Enterprise and State in the West German Wirtschaftswunder- Volkswagen and the Automobile Industry, 1939-1962

8/12/2019 Enterprise and State in the West German Wirtschaftswunder- Volkswagen and the Automobile Industry, 1939-1962

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The President and Fellows of Harvard ollege

Enterprise and State in the West German Wirtschaftswunder: Volkswagen and theAutomobile Industry, 1939-1962Author(s): Steven TollidaySource: The Business History Review, Vol. 69, No. 3 (Autumn, 1995), pp. 273-350Published by: The President and Fellows of Harvard CollegeStable URL: http://www.jstor.org/stable/3117336.

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StevenTollidayEnterpriseand Statein the West GermanWirtschaftswunder:Volkswagenand theAutomobileIndustry,1939-1962

Analysts of the post-war German "economic miracle"(Wirtschaftswunder) ave diverged sharplyover its originsand dynamic. The well-known Olson thesis stresses theimportanceof a radical break in institutionsand interests,while otherhistorianshave recently positedthe centralityofcontinuitiesfrom the fascist era to the Bonn republic.Thisarticle examinesthe historyof Volkswagen, he largestfirmin the crucialautomobile ndustry, o understand he balancebetween continuityand change and systemicand conjunc-tural factorsin the impressivesuccess of this firm.Tollidayrejects the Olsoniannotion of institutional"cleansing"andargues that the legacies of both fascism and the BritishOccupationwere vital but thatduringthe 1950soverlappinginstitutionalstructures,argumentative nterest groups andrivalpoliticalcoalitionsat VW could well have choked offgrowth n the absence of quite favorable ircumstances.

T he core of Germany's post-war economic success has been itsremarkable performance as an exporter of manufactured goods,with machinery, chemicals and automobiles playing a dominant role.STEVEN TOLLIDAY is Professor of Economic and Social History and Director ofthe Centre for Business Historyat the Universityof Leeds, UK.Research for this article was financed by a grant from the Division of Research of theGraduate School of Business Administration,HarvardUniversity.Additional funding fortranslationassistancewas provided by the Research InitiativeFund of the School of Busi-ness and Economic Studies, Universityof Leeds. In Germany I am grateful to the archi-vists of the Federal Archives (Bundesarchiv) Koblenz and to Maria Kisse-Dencke of

Volkswagenfor use of materialsat Wolfsburg.Darleen Flahertyof the IndustrialArchivesof the Ford Motor Co. in Dearborn, Michigan gave unstinting assistance, and the Wid-ener Libraryat Harvardhelped with material on the United States Strategic BombingSurveys. In England I am grateful to the Public Records Office and to the archivistsofthe ImperialWar Museum. Above all I am gratefulfor the invaluabletranslationassistanceprovided by David DeRamus and Ulricka Bolckart.

Business History Review 69 (Autumn 1995): 273-350. ? 1995 by The President andFellows of HarvardCollege.

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Steven Tolliday/ 274Yet there are veryfew studiesof the nature and roots of this manu-facturing uccess.In contrast, he Japanesemanufacturingectorhasbeen put under the microscopeby Cusumano,Friedman,Anchor-doguyand others,' and the strengthsand weaknessesof U.S. manu-facturinghave been widelydebated.2Discussion of Germany'ssuccessful recent economic perfor-mancehastended to focuson its liberaleconomicpoliciesor its dis-tinctivecorporatist nstitutions,3but very little has been writtenonthe technicaland strategicrootsof Germancorporatesuccess or onthe evolution of postwarinstitutionalrelationshipsof industryandgovernment.4This has not prevented certain boldly stylizedviewsfrom dominatingpopularand academicperceptionsof the roots ofrecoveryand rapidgrowth.The boldest and best-knownview was set out by MancurOlsonin TheRise and Declineof Nations(1982).Olsonarguedthat,in sta-ble advancedeconomies, the power of special interest groups or"distributionaloalitions"accumulatesover time, resulting n a pat-tern of institutionalsclerosis in which these groups increasinglyimpedeeconomicefficiency,dynamismandgrowth.Accordingly,heabolitionor emasculationof these coalitions,notably through theupheavalsof war andoccupation,can create the conditionsfor rapidgrowth.This was what occurredin West Germanyand Japanafterthe Second WorldWarwhere "institutionalife would start almostanew."A sort of tabula rasa enabled entrepreneurial apitalism o

' Michael Cusumano, The Japanese Automobile Industry (Cambridge, Mass., 1985);MichaelCusumano,Japan's SoftwareFactories:A Challengeto U.S. Management(Oxford,1991); David Friedman, The MisunderstoodMiracle: IndustrialDevelopmentand PoliticalChange in Japan (Ithaca, N.Y., 1988); MarieAnchordoguy,Comtputers nc.:Japan's Chal-lenge to IBM (Cambridge, Mass., 1989).2 For a variety of approaches focusing on the automobile industry see for exampleWilliam Abernathy,The Productivity Dilenmma: oadblockto Innovation in the Automo-bile Industry (Baltimore, 1974);James P. Womack, Daniel T. Jones and Daniel Roos, TheMachine that Changed the World (New York, 1990); MaryannKeller, Rude Awakening:The Rise, Fall and Struggle or Recoveryof General Motors (New York, 1989).3 For a good guide to this literature see Peter J. Katzenstein,ed., Industry and Poli-tics in West Germany:Toward the Third Republic (Ithaca, N.Y., 1989).4 Some recent exceptions are RaymondG. Stokes, Divide and Prosper:The Heirs of I.G. Farben under Allied Authority, 1945-_51(Berkeley, Calif., 1988); Optingfor Oil: ThePolitical Economy of Technological Change in the West German Chemical Industry,1945-1961 (Cambridge, 1994); John Gillingham,Coal, Steel and the Rebirth of Europe,1945-1955: The Germans and Frenchfrom Ruhr Conflict to EconomicCommunity(Cam-bridge, 1991). For a broader discussion of the gaps in the literature see Raymond G.Stokes, "Technologyand the West German Wirtschaftswunder,"Technologyand Culture32 (January1991) and RichardJ. Overy, "State and Industryin Germany in the Twenti-eth Century"German History 12 (1994).



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Volkswagenndthe AutomobileIndustry 275generate high growth. New special interest groups were slow todevelop and when they did emerge tended to be less particularisticand more "encompassing"han before. Conversely,Olson noted:"The logic of the argument implies that countries that have haddemocratic reedomof organizationwithoutupheavalor invasion helongest,"notablyBritainandthe United States,"willsuffer the mostfromgrowth-repressingrganizations nd combinations."5The broad lines of Olson's thesis have been widelyacceptedbymanyhistoriansand economists.In recentwork,his characterizationof the contrastsbetween Germanyand Britainhasbeen endorsedbyleading British economic historians such as Charles Feinstein,Stephen Broadberry,BarrySupple and Nicholas Crafts.6And themost authoritative ecent accountof macroeconomicpolicyandper-formance n postwarGermany by Giersch,Paqueand Schmieding),explicitlytakes the Olsonianpositionthat West Germany'spostwareconomic miraclehas "faded"as distributional oalitionsand institu-tional sclerosishave slowlyre-emerged,particularlyince the 1960s."Miraclesemerge,"these authorsconclude,"whenspontaneitypre-vailsoverregulation,andthey fade when corporatist igidities mpairthe flexibility or smoothadjustment."7In sharpcontrast o thispictureof discontinuity,destructionanda new start free from old coalitions and institutionalconstraints,other writershave emphasizedcontinuity, ndeed a powerful legacyof institutionsand practices runningfrom the Nazi era to the BonnRepublic.In an important tudy,Simon Reicharguesthat the fascistregimein Germanymarkeda "criticaldivide" n the evolutionof theGermaneconomy.The ThirdReichbrokeawayfrom economiclib-

5 MancurOlson, The Rise and Decline of Nations: Economic Growth, Staglation andSocial Rigidities (New Haven, Conn., 1982), esp. 76, 77.6 Charles H. Feinstein, "Benefits of Backwardnessand Costs of Continuity" n AndrewGraham and Anthony Seldon, eds., Governmentand Economies in the Postwar World:Economic Policies and Comparative Performance,1945-1985 (London, 1990), esp. 289;and "Economic GrowthSince 1870: Britain'sPerformance n Perspective,"OxfordReviewof EconomicPolicy 4 (1988); Stephen Broadberry,"The Impactof the World Wars on theLong Run Performance of the British Economy," Oxford Review of Economic Policy 4(1988); Barry Supple, "British Economic Decline Since 1945" in Roderick Floud andDonald McCloskey,eds., The Economic Historyof Britain since 1700 (Cambridge, 1994),339; N. F. R. Crafts, "The Assessment: British Economic Growth Over the Long Run,"OxfordReview of Economic Policy 4 (1988): i-xviii.'Herbert Giersch, Karl-Heinz Paque and Holger Schmieding, The Fading Miracle:Four Decades of Market Economy in Germany (Cambridge, 1992), xi and passim. Forolder versions of a similar position, see Egon Sohmen, "Competition and Growth: TheLessons of West Germany,"American Economic Review 44, (1959): 986-1003; and F.Janossy,The End of the Economic Miracle (New York, 1971).



