Creating Loyalty through Betrayal – The Case of Volkswagen in the Middle East, 1960-80

Following World War II, German firms struggled to regain their legitimacy in international markets. Organizations producing visible high-involvement products that were closely attached to the country-of-origin faced especially severe challenges entering former-enemy markets. Volkswagen was one these organizations. The Volkswagen’s beetle close resemblance to the KdF-Wagen of the Nazi era transcended the continuities between the FRG and Nazi Germany, becoming a focal point of anti-German protests in one particularly contentious market – the Israeli car market. When Volkswagen entered the Israeli market in 1960, it faced three distinct challenges: First, VW was highly (core-)stigmatized experiencing backlashes by the population and media. These reservations never completely wore off, and by the end of the period in 1980, the Israeli market was still of limited importance to VW. Second, VW faced logistic challenges. VW struggled to establish reliable distribution networks in Israel and had to fight several legal battles with distributors. Third, Volkswagen’s engagement in Israel repeatedly incited boycott threats by member states of the Arab League that imported a significant share of VW’s annual exports. This opens up the main question: Why did VW engage in an unprofitable, small, and hostile market that endangered its sales to a larger, more profitable, and friendly market? My paper claims that by entering the Israeli market, VW violated loyalty norms of Arab countries. In turn, however, Volkswagen demonstrated its loyalty to Israel and complied with normative expectations of former-enemy markets in the “Western world”, especially in the US. US Jews were perceived to be influential actors whose silence on VW’s Nazi past was deemed crucial by VW’s officials to ensure the beetle’s success in the US. Thus, VW’s engagement in the Israeli market was a decisive stepping stone towards regaining legitimacy on the international market. My paper uses sources collected from corporate and state archives. To back my argument theoretically, my paper draws upon legitimacy research, a concept rooted within organisation and management theory.