MarketLine Blog

Volkswagen: Diesel duping scandal

Car manufacturing giant, Volkswagen, has admitted that approximately 11 million vehicles worldwide are effected by the recent scandal involving the rigging of car emissions test results. The discovery was initially made public by the Environmental Protection Agency (EPA) in the US which led to the US government ordering the recall of around 500,000 vehicles. This then led to the admission from Volkswagen that this issue is far more widespread and not limited to the US, but is a global issue. Volkswagen is now in a state of panic and is attempting to recover with approximately $7bn set aside by Volkswagen in order to cover the cost of the scandal. However, Volkswagen could be looking at fines and costs of up to $18bn which is somewhat catastrophic. On top of that, there is also talk that the US Justice Department will look to launch a criminal investigation. On the back of this scandal, Chief Executive Martin Winterkorn resigned claiming the firm needed a “fresh start”.

It is claimed that Volkswagen installed a device within its diesel engines that is able to detect when the vehicle is being tested, and alters its performance in order to improve the results of the test. The software would sense a test environment and automatically reduce the performance of the car in general until the end of the test scenario where the car would subsequently fully re-optimize. The device allows its diesel Volkswagen and Audi cars to produce emissions that are deemed illegal in most countries. Countries such as South Korea, Italy and France are in the process of opening its own investigations.

The escalation on this scandal has been almost instantaneous and Volkswagen appear to know that this has been a major error on their part. Martin Winterkorn issued a frank statement where he stated: “I personally am deeply sorry that we have broken the trust of our customers and the public. We will cooperate fully with the responsible agencies, with transparency and urgency, to clearly, openly, and completely establish all of the facts of this case”. One of the key words in Winterkorn’s statement is the word “trust” as it seems that not only have Volkswagen lost the trust of its customers, but also the trust of investors. Granted, Volkswagen has to address all vehicles affected by the problem and may have to deal with legal proceedings from consumers which is damaging to the company, the relationship with the consumer and also the brand image of the company. In terms of investors, Volkswagen share prices have plummeted from EUR167.60 on 09/17/2015 to EUR115.00 on 09/22/2015 which is an overall percentage drop of 31.3% in a matter of days leading to potential legal proceedings of a different nature.

This scandal has rocked the car industry and could lead to other manufacturers also being put under the microscope. Other manufacturers such as Ford and BMW have been quick to state that they do not use such devices but others are yet to comment on the situation. Share prices of other car manufacturers such as Daimler, Renault and PSA Peugeot Citroen have also fallen displaying the distrust in the industry. This also has a negative effect on an already slowing diesel vehicle industry which has been deemed more environmentally friendly then its petrol counterparts. Volkswagen are now in a very precarious position and will have to fight tooth and nail to recover from this. Germany is a country that prides itself on the reputation it has built up through the years in car manufacturing which will also strain relationships between Volkswagen and its country of origin. With German government officials already liaising with Volkswagen executives on this issue, it is apparent that this scandal is something that impacts business on a global scale.

Leave a comment

*Required fields. We will not publish your email address