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Steven Tolliday/ 276eralism and establisheda networkof exclusive and bilaterallinksbetween the state and elite firmsin a preferred"core"of the econ-omy. These corporatist inkssurvivedboth warand occupation,andthe roots of postwarprosperity n the automobileand other indus-tries can "be traced to changesin state ideologyand policy innova-tion in the Third Reich."Far from the Bonn Republicrepresentinga new economic liberalism, he Social MarketEconomywas deeplycorporatistand "retainedelements of fascist state policy."8In arelatedvein, Werner Abelshauserhas arguedthat the more liberalaspects of Bonn's economic policies were shortlivedand lasted atmost for a few years from the 1948 currencyreformto the KoreanWarcrisis three years later. ThereafterGermanyreverted to a cor-poratist form of economic organizationcharacterizedby collusionbetweengovernmentand businessgroupsandby thinlymaskeddiri-gisme.9In the parallelcase of Japan,so important n Olson'sthesis,ChalmersJohnson and others have compellinglydocumented thepervasive significanceof continuities in ideology, institutions andeven personnel from the authoritarian tate of the 1930s to thehugelysuccessfuleconomicapparatus f the postwarmiracle.10These positionsformthe ends of a spectrumand many impor-tantworkscome between, or cut across,these positions.The inten-tion of this essayis to cast lighton the debate througha studyof theleadingfirmin arguably he most importantGermanindustryof thepostwar recovery.What were the roots of Volkswagen'spost-warrecoveryand success?How much did this owe to continuitiesfromthe pre-warera, how much to a breakwiththe past?To what extentdid this "core"companyenjoy a privileged relationwith govern-ment? Were distributional oalitions dissolvedand a new freedomfor entrepreneurialstrategy unleashed? More generally, to whatextent can Germansuccess be regardedas "systemic," flowingfroma particulardistinctiveset of institutions,policies and strategies)orto what extent should it be regardedas conjunctural, he resultof

HSimon Reich, The Fruits of Fascism: Postwar Prosperity in Historical Perspective(Ithaca, N.Y., 1990). Quotations are from 54, 61.9 Abelshauser'sviews are most fully set out in Werner Abelshauser,Die Wirtschaftge-schichte der Bundesrepublik Deutschland (Frankfurt, 1983); but see also WernerAbelshauser,"AnsatzekorporativerMarktwirtschaftn der Koreakriseder friihenfiinfzigerJahre," VierteljahrshefteffirZeitgeschichte30 (1982): 310-314.1' Chalmers Johnson, MITI and the Japanese Miracle (Stanford, 1982). Aspects ofJohnson's interpretation have been effectively criticized by, among others, Friedman,MisunderstoodMiracle, but his analysisof economic policymaking n the 1950s and early1960s remainscompelling.



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Volkswagennd the Automobilendustry 277favorableexternal circumstancesand opportunities:or, more prop-erly,what was the balance between these two types of factors?

1. Volkswagenunder the Nazi State and the War Economy:(i) The Origins of VolkswagenThe startingpoint must be the highly unusualoriginsof the com-pany.Volkswagen VW)did not evolve organically ut of precedingdevelopments in the German automobile industry.Instead it wasabruptlycreated by the authorityand power of Hitler's NationalSocialiststate, largely n oppositionto the wishes of the Germancarmakers.Until the early 1930s, the German car industryshowed noindicationof any willingnessor capacity o undertake he sort of rad-ical projectto producea low-costcar in high volumes thatVWwasto represent.Germanyhad played a pioneeringrole in the developmentofautomotivetechnologyand the internal combustionengine beforethe First WorldWar. But by the early 1930s the pioneerhad fallenbehind. Adverseconditionsof demand andinfrastructuremeantthatmotorization evels were low. In 1929, Germanyhad only one carper 237 inhabitantscomparedto one per 45 in Britainand one per44 in France."1Germanyhad sparseandpoor roadsbut a dense andefficient state-ownedrailwaynetwork,and the state kept rail fareslow andvehicle,oil andgasolinetaxeshigh, thus inhibitingcar sales.Purchasingpower,too, was low, thoughthe highdemandfor motor-cycles indicated an underlyingdemandfor basic personaltranspor-tation.'2 In the early 1930s Germanyhad more motorcyclespercapitathan any other countryand Germanywas the largestmotor-cycle marketin the world. This fact made AlfredP. Sloan,Jr. andGeneral Motors(GM) identifyGermanyas a tremendouspotentialcar marketbut the Germanproducerswere unableto devise a low-cost car to tap into this demand.'3With the partialexceptionof the largestfirm,Opel, most of the

1 JaroslavPurs, "The Internal Combustion Engine and the Revolution in Transport:The Case of Czechoslovakiawith some European Comparisons" n Theo Barker,ed., TheEconomic and Social Effects of the Spread of Motor Vehicles (London, 1987), 204-5.12Fritz Blaich, "Whydid the Pioneer Fall Behind? Motorisation n GermanyBetweenthe Wars,"in Barker,ed., Economic and Social Effects of the Spread of Motor Vehicles,148-51; S. M. Bowden, "Demand and Supply Constraints in the Inter-War UK CarIndustry:Did the ManufacturersGet it Right?"Business History 33 (April 1991):241-67.13Alfred Sloan, My YearsWith General Motors (London, 1986), 349.



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Steven Tolliday/ 278Germanproducersconcentratedon luxuryvehicles,usingtraditionalmethods and relativelycheap skilled laborto pursueindividualstyl-ing and high quality.'4BMW'spredecessor produced some smallAustins under license, and Opel for a time attemptedto offer unli-censed copiesof a smallCitroen,endingup in a lengthycourt case.15But these efforts were halfheartedand neitherFord,which openeda factoryat Cologne in the 1920s, nor GM, which assumed controlover Opel in 1929, took the developmentof a small carseriously.In1933 Germany produced only 84,000 motor cars comparedwith159,000 in France and 220,000 in the UK. Impeded by poor infra-structure,economic crises and conservativemanagement, he Ger-man auto industry agged far behind the British n scale, qualityofproducts,and vigouruntil the government-stimulated oom of thelate 1930s. All in all, it was a sharpcontrastto the pictureof Ger-mandynamismn other industriesof the second industrial evolutiondescribedby Alfred D. Chandler,Jr.16Against his background,he "people'scar"was the productof aliaison between a visionarydesigner, FerdinandPorsche, and theambitiousplansfor nationalprestige, growthand militaryprepared-ness of Adolf Hitler. Hitler'spersonal nitiativewas a central factor.Within a few months of the seizure of power Hitler met with Por-sche in Berlinandtold him to design"a small 4-seater car.... a sortof low-priced amilycarin which one couldgo for weekendtrips....a car for the people". It was to be a low-priced mass-produced arwhich he referredto as the Kraftdurch Freude(KdF)or "StrengthThroughJoy"car.17ThereafterHitler continuedto take a directper-sonal interest in the design process, even offering body-designamendments n his own hand.'8At first,the government aid down

14F. Blaich, "Die 'Fehlrationalisierung'n der deutschen Automobilindustrie1924 bis1929," Tradition 18 (1973): 27; Anita Kugler, "Von der Werkstatt zum FlieBband:Etap-pen der friihen Automobilproduktion n Deutschland," Geschichte und Geselschaft 13(1987); Bernard P. Bellon, Mercedes in Peace and War: German Automobile Workers,1903-1945 (New York, 1990).15 H. Schrader,BMWAutomobile:Voin ersten Dixi bis zum Modell von Morgen (Ger-lingen, 1978), 35.1f Chandler notes the contrast,though he also gives a rather more favorablepicture ofthe German auto industryin the 1930s. Alfred Chandler, Scale and Scope:The Dynamicsof Industrial CapitalisnmCambridge, Mass., 1990), 527-531.17RichardJ. Overy, "Transportation nd Rearmament n the Third Reich," HistoricalJournal 16 (1973): 401.18"Reportof Interrogationof Mr. Karlos"(VolkswagenDesign Engineer and personalassistant to Dr. Porsche),Reportof GermanReparationsAssessment Teams(RAT)151 (10Februaryto 3 April 1946), ImperialWar Museum (IWM), London;JonathanWood repro-



