VW Probably Won’t Die—But if It Does, Europe Is in Trouble
A multibillion dollar corporation tricks the public into thinking its smog-burping cars are actually good for the environment. A group of Mother Earth-loving researchers exposes the corporation as a fraud. The bad guys are defeated. The good guys win. The credits roll. It sounds like a plot only Disney would dream up. If only real life were so simple. In reality, Volkswagen’s attempt to deceive the Environmental Protection Agency with its emission-masking technology is about to get a lot more complicated.
It all started last week when the EPA accused Volkswagen of violating the Clean Air Act by equipping half-a-million “clean diesel” vehicles with software that would lower the cars’ emissions only when they were undergoing emissions testing. Today, the situation took another downward turn when news broke that the problem is actually much more widespread, involving some 11 million vehicles worldwide.
It’s no surprise the scandal has attracted attention from everyone from German Chancellor Angela Merkel to the European Commission. This is not a manufacturing mistake, but a clear case of trickery. Volkswagen CEO Martin Winterkorn has offered plenty of apologies, but so far, VW hasn’t done much to appease investors or the public. Already its stock price has dropped to a three-year low, and European stocks fell 3 percent overall.
All of this is a natural immediate reaction. It’s tough for investors to have confidence when Volkswagen’s reputation is taking such a blow. But the important question to be asking now is: Will this reaction last? And if it does, what does that mean for Volkswagen, the German economy, and the European Union itself? It’s distinctly possible Volkswagen won’t implode; other big car companies have weathered serious troubles recently and survived. But if Volkswagen does fall apart, the ripple effect could be felt across a continent.
The Best-Case Scenario
There are plenty of people who expect that this will all blow over, mainly because, as icky and evil as this case may look, the vehicles themselves are still safe to drive. “No one’s dying because of this,” says Sean McAlinden, chief economist at the Center for Automotive Research. “The big shock is that they lied, and they did it on purpose.”
That matters, McAlinden says, because we’ve seen other scandals in the past involving companies like General Motors and Toyota that did put people in physical danger. “And yet, people aren’t talking about General Motors all week long,” he says. “You’ll forget about Volkswagen like you’ve already forgotten about Toyota.”
And while there will certainly be class action suits against Volkswagen, McAlinden says they will be less expensive for the company than they might be if anyone had been physically harmed by the use of this software. As for the $18 billion in fines with which the EPA has reportedly said it could saddle Volkswagen, McAlinden says it’s important to remember that $18 billion is the maximum fine. In reality, it will likely be much less than that, he says. Already, Volkswagen has set aside $7.3 billion to cover the possible costs to ensue from the scandal.
McAlinden also points to the fact that Volkswagen’s sales in the US were already declining, meaning it won’t suffer as much from a loss of business here. In its largest market, China, Volkswagen is likely to remain strong, since the affected diesel vehicles were unpopular there anyway.
“I think this is going to be expensive,” McAlinden says, “but short-lived.”
The Worst-Case Scenario
Not everyone is so sure. Others, like Michael Czinkota, a professor of international business and trade at Georgetown’s McDonough School of Business, expect Volkswagen to feel the effects of this scandal for years. For starters, Czinkota says, the fact that Volkswagen has already set aside $7.3 billion to deal with the fallout is a strong sign that the company expects to owe a lot more than that.
“If they over-announce, then they’re spending more than they need to,” he says. “So I think they’re fully cognizant that they have to spend more than what they put aside.”
Then there’s the fact that so much of Volkswagen’s branding in recent years has revolved around its position as an environmental market leader capable of developing vehicles that were clean, powerful, and affordable. Not only has the scandal proved that to be false, but those consumers who do get their cars fixed as a result of this recall won’t likely enjoy them as much, says Matt DeLorenzo, managing editor for Kelley Blue Book.
“The problem is, from a customer point of view, I may see my fuel economy drop, and the car won’t be as powerful as it was before,” he says.
There’s also an innovation problem. The entire industry is now working on ways to comply with increasingly stringent global emissions standards while also giving consumers what they want. By trying to solve that problem with deception, all Volkswagen has done is waste time it could have been using to come up with an actual solution. It isn’t just sneaky. It’s lazy. If its stock price continues to drop, and fines and class action suits continue to mount, Volkswagen may struggle to find the resources to make up for that lost time.
“Any money they’re paying out is less money that they have to invest in new products,” says DeLorenzo. “In the highly competitive automotive world, that’d almost be a death sentence in and of itself.”
The Ripple Effect
In the Disney version of this story, it would be natural to root for the ultimate demise of the big bad corporation. But in reality, that’s an ending that none of us should hope for. After all, a lot more than a few evil executives’ futures are riding on Volkswagen. Volkswagen employs some 600,000 workers. And the German government is a shareholder.
Czinkota, who was born and raised in Germany, points out that if Volkswagen suffers, the German economy would suffer, too. “The dividends the government received from Volkswagen was cash money able to be used for new government programs,” he says. “That could disappear.”
It’s not hard to see what unfortunate timing that would be for Europe, given the severity of the current refugee crisis. In recent weeks, Germany has tried to position itself as a leader, welcoming refugees and migrants at a rate far exceeding its European neighbors. “Where’s the budget for that going to come from if one of the largest companies in Germany is beaten to the ground?” Czinkota says, adding that other countries would likely feel it, too. “In Europe, everything is linked to each other.”
Which is why it’s not shocking that Merkel and other European officials would be stepping up to smooth things over. We’ll likely see a concerted effort on their part to work with U.S. regulators to minimize the damage, Czinkota says. “There will be strong arguments made by German policy makers saying that they hope Volkswagen won’t be crucified,” he says.
“Germany will try to impress upon the US Justice Department that we’re not just talking about a company. We’re talking about people, employment, and families.”
View this article –