report-1461631843

          It does not look good and it is surprising. If the regulator is right…. ethics quo vadis.

          Reply
          • 29. April 2016 at 8:25
            Permalink

            Dear Urs
            No I can read about Mitsubishi car tests that were flawed for decades – since 1991

            What about Citi shareholders rebel against executive pay. More than a third of votes were cast against the bank 2017-04-20.

            Whom can we trust?

          • 29. April 2016 at 8:34
            Permalink

            Dear El Capitain
            Yes, increasing a potential pay package for Michael Corbt, CEO, by 27% to $16.5mio was too much. 36.4% voted against the package.
            About 30% backed a motion that would have stopped share-based awards from vesting for top executives who leave Citi to work in the government or public sector.
            Nevertheless, Citi maintains the pay deals for senior managers are justified
            Still feels as if some compensation committees, employees and shareholders are not on the same page, does it?
            Read: http://economia.icaew.com/news/april-2016/citigroup-shareholders-revolt-over-executive-pay
            Thanks for sharing.

          • 29. April 2016 at 8:41
            Permalink

            Dear El Capitain

            Yes Mitsubishi Motors has agreed that it has been using testing methods approved for the USA to test their cars in Japan since 1991. Apparently this overestimates the fuel efficiency on four models sold in Japan by about 10%

            Some estimate that costs for Mutsubishi are raising and could top $900 mio.

            Findings so far suggest employees were under immense presser to achieve higher fuel economy targets.
            Japan’s mini-car market is highly competitive.

            In 2004 it was already in trouble when the Mitsubishi group had to bail it out following a safety scandal. Then the company admitted to hiding vehicle defects for decades.

            Like VW and GM, governance and compliance procedures of Mitsubishi need to be straightened as well.

            Read more: http://www.ft.com/intl/cms/s/0/f163f388-0ba4-11e6-b0f1-61f222853ff3.html

  • 1. May 2016 at 8:16
    Permalink

    But I do not think we just have a problem with business or large companies.

    Jut think Macedonia – this 2m-strong former Yugoslav republic – that wants to join Nato and the EU.

    April 12, Macedonia president Gjorge Ivanov sparked uproar by pardoning 56 people that are under investigation for corruption by the country’s special prosecutor Katica Janeva. When put in the position September 2015, she announced two probes code named Titanic and Fortress.

    I hope they are the beginning to a successful fight against high-level corruption, state capture and fraud in a country once hailed as a reform success story.

    See here: http://meta.mk/en/tag/katica-janeva/

    Reply
    • 1. May 2016 at 8:28
      Permalink

      Dear El Capitan
      Thanks for this interesting information about Macedonia and Katica Janeva. I really wonder how much longer Gjorge Invanov and the Macedonia elite can continue to underestimate her…. and stay in power.
      How can a president pardon corruption suspects? Amazing.

      Interesting on the car emissions scandal and its fallout.
      Mitsubishi is testing if the same chaeting took place in cars sold overseas…

      Former VW CEO Martin Winterkorn – who stepped down days after the scandal broke – received €5.9m in performance-related pay. But he is not subject to a bonus clawback, because he left the board before the decision to dock in light of the scandal.

      Hence, another one that gets rewarded for not doing his job …. similar to BP’s CEO, Bob Dudley (see comment above http://blog.drkpi.com/brand-management-1/#comment-5669 )

      But Philip Green used ruthless cost-cutting to build a £3.2 high street empire. For instance, he paid from BHS £200m a decade and a half earlier. He failed to invest much but got about £423m in dividends between 2002 and 2004. He made a total cash profit of about £223m. Incidentally, the company paid about £290m in dividends when the pension fund was already in deficit.

      But this dwarfed money made through intermediaries and closely held companies. For instance, management fees accrued of about £600m and Lady Green making a killing with rent on BHS properties her company bought and leased back to BHS.

      By the way, a year after selling his shares in BHS for £1, the chain has collapsed. Pension liabilities are near £600m.

      SEE http://www.ft.com/intl/cms/s/0/08ce87aa-0ded-11e6-ad80-67655613c2d6.html

      I am appalled. Corruption, unethical conduct in business and politics seems rampant in Europe and the US. How much worse is it elsewhere were a president like Jacob Zuma (president of South Africa) risks facing more than 780 charges of fraud, racketeering and corruption? Incidentally, these were dropped before he became president 7 years ago – 2009. Now the South African high court ruled that he should face the charges.

      ==> http://www.ft.com/fastft/2016/04/29/zuma-suffers-setback-with-new-court-ruling/

      I rest my case.

      Reply
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