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StevenTolliday 280Traction-Avant r the CentralEuropeanTatra.Rather hanthe Pan-hardwater-cooledfront-engined onventionallayouthisconceptwasbased on a backbonechassis, swing axles, independentsuspensionandaircooled rear-engine,all of whichmadepossiblemajor nnova-tions in aerodynamicdesign and weight reduction.23The conceptwas pathbreakingand radical,but to turn the grand idea into aneffective vehicle which could be economically produced involvedenormousdevelopmentproblemsandcosts. Porsche receiveddesignresources and financialsupport from the governmentthat wouldhave been unimaginableorrivalproducers.Doleschalhasestimatedthat the total developmentcosts of the VW by 1939 amountedtosome RM 30m or approximately 12m [1RM = c.40 cents].24Even so, the technicaland developmentalproblemsremaineddauntinglycomplex and time consuming.Despite the priorityandresourcesaccorded o it the finaldesignwasnot stabilizeduntil 1937(after four years of intensive research,development and testing).The developmentof a suitablelightweightengine and new designsand constructionfor suspension,cranksand gears were particularstumblingblocks.25 n addition,other problemsstemmed from therequired ow price.Hitler'spoliticallymotivateddemandthat the carshould cost no more than RM 1,000 ($400) was at first viewed byPorsche as idiotic and threateningto the whole project, especiallybecause of the relativelyhighercosts of the lightweightmaterialshewanted to use, and problemsin matchingthe desiredspecificationswith the targetprice resultedin still furtherdelays.26The responseof the other autoproducerswas foot draggingandthe most reluctantcooperation.They fearedthat the Hitler/Porschecar would undercuttheir sales, and they constantly tressed the dif-ficulties of producingsuch a car at the targetprice.They also saw itas a further encroachmentof state enterpriseinto private industry,especially n lightof the projectto create the Hermann-Goringteel-works in 1937.27 While the design and development difficultiesremained at center stage, their resistancewas not too palpable,but

23Michael Sedgwick, Cars of the Thirties (London, 1970); Wood, The VW Beetle.24Reinhard Doleschal, "Zur geschichtlichen Entwicklung des Volkswagenkonzerns,"in ReinhardDoleschal and RainerDombois, eds., Wohinlauft VW?Automobilproduktionin der Wirtschaftkrise Reinbek, 1982), 30.25The complex design history is well chronicled and illustrated in Wood, Beetle,20-28.26Nelson, SimallWonder, 48.27 P. Kluke, "Hitler und das Volkswagenwerkprojekt,"Vierteljahrshefte uir Zeitge-schichte 8 (1960): 376-9; Richard J. Overy, "Heavy Industry in the Third Reich: TheReichswerkeCrisis,"European History Quarterly 15 (1985).



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Volkswagenand the AutomobileIndustry / 281

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Steven Tolliday/ 282

26 May 1938 . Adolf Hitler performs a ceremonial laying of a foundation stone for theKdF-Wagen factory.On the left is a closed body prototype and on the right a cabrioletversion. (Photograph reproducedcourtesy of the VW Archives.)

once the focus began to shift towardsproduction t quicklybecameapparent hat they wouldimpede the progressof the project f theycould. The enormouscosts of designandplantconstructionand therisks of losses in an uncertainmarketmade the projectunattractiveto the privatesector.Accordingly,n 1937 the Nazis shiftedrespon-sibility rom the RDAto the DeutscheArbeitsfrontDAF), the state-controlled union organizationwhich had developed into a hugefinancialempirebased on confiscated rade unionfunds and a com-pulsorymonthlylevy on all Germanworkers.DAF owned its ownbuildingsocieties, companiesand a majorbank and was, therefore,uniquelyplacedto finance and implementthe VWproject.28DAF's role was to build the plant and get the VW into massproduction.From the start the new car was designed to be massproducedon Fordist ines in an integrated actoryat Wolfsburg hatwouldin its "thirdstage"be capableof building1.5 million carsperyear.Even the first of the three stagesconstitutednot onlythe larg-est plant in the world but had 50% more floor space than Ford'sgiantwartimeplantat Willow Run.29The huge plantand the importof numerousexpensivesingle-purposemachine-tools rom the U.S.(using much scarce foreign exchange)resulted in massivestart-upcosts which were heavily subsidizedby DAF at a time when the

28 Reich, Fruits of Fascism, 155-7.29The Willow Run plantwas built 1940-2 and at the time of its opening (for the man-ufacture of B-24 bombers) was regarded as the largest single industrialstructure in theworld. Robert Lacey, Ford, the Men and the Machine (Boston, Mass., 1986), 390.



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Volkswagenand the AutomobileIndustry / 283plant had very uncertainprospectsof return.By late 1939 80% ofthe first stage was completed at a cost of investment in plant,machineryand equipmentof RM 215m. Though largelycompletedandequipped,the planthad not producedany significantnumberofcars before the war began. This enormousspecial purpose factorywould have been simplya fantasy or anyother Europeanmanufac-turer at the time.30The size of funds requiredfor this constructionwas such thateven DAF had to turn to new waysto raise finance. DAF enrolled aquarterof a million Germansin a quasi-compulsory ar purchasescheme, paying n installments n advance while the carwas still onthe drawingboard-the infamous"Volkswagenavers' und." SaverscontributedRM25 per monthtoward he purchaseof a Volkswagenandwould receive their caronce they had contributedRM 1200. By1939 253,000 Volkswagenshad been pre-ordered(equivalent o thetotal output of the entire Germanauto industry n 1938 and threetimes the total output of 1935) and RM 110m subscribed.By theend of the war, 336,000 people had subscribedRM 267m withoutreceivinga single car.31Motoriesierung nd the VW projecttransformed he status andprospectsof the Germanauto industry.The huge governmentstim-ulus to demand also provideda platformfor resurrectionand take-off at Opel and Ford. Ford in the early1930s had been a small anderraticoperation,heavily dependent on ratherinadequateoutsidesuppliersand inhibited from investing by the inadequaciesof localmanagementand the company'schequered relationshipwith theNazi regime. However,in the late 1930s, as Wilkinsand Hill note,the company"swallowedany qualmsthey mayhave had"andturnedto "teamingup with the National Socialists o achieve success."32 nparticular heyandOpel benefitted fromGoring'spreferenceto basehis armed forces on Ford and GM trucksrather han the"wretched"locallyproducedones. Opelwas also the chief immediatebeneficiaryof Hitler'sMotorisierung rogramas the governmentbuilt roadsandstokedup demandin anticipation f the arrival f the "people'scar."With a good range of Americandesigned cars and well-equippedfactories,Opel was able to ride the tide of expansionin the four

3 Doleschal, "Zur geschichtlichen Entwicklung," 25-32; Reich, Fruits of Fascism,156-8.31 Reich, Fruits of Fascism, 158.32 MiraWilkinsand Frank E. Hill, American Business Abroad: Ford on Six Continents(Detroit, 1964), 284, 273-82.



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Steven Tolliday/ 284

Postage Stamp, 1939 . The VolkswagenSavers'scheme was intensively promoted by theNazi state. This postage stampshows a KdF car speeding along an Autobahn,even thoughthe carswere not yet availableto the public. (Photographreproducedcourtesyof the VWArchives.)

yearsbeforethe warto take40%of the Germanmarketandbecomethe largestauto producer n Europe.33The impacton the domesticproducers was less clearly favorable. Indeed, Simon Reich hasarguedthat the defensivementalityand cliques engenderedby theVW project turned them inward-lookingand inert in the mid-1930s.34Butperhapsas importantas the aggregatedemandstimuluswasthe fact that there is no evidence that the Germanauto industrycould have developed a cheap small car without Hitler. Until the1930s, insofar as they pursued cheap cars they looked towards"hybridized"Americancars, cheap low-poweredcut-downversions

33KarlLudvigsen,Opel:Wheelsto the World (Princeton,NJ, 1975);Dietmar Due andHentrichJorg,Kriseder Automobilindustrie:Das Beispieldes Multis GeneralMotors/OpelAG (Frankfurt,1981).34Reich, Fruits of Fascism, 154.



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Volkswagenand the AutomobileIndustry / 285of largercars.35This was compoundedby an elitist social outlook:when confrontedwith Hitler's demands for a "people's car" theresponse of the technical director of the RDA was to propose a3-wheeler because the Associationdid not believe that "the commonman should be drivinga car.... we were thinkingmore of a sort ofcovered-upmotorcycle."36 pel, however,with its productdevelop-ment largely n the handsof GM's Detroitproduct-study roup,wasable to adaptand introducemanyimportantAmericandesign fea-tures into Europeancars (syncromesh, ndependent front suspen-sion, all-steelbodies and integralsteel frame and body). In the P-4,launched in 1935, Opel introduced a cheap basic car and in 1937reduced its price to a strikinglyow RM 1450.37But the P-4 (laterthe basis of the Kadett)was a whollyconventionalcut-downversionof Opel's largercars. It could not have fundamentally hangedtheface of motorisation n the waythe Beetle did.The Nazi Motorisierung ransformed he industryfrom a back-water and made it into Germany's argestindustryby sales on theeve of the Second WorldWar.Unprecedentedstate supportstimu-lated demandand laid down an infrastructurewhich facilitated herevivalof the American-ownedcompaniesandcreatedthe basis of amass market.At the same time massivesupportfor productdevel-opment and capital nvestment meantthat, on the eve of the war,apioneeringcardesignhadbeen createdreadyfor massproduction nwhat Simon Reich has aptlydescribed as "the most expensive,eco-nomically rrationalplantin history."38

(ii) Survival,1944-6All of this would have meant little if the new investments hadbeen destroyedduringthe war or brokenup afterwards, ndaccord-ing to the mostwidely-readaccountsthe VWplantwas utterlyshat-tered by bomb damage. JerrySloninger reportsthat the plant was"two-thirdsdestroyed"and Nelson accepts the claim of HeinrichNordhoff, VW's ManagingDirector from 1948 to 1967, that the

35 The nearest approximationswere Zschopauer's DKW Reichsklasse and the OpelP-4. See H. C. Grafvon Seherr-Thoss,Die deutsche Automobilindustrie:Eine Dokumen-tation von 1886 bis 1979, 2nd ed. (Stuttgart,1979), 290-304 for details on German smallcars in the 1930s.36Quoted in Nelson, Small Wonder, 47.3' Sloan, My Years with General Motors,256; Ludvigsen, Opel, 50-1.38Reich, Fruits of Fascism, 158.



