The VW scandal isn’t good for German family businesses, many face takeover

Photo by Alexander Koerner/Getty Images News / Getty Images
Photo by Alexander Koerner/Getty Images News / Getty Images

The scandal surrounding VW’s emission tests is likely to have a profound affect on Germany’s family business sector, with many of them facing takeover or even closure in the next 10 years, say analysts.

Tom Rüsen, executive director of the Witten Institute for Family Business in Germany, says the VW scandal will affect the country’s family businesses because many of them are linked to the world’s biggest manufacturer of cars. “So many of them are component makers for the automobile industry that any downturn in the sector will have a negative effect on their businesses.”

Rüsen reckons that more than 50% of family businesses in the German manufacturing sector could be affected.

He also said the scandal is likely to have an indirect affect on their businesses because of new inheritance tax rules in the country. Although yet to be finalized, the German government is poised to introduce an inheritance tax law for family businesses, which will be linked to the number of staff businesses are employing. If family businesses can prove they are employing more people over a given period of time they will be exempt from paying inheritance tax. But if they can’t then they will have to pay a hefty tax.

Rüsen says that given the likely negative consequences for family businesses because of the VW scandal some will find it difficult to grow their businesses and take on new staff. He also says that regardless of the scandal competitive pressures are creating difficulties anyway. “Many of them will be forced to pay inheritance tax when they pass the business over to the next generation as they can’t guarantee new jobs. That would be devastating to family businesses in the country.”

Marc-Michael Bergfeld, a professor at the Munich Business School and managing director of the family business consultancy Courage Partners, reckons German family businesses face strong competitive pressures even without the VW scandal.

"Many Mittelstand (mostly family-controlled) companies are still looking inwards in terms of their markets and innovation, and relying too much on past success and the ‘Made in Germany’ fame. These companies will face a real threat to their existence. And this could be as many as 50% of them."

Bergfeld and Rüsen both agree that some are vulnerable to takeover as a result. “The Chinese are waiting in the background to pick up these companies cheaply. They want the technology,” says Rüsen.

There is also the added difficulty the VW scandal might have on governance structures of family businesses. The car maker, itself owned by the Piëch and Porsche families, is under intense scrutiny and is facing criticism about its governance structures. This could have a knock on effect for family businesses with similar advisory and executive board structures as overall governance structures are forced to change because of the problems at VW.