Since the Volkswagen emissions scandal broke in September, loss in 15 years, and has sought pin the blame on a few ‘rogue’ software engineers (an argument many have struggled to believe).
Meanwhile the scale of the crisis has ballooned; at first affecting 500,000 cars in the United States, it grew to 11m worldwide. Most recently the scandal that at first affected the NOx and particulate emissions of diesels has expanded to include the reporting of carbon dioxide emissions and fuel economy, and to include – for the first time – petrol as well as diesel engines.
The firm has set aside €6.7bn towards recall costs, possible fines, alteration costs and possible compensation for customers whose vehicles will, as a result of fixes, have poorer performance.
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That won’t go anywhere near far enough, however, and estimates of the final bill for the firm vary from €20bn to €60bn with most estimates in the €30bn to €35bn range. The firm will survive this but as costs stack up, the more likely it is that VW will have to sell off assets at some point.
VW has now been downgraded by credit ratings agencies Moody’s and S&P, with the three big agencies all having VW on ‘negative watch’ for downgrades. As Moody’s noted last week:
“These new developments pose additional risk to Volkswagen’s reputation, future sales and cash. They also suggest serious internal control and governance issues, which may be more widely spread than believed initially, that in the coming months”.
Quite. But will it?
The replacement of the CEO with an insider (in the form of Matthias Mueller, ex head of Porsche) with over 30 years VW experience hardly smacks of a new beginning of openness. The scandal is unfolding as one of the greatest corporate disasters in history and as I’ve noted from the outset, it would have been far better if the new CEO had come from elsewhere.
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The dangers in the new appointment were soon apparent, when Porsche itself was implicated in the scandal. Last week, the US’s Environmental Protection Agency (EPA) notified VW of a ‘Notice of Violation’ which “alleges that VW developed and installed a defeat device in certain VW, Audi and Porsche light duty diesel vehicles equipped with 3.0 liter engines… that increases emissions of nitrogen oxide (NOx) up to nine times EPA’s standard”.
VW has firmly denied fitting defeat devices to Porsche models, and has sought to downgrade how serious the new charges were, talking of software “not adequately described in the application process” rather than having “developed and installed a defeat device.”
Having massively “screwed up” (in the words of VW’s US boss), it might perhaps be better for VW to take a more cooperative approach to regulators, and the response again runs the risk of inflaming the latter’s ire. With heavy fines likely, one wonders if this is the right course of action for the new CEO?
The scandal keeps growing. Last week also saw VW announcing an investigation to establish whether there were other ‘irregularities’ in relation to emissions testing for VW vehicles. The firm seems to have understated CO2 emissions data for some of its brands, thus enabling it to make unrealistic fuel economy claims as well.
VW states that around 800,000 vehicles are currently thought to be involved, mostly in Europe. But bear in mind that the original NOx emissions scandal began with just 500,000 cars in the US and grew to 11m worldwide. This could well grow in scope as well.
The impact on CO2 (and hence road tax) and fuel economy also makes the whole scandal more ‘real’ for consumers. VW had been hoping to ride out the scandal in Europe at least, but this latest twist in the scandal makes the possibility of brand damage more likely, and reaffirms consumer perceptions of cheating.
VW’s argument that the scandal was down to a few rogue software engineers was anyway difficult to believe, and as the scandal grows in scope and scale this becomes even more tenuous. It increasingly looks like systematic cheating so as to give VW an unfair -and indeed illegal - advantage over rival car makers.
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The latest twist also raises the issue of possible tax evasion. of CO2 emissions. So some of VW’s customers have effectively paid less tax than they should have done, and there is now an issue over who coughs up for the unpaid tax.
The 海角视频 government has hinted at least that it won’t go after consumers who have bought the cars in good faith, and has reportedly gone after VW itself. VW’s embattled CEO has asked EU finance ministers to ensure that their national tax authorities “charge Volkswagen directly, and not our customers, for any additional taxes.”
To restore its image, VW has to genuinely show that it's sorry (and not just sorry it has been caught), co-operate fully with regulators, communicate with customers, open up, and change its strategy and structure so that this isn't possible again.
VW has at least announced a strategy overhaul to focus more on electric and hybrid vehicles – that’s long overdue and maybe some good can come out of this for the firm and the wider industry. It will also have to and revamp its diesels with cleaner exhaust emission systems.
But more importantly, VW’s growth strategy needs to be ditched, costs brought under control, investment needs to be more focused, and the firm has to embrace technologies like electric and hybrid technologies so as to build a - literally - more sustainable firm.
Five years ago, was mired in a huge recall scandal over quality issues in its cars. Its boss admitted that it had put growth above quality and subsequently made some fundamental changes to the firm in terms of changing corporate strategy, altering it structure to enable local units to respond more quickly to consumer feedback, and in bringing in outsiders to turn things around.
The quality issues took years to come out, and I wonder if the emissions scandal now engulfing VW will similarly take years to work out. And while Toyota was able to make some fundamental changes quick quickly, will VW be able to do that quite so easily given its hugely complex corporate governance system?
Professor David Bailey works at the Aston Business School