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Steven Tolliday/ 286"destructionwas in effect, total."39Yet,despite the recurrentimageof VWrising ike "aphoenixfromthe ashes"fromwartimedestruc-tion, the realitywas ratherdifferent. The Volkswagenwerkurvivedthe war remarkablyntact. Its survivalwas then guaranteedand itsrevival made a priorityby the BritishOccupation.And the inertiaand confusionof its competitors,particularlyhe American-ownedfirms,allowedit to gain considerableadvantagesas the first moverin the post-warGermanauto market.The impactof alliedbombinghas generallybeen exaggeratednaccounts of VW'spost-warhistory.In fact, until late in the war theVolkswagenwerk as practicallyundamagedby Alliedair raids.Theheaviestbombingcamein three majorraids n JulyandAugust1944,and photographsof the works after this damagegive an impressionof devastation.However,as Simon Reich has shown,detailedanaly-ses madeby the United StatesStrategicBombingSurveyat the endof the war makenecessarya significantrevisionof this picture.40 nthe course of these raidsa total of 2,182 bombswere droppedon theplant. However, only 263 actuallyfell on the buildings,and poorco-ordination ndbadly-set imingfuses limitedthe damage.Mostofthe bombsexplodedhigh up in the roofingand failed to cleara pathinto the lower structuresfor the incendiariesto wreak their maxi-mumdamage.41As a result of these raids20%of the floorarea of the plantwasrenderedtotallyunusablewith majorstructuraldamagewhile a fur-ther 14%sufferedpartialstructuraldamage.More significant handamageto the buildingswas the fate of the machine-tools.At thebeginningof these raids the plant contained 2,776 machine-tools,includingvirtuallyall of the highlymodem tools installedbefore thewar. The June raid resulted in destructionof 225 (8.1%)of thesetools, "heavydamage" definedas "damage hat requiredrepairsorspare parts from the originalmanufacturers")o 139 (5.0%),and"light damage"(defined as "damage hat could be repairedwithinthe plantin less than a month") o a further160 (5.8%).In addition,

39Jerry Sloninger, The VolkswagenStory (Cambridge, 1980), 48; Nelson, Small Won-der, 92.40 See Reich, Fruits of Fascism, 167-9. Further details here are mainly drawn fromUnited States Strategic Bombing Survey(USSBS), ReportNo. 88: Volkswagenwerk,Fall-ersleben, Germany (Munitions Division, USSBS, 17 September 1945); USSBS, PlantReport No. 10: Volkswagenwerk,Fallersleben,Gernany (Munitions Division, Motor andTank Branch,August, 1945); and USSBS, Report No. 77: German Motor Vehicles Indus-try, Munitions Division, 3 November 1945 (Washington, D.C., National Archives andRecords Service, General Services Administration NA), 1975), M1013.41 USSBS, Report No. 88, 13-19 and Bomb Plotting Diagrams,Annex 8.



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Volkswagenand the AutomobileIndustry/ 287

Wolfsburg Factory *Despite heavy bombing during the War, the Wolfsburg plantescaped with relativelylimited damage. This photographwas taken during an evacuationof the factory during an Allied air attack. (Photograph reproduced courtesy of the VWArchives.)

the press shop with its mammothpresses,proved"practicallynvul-nerable to air attack"because of its powerfulconstruction.Perhapsmore fortuitously, the works' crucial giant power-station alsoemergedunscathed.This "low machine oss" of only 8%was largelyattributed o effectiveprotectionfrom reinforcedexternalwalls anda reinforcedconcrete semi-basement hat had been partof the orig-inal construction.The subsequentraidsdid very little further dam-age to the toolingbecauseby August1944 mostimportant ools hadbeen relocated in the semi-basementswhile 827 key tools weremoved to dispersalfactories,mostly in the vicinity, though somewere taken as far awayas the Czech mountains.42Following hisdamage he raidsceasedandtherewas no furtherharm to the plant from enemy action. The production evels of themonths beforethe raidwere againreachedby December 1944.Thefinal stoppageof the plant in February1945 was not the result ofsubsequentwar damagebut of paralysisresultingfrom the generalchaos of suppliesdue to the destructionandcollapseof the nationaltransport ystem.43n the finaldaysof the War,the factorywaspro-tected from destruction,according o Hitler's scorched-earth om-mands,by the mayorand the local militia,partlybecause the power

42 USSBS, Report No. 88, 13, 19-20, and Exhibit M "Dispersal Program."43USSBS, Report No.88, 2.



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Volkswagenndthe Automobilendustry 289eliminationof Germancompetitionor the "exploitation"f the Ger-maneconomy,and that the Britishquickly urnedtowardspragmaticreconstruction.48They are certainly correct that the British reconstructionistsfinallyprevailed.But morehawkishcurrentswere strongand seriousin 1944-6, andVW hovered on the edge of dismantlement or sometime. Amongthe leading proponentsof such a policywere the Brit-ish car manufacturers, ogether with important elements in theBoardof Trade and Ministryof Supply.Under theirinfluence, n thefinalyearof the war,the curtailmentof the Germanmotorindustryor even its wholesalesuppressionwere seen as attractiveoptions bythe inter-ministerialworking partyand industryrepresentatives.Atthe very least, the workingparty hoped that by eliminatingGermancar exportsthey could provideBritish manufacturerswith a uniqueopportunity o reshape Europeanmarkets.In September1944, thecombinedministriesrecommended hat afterarmistice"theGermanmotor industry should be immediately suppressed for the timebeing, except for the temporarymanufactureof spareparts."Theywere adamant hatstrongactionwouldhaveto be takenquicklyafterthe armistice f effective suppressionwere to be achieved.It wouldbe extremelydifficultto destroythe industry f it were permittedtocontinue in productioneven on a temporarybasis.49This aggressive position could not be sustained for long. ByDecember 1944, the WorkingParty had alreadyreconsidereditspositionon "suppression". irstly,warplannershadbegunto look atthe likelihoodof a continuing ongwarwithJapaneven aftervictoryin Europe, and to see the potential usefulnessof Germanvehiclecapacity n meeting those needs. Secondly,they began to stresstheoverall shortages of transportation equipment throughout Europeand Germanywhen peace arrived. n the lightof this, "suppression"was removed as a goal. Insteada controlledand nlmitedoutputwasto be allowed,strictlyconfinedto the needs of the Occupationandthe German home market.50This remainedthe officialpositioninthe firstyearof Occupation.The frameworkaid downby JCS1067in May 1945 (a document still strongly influenced by the Mor-

48Alan Kramer,TheWest GermanEconmny,1945-55 (NY, Berg, 1991), 46-7; Turner,"BritishOccupation Policy,"passim.49Minutes of the WorkingPartyon the German MotorVehicle Industry,31 May 1944and 16 September 1944, and attached notes, FO 942/197, Public Records Office (PRO),London.50 Report by Working Partyon the German MotorVekhie Industry,December 1944,FO 942/197, PRO, London.



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StevenTolliday 290genthaudoctrine)envisioneddismantlingevery factorythe productof which was not necessary o guaranteea minimumstandardof liv-ing.5'As appliedto the automobileindustry n the early plans,andas confirmed n the Level of IndustryPlan of March1946, totalpro-ductionwas thereforeto be restricted o a quotaof only20,000 carsand 21,000 trucksfor the Britishzone, all of which would be pro-duced at Ford'sCologne plant.The VWplantwas listed as "surplusto requirements"and was therefore scheduled for dismantlingorreparations.52

(ii) BritishManufacturers nd the Futureof VolkswagenWhy was the plant not, in fact, dismantled? A number ofaccountssuggestthat British manufacturersmissed a golden oppor-tunityat this point. It is alleged that they seriouslyunderestimatedthe future value of the VW plant and the Beetle car, and spumedoptionsto acquireeither or both. According o Sloninger, he Soci-ety of MotorManufacturers ndTraders SMMT)Commission hatinvestigatedVWat the end of the War concluded that the Volkswa-

gen car "wouldnever be competitionfor British cars"and MartinAdeney reports that British manufacturerswere offered the VWplantbut "turned t downwithcontempt."53 hese versionsseriouslymisrepresent he situation.From the summerof 1945 until Septem-ber 1946 (when VW was indefinitelyreservedfrom future repara-tions or dismantlement), he future of the plant and the car werehotly contested issues. Contrary o the myths, British industrialistsquite quicklyassessedthe potentialthreatsposed by VW's car andplant and sought to neutralize them. But despite early encourage-ment from certain government quarters,these hopes were soondashed.It is true thatduringhostilities,and for some monthsthereafter,while British manufacturers ad little decent informationabout theplant or vehicle, dismissiveviews were expressed.Wartimeevalua-

51Beate Ruhm von Oppen, ed., Documents on Germany under Occupation, 1945-1954 (Oxford, 1955), 13-27.52 "Reportto Sub-Committeeon Machineryand Optics on Planned Productionfor theGerman Motor Industry,1949,"AppendixA, 27 November 1946. Sir Percy Mills (ControlCommission for GermanyBritishElement) to MarkTurner(ControlOffice) 22 May 1946,BT 211/92, PRO.53Sloninger,VolkswagenStory, 57; MartinAdeney, The Motor Makers:The TurbulentHistory of Britain's Car Industry (London, 1989), 209. For similarviews see also Nelson,Small Wonder, 101-2; James Laux,The EuropeanAutomobileIndustry (New York,1992),170.



