The Volkswagen group has been in the news lately for its emission scandal. In sept, VW(Volkswagen) was accused of understating the emission numbers and approving the emission tests with the help of a software. It is not the first time that a car making company is facing such accusations. Prior to this there have been recalls by various car makers such as Ford(2012), General Motors(2013), Ford(2013), Maruti Suzuki (2014), General Motors(2014), Honda (2015) etc. So what makes VW a special case? The Emission Defeat Device. Volkswagen, has surpassed the emission test with a completely different approach that has started questioning the corporate governance in the group as well. In “The Wobbly Wagen”, we will discuss about what exactly had VW put in place and how its works, the effects of the scandal so far, the implications in terms of corporate governance, share prices and the way forward for VW group.
In September, the Environmental Protection Agency (EPA) found that many VW cars being sold in the US had a “defeat device” – or software – in diesel engines that could detect when they were being tested, changing the performance accordingly to improve results. The company has also been accused by the EPA of modifying software on the diesel engines fitted to some Porsche and Audi as well as VW models. The defeat software thus made things easy and ugly at the same time for VW. The image below will give a brief idea on how the defeat software works and its interesting!
VW accepted those accusations stating that the software existed in the engines. The effects after the acceptance have been immense on the reputation, credibility and revenue of the world’s largest car maker. VW was forced to call back its cars in the US and the UK amidst the information going public. What started in the US has spread to a number of countries. The UK, Italy, France, South Korea, Canada and, of course, Germany, have opened investigations. Throughout the world, regulators and environmental groups are questioning the legitimacy of VW’s emissions testing. VW has started the recall of 8.5 million cars in Europe, including 2.4 million in Germany and 1.2 million in the UK, and 500,000 in the US as a result of the emissions scandal.
Over the past decade and more, car makers have poured a fortune into the production of diesel vehicles – with the support of many governments – believing that they are better for the environment. Diesel cars were just getting popular in the world economy. With this scandal, predominantly being found in diesel cars, the sales of such cars might be difficult in the coming future for any car maker. While on the reputation front, VW has dented its reputation in majority of the economies and the losses for which cannot be hedged. Looking at the financials, with VW recalling millions of cars worldwide from early next year, it has set aside €6.7bn to cover costs. That has resulted in the company posting its first quarterly loss for 15 years of €2.5bn in late October. But that’s unlikely to be the end of the financial impact. The EPA (US) has the power to fine a company up to $37,500 for each vehicle that breaches standards – a maximum fine of about $18bn. The entire situation has also led to the resignation of their long lasted CEO since he lost support of the key shareholders.
Corporate governance, the upcoming risk management measure, has yet another time being questioned with the VW scandal news. In 2014, in the US, regulators had raised concerns about VW emissions levels, but these were dismissed by the company as “technical issues” and “unexpected” real-world conditions. If executives and managers willfully misled officials (or their own VW superiors) its difficult to say that the company had stringent corporate governance. On the other hand, UK Trade body has also failed in upgrading their emission tests in the recent past. The tests at present fail to embrace the new testing technologies and more realistic on-road conditions.
The VW share prices on the other hand, have reduced by almost 30-35% in the past month. The downfall although, does not seem to recover anytime soon looking at the current conditions.
The way forward for VW seems to be a bumpy ride in most of the economies. The issues of corporate governance need to be addressed to avoid any further worsening of the reputation. The financial impact although is going to take at least a year to recover. In this instance, it’s an open case. And when you’re caught with your hand in the cookie jar to that extent, you really have no choice but to take ownership of it and do all you can to minimize the damage.
Thank you. 🙂