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Volkswagenand the AutomobileIndustry / 291tions of VWwere inadequate.Only92 VWsaloons had been manu-factured before the war and most evaluationswere made on thebasis of battered botched-up militaryversions of the vehicle (theso-calledkubelwagen) apturedduringthe war.54Underoccupation,the factorysimplycontinuedto producecivilianversions of the mil-itarymodel on an ad hoc basis for severalmonths,since the toolingand designsto producethe genuine prewarpassengercar could notbe put into operationuntil December 1945. Accordingly, he earlyreputationof the VWcarwasverypoor.In 1945, Sir WilliamRootes,commentingon one of the wartimeversions,stated that "The vehi-cle does not meet the fundamental technical requirementsof amotor car. As regardsperformanceanddesignit is quiteunattractiveto the averagemotor-carbuyer. It is too ugly and too noisy..... atypeof carlike thiswill remainpopular ortwo or threeyears, f that.To build the car commerciallywould be a completelyuneconomicenterprise".If the Germansproduced the Volkswagen,"it wouldmean no undue economic competitionon the world marketagainstBritishproducts."55Evenduring1945, however,furtherinvestigations y the SMMTunderthe auspicesof the Ministryof Supplywere yielding verydif-ferent conclusions.An SMMTsurveyconcluded that the VW plantwas the most modem installationn the world:"Boththe car and thefactory n which it is producedare wonderfulachievements n theirrespectivespheres.... [TheVolkswagen]wouldappear o offer,withperhapsa few modifications,a possiblesolutionof the cheap utilityvehicle which would be acceptableto this countryand its overseasmarkets."56Follow-upinvestigationsof the VW car by British man-ufacturersyielded mixedresults. Ford was impressed by the funda-mentalsof the car,57Humber and Singerless so.5 But their studies

5 The militaryKiibelwagenhad an entirely different body and extensive modificationsto wheels, gears, axles and chassis clearance. "Reporton examinationof a German LightAid Detachment Vehicle Type 82 Volkswagenby the Rootes Group Engineering Dept.,Humber Ltd, September 1943," reprinted in BIOS Final Report No. 998, ImperialWarMuseum (IWM), London.55Nelson, Small Wonder, 101-2."Investigationof Developments in the German Automobile Industryduringthe Warperiod." Report of Society of Motor Manufacturersand Traders Commission (SMMT) to

Germanyled by Dr. H. E. Merritt(Senior Technical Executive of the Nuffield Organisa-tion), 24 July to 1 October 1945, BIOS Final Report No. 300, IWM.57RAT 151, (10 Februaryto 3 April 1946), BIOS Final Report No. 768, IWM.58"Reportby Humber Ltd. on the ComparativeRoad Performance Test of the Volk-swagen Saloon Type 11" (February 1946); "Report by Singer Motors on Road Perfor-mance Test of the VolkswagenMilitaryVehicle Type 21" (February 1946), in BIOS FinalReport No. 998, IWM.



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Steven Tolliday/ 292were seriouslyhandicappedby the poorconstructionand bad condi-tion of the vehicles they evaluated.As the Chief ResearchEngineerof VauxhallMotorsput it in his reviewof these evaluations, t wasdoubtful whether these technicalreports "conveyeda true idea ofthe possibilitiesof the car."59Members of the British Occupation involved in running theplant itself, however,saw an enormouspotentialfor the car and itsplant. Colonel Guy Boas of the ControlCommission'sMechanicalEngineeringBranch,whichwas responsible or the day-to-day per-ation of the plantat the time, proposedto the governmentand theSMMTthe wholesaleacquisitionof the plantand the car.Accordingto Boas, "I consider that the acquisitionof the complete plant forthiscountrywould not only satisfya lowpricedemand of the domes-tic motor user, but be an extremelyattractivepropositionfor theoverseasmarket.Lastly,it would form the nucleus of a nationalorsemi-nationalmotorindustry n England."60Boas's proposalwas taken seriouslyat the highest ministeriallevels,and it provokeda sharpclash with the SMMT.61The SMMTwas not attractedby the car itself.Though mechanicallynterestingit was not as sophisticatedas the best Britishdesigns,and it was farbelow typicalBritishstandards f comfort,performanceand quality,even without the odiumattaching o its reputationas "Hitler'scar."But the plantwas a differentmatter.The manufacturersrecognizedfrom the start the commercial hreatthat it posed. It was recognizedas a plant "designed or the massproductionof a cheapcar which itis possible to manufacturewith a smallerexpenditureof manhoursand at a smallercost thananysmall car can at presentbe producedin thiscountry."62 ccordingly, hey set theirsightson either obtain-ing the plantor breaking t up.The SMMT believed that obtainingand absorbingthe entireVWplantand transferringt to Britainthrough reparations"willbelikelyto prove too big a mouthfulfor our industry."Wolfsburgcov-ered three and a half million square feet, comparedwith Long-bridge, the largest Britishplant, at 1 millionsquarefeet.63Instead

39 Maurice Olley. "The Motor Car Industry in Germany during the period 1939-1945,"in BIOS Overall Report 21 (1949): 20, IWM.i' C. P. Boas to A. M. Skeffington(Control Office), 22 August 1946, BT 211/92, PRO.6' See BT 211/92; AVIA49/65, PRO.62 C. A. L. Dunphie, "VolkswagenGmbH, 5th September 1946."AVIA49/116, PRO.reportingthe results of an SMMT study in the sunmmer f 1946.C. S. Knight to General Staff (Civil Affairs), 24 April 1946, MIN. SUPP. 14/397,PRO;on the serious problems experienced by the Russiansin removingwhole plants and



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Volkswagenand the AutomobileIndustry / 295increased level of output when the Level of Industry Plan wasrevised.Accordingly, he Boardof Trade'sattitudewas "afirmNO.We aregoingto have a toughtime arguingon [i.e., against] he mer-its of permittingmore Germancapacity o be retainedin the long-run,but we mustprotectour own manufacturers[,] ndcars,surely,are one [industry]where the value to us of the worldexportmarketis most important."75The supportof the Boardof Tradeand the Ministryof Supplyfor the British manufacturerswas never unconditional,however.They sawtheir interventionas a short-termone andwere anxious odistance themselvesfromproposals o impose long-termrestrictionson Germancommerce to assist Britishcompetitors.In commonwiththe Treasury hey believed that this would damage anyprospectsofa workable German economy and possibly provoke desperationmoves like dumping.76They were criticalof those withintheir ownranksand in other ministrieswho encouragedBritishindustriestothink that with Germany'sdownfallthey wouldsimplybe allowedtotake the place of formerGermanexporting ndustries.77 he Boardof Tradefinallyprevailed n the inter-ministerial howdown n Sum-mer 1946 and effectivelyclosed the questionof VWexportsfor thetime being.But though the Board of Trade won a battle, they were losingthe war. The negotiations or the formationof the British-AmericanBizone from the summer of 1946 involved a substantial oss of Brit-ish authorityand a recognitionof the dominant role of the Ameri-cans,who were now focusedon the need for rapidreconstruction.78Partlyas a resultof this, in September1946, despite the lobbyingofthe manufacturers nd the Ministryof Supplyfor the dismantlingofVW, the MilitaryGovernment decided to put the VW plant onreserve from reparations or a further four years. In October, theLevel of IndustryPlan, the key reparationsdocument, was sus-pended. In the springand summerof 1947 upwardrevisionsof thisplan for the Bizone permittedthe restorationof Germanindustrialoutput generallyto the levels of 1936. The permitted level of car

75J. Selwyn to H. A. R. Binney, 12 Sept. 1946, BT 211/92, PRO.76"Repercussionsof the German Level of IndustryPlan on Allied Economies," 7 June1946, BT 211/1, PRO.77"Minute"22 Nov. 1946, BT 211/5, PRO. For a very similarrelationshipbetween theBoard of Trade and the chemical industrysee Stokes, Divide and Prosper, 78-80.7 Alan S. Milward,The Reconstructionof Western Europe, 1945-52 (London, 1984),363; Daniel Yergin, Shattered Peace: The Origins of the Cold War (New York, 1990),225-32.



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StevenTolliday 296outputwas raisedat a strokefrom40,000 to 160,000, thus virtuallyexemptingthe Germancar industry romdismantling.79

The exportquestionwasnot immediatelyreopenedbecauseVWremained restrictedby shortagesand emergencyconditions.But bythe summerof 1947 it was clear that VW was sittingon a tremen-dous capacityfor expansionand the questionreturnedto the table.The ControlCommission,stronglysupportedby the IndustryDivi-sion and the factory management,began to argue stronglyfor VWexports.8 Despite continued Board of Trade objections, they wereable to appointdistributorsn severalEuropeancountriesand com-mence exportsat the end of 1947.81 n 1948 23%of VWoutputwasexported.Between 1948 and 1950 the attitude of both OccupationandBritish government departmentstoward VW became increasinglybenign,and the more restrictionist r nationalist iewswere margin-alized. Ian Turnerhas arguedthat DM overvaluation nd govern-mentalrigidities n exportprocedures ollowing he currencyreformof 1948 seriouslypenalizedVW.82 n fact,however, oopholesin therulespermittedVW to continueto ship a massivebacklogof exportordersat profitablepre-reformexchangerates until early 1950, andVWlargelyescapedthe effects of the "dollar lause."The regulationhurt Ford much more since it had no exportorders booked at theold rate, and at the new rates all its exportorders sold at a loss.83Althoughlocal Ford managerswere ready to do this in order toobtainmarketshare,Ford Internationalrejectedthis as "contraryoprinciple"and insisted that Ford Germanywould have to ceaseexports until the rules changed.84 n the meantime VW'sexportshelped to reduce its costs as capacityutilizationrose. By October

'9"Planfor MotorVehicle Productionin the Combined Area,"Paper from the Indus-try Division CCG for meeting of the BipartiteEconomic Panel, 15-18 March 1947, PRO,FO 943/171 BIECO/P (47) 72; Backer,Priming,80-2.'8 L. E. D. Barber (DAF Section, PropertyControl Branch)to Chief, Financial Divi-sion, "Subject:The VolkswagenwerkComplexin Controlunder Law52," June 1947, PRO,BT 211/92; Col. C. R. Radclyffe(VolkswagenController, Mechanical Engineering Indus-try Branch)to Lord Brabazonof Tara, 15 July 1947, SUPP 14/397, PRO.81E. Harle, Director of MechanicalEngineering Branchto Chief of IndustryDivision,15 May 1947, BT 211/92, PRO;"Reportto Board of Control on Investigations n Belgiumand Holland to Appoint VolkswagenConcessionaires,"Oct. 1947, FO 1046/93, PRO.82Turner, "BritishOccupation Policy,"603-608.3 E. Vitger to N. A. Bogdan, 14 July 1949; Ford Motor Co., "A programfor a newpassenger car to be produced at Ford Werke Cologne," 24 Feb. 1950, box 30, AR 65-71,Ford Motor Co. Archives (FMC), Dearborn, Mich.84G. Howard to E. Vitger 21, July 1949; E. Vitgerto N. A. Bogdan, 14 July 1949, box30, AR 65-71, FMC.



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Steven Tolliday/ 298sion restarted he plantto meet its own needs. In August1945 it sentin a small group of REME engineers under a 39-year-oldMajor,Ivan Hirst, as Senior Resident Officer and representativeof theIndustryDivision of the PropertyControl Branchof the ControlCommission.Hirst and his team initiallyrepairedjeeps and thenassembledkubelwagensrompartsfrom wartimestock,while Britishmilitary engineers retrieved machinery from dispersal sites andrepairedpartsof the plant.88The AlliedMilitaryGovernmentalmostimmediatelyplaced a contractfor 20,000 VWs for Occupationuseand instructedthe plant to raise its output as quicklyas possible.89The Occupationhada desperateneed for rugged2 seatertransport,but a British"Jeep"could not be producedbefore 1947, while the2-seater Austins that had been used were prone to breakdownandAustinpreferred o makeother moreprofitablevehicles.The use ofVWs was therefore seen as essential, even though the MinistryofSupplybelieved that it was "a bad advertisement rom the point ofview of British ndustry."90Becauseof its relationswith the MilitaryGovernment,VWwasable to quicklysecure the state railwaysand the post office as itscustomers.The ControlCommissionalsotook directaction to set upa distributionnetwork for official auto users in the Britishzone,whichquicklybecame the basisof a network orciviliandistributionin the whole of the Westernzone. In 1945-8 productiondependedcruciallyon raw materialallocations,and as an enterprisecontrolledby the militaryVW achievedan unusual status.VW production orthe Allied forces was designatedmandatory nd it receivedpriorityin the allocationof scarcematerials.91 ven so, productionwas inter-mittentlydisruptedby steel shortages,andbottlenecksalsooccurredbecause of shortagesof tires, brakelinings, ight bulbs, and evengrease. Many of VW's customarysupplier relationshipswere dis-ruptedby the divisionof Germany nto zones:most of the old head-lightproducers, or instance,had been locatedin the Soviet zone.92

88 See esp. "Subject:The VW Complex in Control under Law 52," June 1947, Prop-erty Control Branch, Finance Division, FO 371/65114, PRO, and SUPP 14/397, PRO,passim;Robert Wyse, "The Great BerrymanStory"Safer Motoring, 1965.89Turner, "BritishOccupation Policy," 175-81.0 "Memorandum from Ministry of Supply to War Office," 23 March 1946, AVIA49/116, PRO.91By January1949 there were 31 large dealers and 103 individualdealers. IanTurner,"Das Volkswagenwerk-Ein Deutsches Unternehmen unter BritischKontrolle," n JosephFoschepoth and Rolf Steininger, eds., Die Britische Deutschland-und Besatzungpolitik,1945-9 (Paderbor, 1985), 295-6; Turner, "BritishOccupation Policy," 175-81.92 Minutes of the Boardof Control, 1948, FO 1046/194, PRO.



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Volkswagenand the AutomobileIndustry/ 299

Major Ivan Hirst. Shown here (far left) greeting government officials in the winter of1945-6, at the plant which he ran under the BritishOccupation.

Moreover, until the currency reform, suppliers were often reluctantto deliver materials and quasi-barter relations prevailed. VW had anadvantage in these conditions since finished cars were highly valuedproducts which could be traded (albeit quasi-illegally) with suppliers.In July 1947 one VW car could, for example, be exchanged for 100to 150 tons of cement or 200,000 bricks VW also had its own powerplant, which cushioned it from some of the electricity shortagesexperienced by other industries.93

Management and control at works level at first remained in thehands of the occupation authorities. The factory and the city werechaotic and lawless when the Allies arrived, and as former Nazi Partyproperty the works were seen as "fairgame for all kinds of theft anddamage."94As former slave workers were repatriated, refugees fromthe East and released prisoners of war and ex-soldiers flowed in.Wolfsburg became a sort of giant transit camp.95 In the factory,absenteeism ran at 25% a day as workers found it more advantageousto cultivate food on allotments or scavenge in the countryside thanearn worthless cash wages in a factory. The factory, with its associ-ated farms and forests, was "a veritable Eldorado in a Germany

93Turner, "Volkswagenwerk,"87-8.94 Minutes of the Board of Control, 6 Dec. 1946, FO 1039/797, PRO.95Turner, "BritishOccupation Policy,"205.



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Steven Tolliday/ 300starved of food and consumer'sgoods,"and it inevitablybecame ahub of black-marketeering.96

The militaryauthoritiesused strict bureaucratic ontrolsand theallocation of all materialsto prevent this. But they also sought todevolve control of the plantto Germansas soon as possible.A firstattemptto do this was made in early 1947 when severalof the full-time Britishmanagersand controllerswere pulled out of the plant.The result of the hand-overwas a near disaster.The Germanman-agers lacked the clout to ensure regularsupplyin the still baronialworld of Occupation logistics, contributingto the plant's closurefrom steel shortages n early1947. Without the influenceto compelsupply, ocalmanagers ell back on barteror black-marketeeringnd"extremely eriousthievingand nefariousactivities" esulted.Withinmonths the transferwas rescinded,the WorksTransportManagerwas arrestedand the ProductionManagerdismissed and Ivan Hirstwas broughtbackinto full-time residence.97Nevertheless,the high cost of occupationand an acute shortageof personnelmadeit essential to devolvecontrolagain,98 ndfinally,in January1948, the British dentifieda suitable Germanmanagingdirector:HeinrichNordhoff.Nordhoffhad risen throughthe ranksof the Opel customer-servicing rganizationbefore the war. As aseniorOpel managerhe gainedexperienceof Americanproductionmethodsin the USA and (ironicallyn the lightof his laterrole)wasactive in the RDA oppositionto Hitler'splans for a Peoples' Carbefore the war. He managedthe Brandenburgruckfactoryduringthe Warand fled the SovietOccupationat the end of the war,onlyto fall foul of Americandenazificationproceedings,which bannedsenior staff at his level from futureemploymentabove the level ofan unskilledworker.For a whilehe turnedto runningan Opel repairshop,but then he benefited fromthe more lenient interpretation fdenazificationn the Britishzone when the Britishmilitarydentifiedhim as a suitable top managerand plucked him from obscurity.99Fromthe time thathe arrived,Nordhoff nsistedon "entire reedom

9c L. E. D. Barber (DAF Section, PropertyControl Branch) to Chief, Financial Divi-sion, "Subject:The VolkswagenwerkComplex in Control under Law 52," June 1947, BT211/92, PRO.7C. R. Radclyffeto H. Orr-Ewing (IndustryDivision), 13 Oct. 1947; "Memorandumfor Allocations and PrioritiesBoard,"11 Dec. 1946, FO 1039/797, PRO; L. E. D. Barber(DAF Section, PropertyControl Branch)to Chief, Financial Division, "Subject:The Volk-swagenwerkComplex in Control under Law 52," June 1947, BT 211/92, PRO.98"Finance Division and DAF Properties at Wolfsburg,"Oct. 1947, PRO, FO 1046/93. 9 Nelson, Small Wonder, 122-5; Sloninger, VolkswagenStory 61-2.



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Volkswagenand the AutomobileIndustry / 301of action", which the British authorities were happy to allow him.After a brief period of co-operation with a small group of Britishofficers, he soon took sole charge. He was to remain the dominantfigure at VW until 1967.VW thus had an exceptional position compared to its competi-tors because of its modem equipment, large capacity, and room forexpansion and because it was favored by the occupying power for itsown pragmatic reasons. But its early post-war success also dependedon the behavior of its competitors. Its principal German rival, theAuto-Union group, was effectively wiped out by the loss of its facto-ries to the Russian zone. Ford and GM-Opel, however, were muchbetter placed to take advantage of the position in post-war Germany.Their failure to do so is a crucial part of the VW success story.

(iv) American Multinationals under the OccupationOpel had held 40% of the German car market in 1938 andaccordingly was the most likely leader of the industry in post-warGermany. Although Opel suffered more from war damage than VW

this was not in itself a decisive factor. It lost its Brandenburg truckplant to the Russian zone and Russelsheim was more seriously dam-aged than Wolfsburg.'0? More importantly, Russelsheim fell into theAmerican zone of Occupation and, in the confused early months ofoccupation, the American Military Government took a more hawk-ish attitude to dismantlement and reparations than did its Britishcounterparts. At an early stage the Americans authorized the produc-tion lines, equipment and machinery of Opel's Kadett to be disman-tled and handed over to the Russians as reparations.101Why did GM allow this? One reason was that during the Warthe company had taken advantage of an option to write off its exist-ing $35m investment in Opel against taxes. This both confused theownership position and made GM extremely wary of resuming own-ership lest recovering possession should result in a major tax liabil-ity. As a result, as Alfred Sloan later put it, "we were somewhat inthe air about resuming control of Opel."'02 Compounding this wasGM's own lack of faith in the future prospects of its German opera-'X0USSBS, Report No. 77, NA, M1013.10 This became the basis for the Moskvitch400 in the Soviet Union. Opel technologywas a key prop of Russian auto production and engineering in the 1950s. For a while itseemed that the entire Russelsheim plant might be dismantled and shipped to the Rus-sian zone. See Ludvigsen, Opel, 58.102 Sloan, My Years With General Motors,331.



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Steven Tolliday/ 302tions. Sloan in his memoirs admits that in March 1946 he believedthat the future market would be too limited to make Opel a money-making operation. Accordingly, for more than two years, the situa-tion was allowed to slide. It was the U.S. Occupation, not thecompany, that restarted production on an interim basis and it wasGeneral Lucius D. Clay, the American military governor, whostepped up pressure on GM to resume control as post-war pessi-mism eased.

Top management at GM remained extremely divided and hesi-tant about Opel. In November 1947, the Operations Policy Commit-tee recommended that GM resume control, but the Financial PolicyCommittee blocked this pending a further investigation. A studygroup of senior officials recommended resumption of ownership inMarch 1948 but were again blocked by the Financial Policy Commit-tee, which concluded that "in view of the many uncertainties sur-rounding the operation of this property, the Corporation is notjustified in resuming the responsibility for its operation at thistime.""'3Charles Wilson, the GM President, was in a minority of oneon the FPC in favouring resumption, but he strongly lobbied Sloanto reverse the decision. In May 1948, the Committee finally autho-rized resumption of control, but only under some highly restrictiveconditions. GM would resume control only for a two-year probation-ary period and would "not advance or in any way guarantee theadvance of any additional funds to Opel.""'4Even then, GM did notofficially resume control until November 1948, and only on a proba-tionary or caretaker basis.'"5Ford's German operations had been on a smaller scale thanthose of GM before the war. However, like VW's Wolfsburg, Ford'sCologne plant suffered little war damage despite its key role as amilitary truck supplier.'?6 A team of managers from Ford's BritishDagenham plant was on the spot almost at once. Dispersed machin-ery was retrieved and the assembly line was quickly put back in

J03Minutes of the Financial Policy Coinnittee. 5 April 1948. quoted(b Sloan, My)ears WVith eneral Motors,333.104 Minutes of Finance Policy Commnittee. rd May 1948. quoted by Sloan, My Years\itlh General .fotrs, 336.1,5 Sloaln, 1y Years \'ith General Motors, 331-6; Ludvigsen. Opel, 58-61; DietinarDue and Hentrich Jorg, Krise der Autolilobilindustrie Das Beispiel des Multis GeneralMotors/OpelAC (Frankfurt.1981), 29-32.1'')Despite some damage from U.S. shelling late in the war, Allan Nevins and FrankE. Hill conclude that "no herculeani effort would be required to put Ford-Werke ofCologtie back inito operatinigcondition." See Allan Nevins and Frank E Hill, FordDecline and Rebirth. 1933-1962 (New York. 1962), 289.



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Volkswagenand the AutomobileIndustry/ 303workingorder.?07 lso, likeVWbut unlikeGM, Ford at its Cologneplantcame under the sympatheticBritishmilitaryoccupation,whichencouraged he earlyre-startof productionandorganized he distri-bution of Ford trucks to official users. In this respect,Ford startedout with an even strongerhand than VW. Ford actuallyrestartedproductionbeforeVW.By the end of 1945 it hadalreadybuilt2,443trucksandin 1946 a further4,550 trucks.'08Moreover,Ford wastheputativedirectbeneficiaryof earlyBritishpolicy.In the initial Levelof IndustryPlan of March 1946, car and truck productionin theBritish zone were plannedto be confined to the Fordwerke,whileVWwas to be dismantled.'09Whywas Ford unable to capitalizeon this headstartand favoredposition?One problem,which it sharedwith Opel but not withVW,was that its low degree of verticalintegrationmade it vulnerable othe disruptionof suppliersand deliveries.Fordalso lost its keybodyandpresswork upplier,Ambi-Budd, o the Russianzone anddid notget the tooling returned to it until August 1948.11 As a result, theVolkswagenwerkecame Ford'sleadingpresswork ontractor,work-ing with dies that Fordhad recoveredfromthe East. Heinrich Nor-dhoff was happy to fulfill all Ford's requirements to use hisenormousexcess press shop capacitysince VW had the capacitytosupplyall of Ford'slikelydemandin the foreseeablefuture."'Morecritical,however,were some of the company's undamen-tal strategicdecisions.Despite earlydifficulties,Ford made signifi-cant profits, and by March 1947 had accumulateda large cashreserveof DM 36.5m whichits Germanworksmanager,ErhardVit-ger, urged it to quickly nvest in fixed assets becauseof dangersofinflation and taxation."12But hesitations n Ford'scorporateofficesin Dearborn,Michigan,and bureaucraticdelaysin Germanymeantthat his proposals or a new forgeand foundryandthe acquisitionof

o10Frank Cort, "Report on Cologne Plant," undated, May 1945, acc 507, box 17,Henry Ford Museum Archives (HFMA).'l" Charles Thacker to Sir Stanford Cooper, 8 Dec. 1947; B. Lonsdale, "GeneralReview, January1946 to September 1947,"ace 713, box 20, HFMA. See also WilkinsandHill, American Business Abroad, 345-6.109Percy Mills (CCC) to MarkTurner (Control Office for Germany and Austria),22May 1946, BT 211/92, PRO.11"Hanns-Peter Rosellen, Ford-Schritte n Deutschland, 1945-1970 (Frankfurt,1988),21, 35."' E. R. Breech, "Agenda for Meeting on October 18th 1948 at Fordwerke," AR65-71, box 30, FMC.112 ErhardVitger to R. I. Roberge, 22 Aug. 1947, acc 713, box 19, HFMA; FMC-USMinutes of Foreign OperationsCommittee, 1 July 1947, Acc 713 Box 20, HFMA.



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Steven Tolliday/ 304adjacent land had not been acted on. Thus, Ford's cash balanceswere devastated by the national currency reform of June 20 1948.113

This financial setback was symptomatic of more fundamentalproblems in Dearborn's handling of the European situation. From1945 to 1948 Ford-U.S. was a tottering company undergoing a majorinternal restructuring. Issues of European strategy tended to receiveinadequate and erratic attention. Ford's strongly managed Britishand French operations were able to claim attention and resources,but the German operations with their weak local management hadless impact. The British managers secured their claims to first call onEuropean resources, while the French managed to persuade theparent to put large sums into the recapitalization of the Frenchoperations in 1945-7 to support a strategic attack on the medium-size car segment. This strategy proved to be misconceived, andresulted in Ford's failure and withdrawal from France in 1954.14 InGermany, however, the already limited pre-war plant became "woe-fully inadequate" once demand began to revive. As Wilkins and Hillput it, "the need for increased production facilities fairly shrieked itsurgency.... yet Ford officials in Dearborn and Cologne did little tomeet the situation.""5 The plant needed resources and Germanmanagement needed help; but they got neither.The one possibility that presented itself as an alternative to thepainful rebuilding of the German subsidiary was to jump ahead viathe purchase of VW. Many apocryphal versions of such VW/Fordproposals exist. Nelson recounts that in March 1948 "the Britishdecided to make one last attempt to give the company away" andoffered it to Ford. The result was a historic meeting in a Colognehotel in May, with Nordhoff, representatives of the Military Govern-ment and top executives of Ford (including Henry Ford II) present.Ford president Ernest Breech slammed the door on the deal whenhe turned to Ford and said: "Mr. Ford, I don't think that what weare being offered here is worth a damn.""16Another version, bySloninger, alleges that Henry Ford II turned down the offer of the

113 Cash fell from RM 22.6m to DM 1.6mand orders for new plant and machineryhadto be canceled. See R. I. Roberge to E. Breech, 21 Jan. 1948; "Manager's Report toDirectors," 16 July 1948, ace 713, box 20, HFMA.114 Wilkins and Hill, American Business Abroad, 338, 344, 377, 393.ll" Wilkins and Hill, American Business Abroad, 390.16 Nelson, SImallWonder, 17-18, 136.



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Volkswagenndthe AutomobileIndustry 305plant when he saw a map and was horrified at the proximityofWolfsburg o the East Germanborder.17

In fact, fromthe time of an on-the-spot studyof VWin March1948, Fordexecutiveswere considerably xcitedabout the potentialof VW for their organization. n particular, hey graspedthat theBeetle was a unique and valuable car. Thoughthere was room forimprovementin its design, materialsand fabrication, hese weak-nesses were correctableand did not prevent"anamazing uture forthis little car.""8As a result, Henry Ford II and Graeme Howard,the head of the InternationalDivision, had preliminary alks withNordhoffduringtheir visit to Europein March1948.19 But the ini-tial move came from Nordhoff,who in April1948 sent a handwrit-ten letter to Fordraising he questionof a takeover.'20Nordhoffhadseriousdoubts aboutVW'sviabilityandthought t mightbe better toshelterunder the wing of a powerfulAmericancompany.FollowingNordhoffs letter, Howarddiscussed the idea with Under-Secretaryof State for War WilliamDraper,the head of the Economics Divi-sion, in Washington.Howardand Fordgraspedthe wider relevanceof such a mergerto American/Germanommercialrelations.Follow-ing George Marshall's amous speech of 20 March 1948 and thelaunchof the European RecoveryProgram ERP), they urged that"immediately ollowingthe passageof the ERP, the policy of FordMotor Co. should be to invest dollarsin Europe."A majorinvest-ment in VW would "by example exert an important nfluence onre-establishingpracticalinterest on the part of Americanprivatecapital n Germany,so necessary o its revival."1'2Draper,who as aformerpartner n the investmentbankDillon Read had been closelyinvolved n the extensivenetworksof U.S./Germanbusiness nterestsin the 1920s,'22 responded stronglyto the idea. He and Howard

11 Sloninger, Volkswagen Storj, 57; Wilkinsand Hill argued that the purchase of VWwas "of more than passing interest." See Wilkins and Hill, American Business Abroad,368.118Henry Ford II and Graeme Howard, "Report on European Trip, February toMarch 1948,"AR 65-71, box 25, FMC.119Ford and Howard, "Reporton European Trip."120 The letter does not appearin the Ford archives but it is summarizedin G. Howardto H. Nordhoff, 7 June 1948, AR 65-71, box 30, FMC.121Ford and Howard, "Reporton European Trip."122See Robert Sobel, The Life and Times of Dillon Read (New York, 1991), 97-111for U.S./German business relations before the war.



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Steven Tolliday/ 306concluded that a VW/Ford merger "would be of outstanding benefitto the German economy and to the German passenger car and truckconsumer."123The link to Ford would expand VW's export network and enablethe company to generate exports and foreign exchange from "aprod-uct which has never been exported and which has the stigma ofGerman origin." It would produce economies in capital expenditureand overheads, and it would bring into VW Ford's design and engi-neering know-how. Ford preferred to take a large but minority sharein the new company "so as to eliminate the inevitable unfavorablereaction to foreign acquisition of such an important and dramaticcompany as Volkswagen." Indeed, Howard proposed, "The mergedcompany should have a distinctly German name, and the sameshould apply to its products. In other words, the name 'Ford' shouldbe entirely eliminated.'"124But would the Military Government approve? On the Americanside, the main danger seemed to be that a merger might conflictwith the policy of decartelization. Ford executives therefore plannedto take this issue up directly with General Lucius D. Clay. On theBritish side, attitudes were more mixed. The Industry Division(Tregonning) favored the plan as a way of maximizing the use of theVW factory at an early date and injecting fresh management into thecompany. Others feared that an acquisition by Ford would be detri-mental to the German economy because VW's interests would besubordinated to those of Dagenham. Meanwhile the Property Con-trol Division envisaged some ultimate form of public ownership forVW and were therefore reluctant to discuss any private sale to any-body. Nevertheless, the Industry Division were sufficiently inter-ested for Colonel Radclyffe, the Control Commission official directlyresponsible for the car industry in the British zone, to fly to Londonat Ford's request for talks with Henry Ford II.125In the meantime, Howard sought to recruit Nordhoff directly toFord whether or not the merger eventuated.126 Nordhoff was seenas the outstanding German auto executive available, and also assomeone who would be able to bring over a number of leading pre-

123G. Howardto H. Nordhoff, 7 June 1948, AR 65-71, box 30, FMC.124Ford and Howard,"Reporton European Trip."'1"W. L. Tregonning to Sir Eric Coates, 15 April 1948; Tregonning to R. H. Parker,29 and 30 April 1948;J. F. Cahanto Coates, 21 April 1948;Parker o Tregonning,29 April1948, PRO.126 At one stage he believed that Nordhoff had accepted the proposal. Ford andHoward,"Reporton European Trip."



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Volkswagenand the AutomobileIndustry/ 307war engineers from Opel to Ford, and he himself had raised thequestion of a move to Ford in his handwritten communication. "Ifyou think it possible and advisable, I would be very glad to come toan agreement with you [to take over as Managing Director atCologne] already now-I leave that to you."127Howard effectivelytold him to name his own price. "As to your personal compensation... it would be largely up to you to indicate your needs and wishesin this matter."'28

Through the summer of 1948, Howard continued to urge Nord-hoff both to press ahead with the merger and to commit himself toa move to Ford. Discussions finally petered out after Breech andHoward met with Nordhoff and Colonel Radclyffe in a Colognehotel in October 1948. Nordhoff and Radclyffe remained "anxiousfor a merger," but by now the complications from the standpoint ofthe murky ownership position'29 and the financing of the deal weredeterring Breech. Though Nordhoff and Vitger agreed to carry outone further study, the Ford executives believed that the difficulties"appear at this moment insurmountable."'30Breech's alternative wasto continue to build the German company on "a sound but slowpace."131Thus, during the immediate post-war period, GM had the capac-ity to deploy engineering and managerial resources to support itsGerman operations but failed to use them. Ford's own internal prob-lems in the United States absorbed nearly all its available managerialand engineering resources and sapped the company's will to over-come operational and financial difficulties in Germany. A fewmonths later, after the collapse of the VW negotiations, GraemeHoward's attempt to focus more direct attention on internationaloperations through the creation of Ford International Co. collapsedin face of hostility and allegations of empire-building.Like GM, Ford had its share of executives that remembered thepost World War I boom and slump in Europe and who urged cau-tion, and the 1948-9 Berlin blockade also exacerbated hesitation

127Howard to Nordhoff, 7 June 1948, AR 65-71, box 30, FMC, quoting Nordhoffshandwrittenletter.128Ibid; Howard to Nordhoff, 26 July 1948, AR 65-71, box 30, FMC.129 It was described as "a box on an organisationchart without any linearattachments,"Ford and Howard, "Reporton European Trip."'l3 E. Breech to Henry Ford II, 24 Oct. 1948, AR 65-71, box 25, FMC. This is prob-ably the hotel room meeting that appears(in May 1948) in the apocryphalNelson version.Note that Henry Ford II was not present.131 E. Breech to Henry Ford II, 24 Oct. 1948, AR 65-71, box 30, FMC.



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Steven Tolliday/ 308over expansion. Expansion planningwas delayed until 1950, andeven then waspitchedin a minorkey. Germanywas seen as "a valu-able hedge and protection for our international distributingorganisation"ather han a core production acility.Nor would Dear-borncontemplate nvestingparentfundsin Germany.Ford insistedon modernizingts Germanplantsolelyout of localearnings,withnoAmericancapitalor even outsideborrowing.'32Thus,VWwas able to fill a vacuum. If Ford or GM had seizedthe initiative,or if Ford had succeeded in takingcontrolof VW, itseems likelythat the occupyingpowerswould havesupported hem.The BritishOccupation