T205A TMA Case Study – Fall 2015 VW scandal: corporate shakeout and economic crisis The German car giant has admitted cheating emissions tests in the US. According to the Environmental Protection Agency (EPA), some cars being sold in America had devices i

T205A TMA Case Study – Fall 2015
VW scandal: corporate shakeout and economic crisis
The German car giant has admitted cheating emissions tests in the US. According to the Environmental Protection Agency (EPA), some cars being sold in America had devices in diesel engines that could detect when they were being tested, changing the performance accordingly to improve results
Volkswagen has blamed its emissions scandal on a “small group” of people and has suspended a number of staff as Matthias Müller was unveiled as its new chief executive.
Müller, who has been promoted from his role as boss of Porsche, pledged to leave “no stone unturned” and “maximum transparency” in an investigation into how the company cheated emissions tests on diesel cars. However, the new VW boss did not reveal how many staff has been suspended or who they are.
Bernd Osterloh, chairman of VW’s work council and a member of the executive committee, said: “A small group has done damage to our company. We need a climate where mistakes are not hidden.”
Müller and Osterloh were speaking at a press conference to unveil the new boss of the troubled German carmaker. The 62-year-old was elected by the VW board at a meeting to replace Martin Winterkorn, who resigned following revelations in the US that Volkswagen installed software in its cars to disguise illegal emission levels.
Müller faces a major challenge in rebuilding VW. The company has admitted that 11m cars were fitted with defeat devices and set aside €6.5bn (£4.8bn) to pay for the costs of the crisis. However, it also faces the prospect of fines of up to $18bn (£11.8bn) from US regulators and one of the biggest legal claims in history from customers and shareholders around the world.
Berthold Huber, the acting head of VW’s supervisory board, called the crisis a “moral and policy disaster”. The carmaker has called an extraordinary shareholder meeting for 09 November.
“The supervisory board has, on the basis of current information, recommended suspending some employees immediately until the whole case is cleared up,” Huber said. “This has in part already happened.”
In further developments, the German government said that 2.8m of the 11m cars installed with the defeat device were sold in Germany and that commercial vehicles were also involved. Documents also emerged that showed EU offices knew that devices could skew emissions tests, and the US’s Environmental Protection Agency warned that it would step up its emissions test against all carmakers and that VW faced “massive fines”.
In addition, Bloomberg reported that key parts of the faked emissions tests had been overseen by VW executives based in the company’s headquarters in Wolfsburg.
Shares in VW fell by a further 4%. This means that roughly €25bn, or one-third, has been wiped off the value of the carmaker this week.
Analysts at UBS Investment Bank warned that if the crisis worsened it could signal the eventual end of the combustion engine. Julie Hudson at UBS said: “Should transport emissions become too difficult to regulate because of the difficulty of amassing accurate data, we think this might go way beyond the diesel engine, to accelerate the demise of the combustion engine.”
Alongside the appointment of Müller, VW announced a corporate shake-up designed to simplify its management team. This will involve operations in the US, Canada and Mexico combining under a new North America arm, Porsche being grouped with fellow sports car brands Bugatti and Bentley, and the VW brand combining with Seat and Skoda in a new “volume” division.
Michael Horn will remain head of VW in the US even though he admitted earlier this week that VW had “totally screwed up”.
Müller has worked at Volkswagen for more than 30 years. He joined the company’s Audi subsidiary in 1971, training as a toolmaker and then studying computer science. He was group head of product planning from 2007 and has headed the Porsche sports car division since 2010.
“I am taking on this task at a time in which our company faces unprecedented challenges,” the 62-year-old said.
“I will personally do everything to win back the trust of our customers, our employees, our partners, investors and the whole public.
“We stand by our responsibility. Occasionally, our and your patience will be tested, but carefulness is even more important than speed.
“What is decisive is that nothing like this ever happens at Volkswagen again. So we will introduce even tougher compliance and governance standards in the company.”
Max Warburton, analyst at Bernstein, warned that the new chief executive faced “probably the world’s toughest corporate gig”.
He added: “A year of endless work beckons, begging for the forgiveness of regulators, government and consumers.”
Warburton said VW should consider buying back and scrapping all the 482,000 cars that US authorities have ordered it recalls. This could cost $6bn. Müller should also travel to the US immediately to meet government officials, he added. “VW needs to think big and bold.”
VW is yet to break down where the 11m cars were sold around the world. However, officials at the GMB trade union in the UK called the company’s actions “unforgivable” and that nitrogen dioxide levels were risking the health of street cleaners, refuse and parking staff in 18 areas around the UK.
John McClean, the GMB’s national health, safety and environment officer, said: “What VW has done is unforgivable. The company should be severely punished for its immoral, devious and deceitful approach to public health risks as well as mis-selling to car drivers.” Volkswagen faces fines of up to $18 billion in the U.S. for using a “defeat device” that tricked exam equipment during the emissions testing process. The company could also be smacked with lawsuits from angry customers who feel duped by Volkswagen’s advertising around its diesel cars, which promised better mileage and a greener ride.
Here’s everything to know about the Volkswagen emissions crisis in one graphic:

Volkswagen could pose bigger threat to German economy than Greek crisis
The Volkswagen emissions scandal has rocked Germany's business and political establishment and analysts warn the crisis at the car maker could develop into the biggest threat to Europe's largest economy.
Volkswagen is the biggest of Germany's car makers and one of the country's largest employers, with more than 270,000 jobs in its home country and even more working for suppliers.
Volkswagen Chief Executive Martin Winterkorn paid the price for the scandal over rigged emissions tests when he resigned and economists are now assessing its impact on a previously healthy economy.
"All of a sudden, Volkswagen has become a bigger downside risk for the German economy than the Greek debt crisis," ING chief economist Carsten Brzeski told Reuters.
"If Volkswagen's sales were to plunge in North America in the coming months, this would not only have an impact on the company, but on the German economy as a whole," he added.
Volkswagen sold nearly 600,000 cars in the United States last year, around 6 percent of its 9.5 million global sales.
The U.S. Environmental Protection Agency said the company could face penalties of up to $18 billion, more than its entire operating profit for last year.
Although such a fine would be more than covered by the 21 billion euros ($24 billion) the company now holds in cash, the scandal has raised fears of major job cuts.
The broader concern for the German government is that other car makers such as Daimler (DAIGn.DE) and BMW (BMWG.DE) could suffer fallout from the Volkswagen disaster. There is no indication of wrongdoing on the part of either company and some analysts said the wider impact would be limited.
The German government said on Wednesday that the auto industry would remain an "important pillar" for the economy despite the deepening crisis surrounding Volkswagen.
"It is a highly innovative and very successful industry for Germany, with lots of jobs," a spokeswoman for the economy ministry said.
But analysts warn that it is exactly this dependency on the automobile sector that could become a threat to an economy forecast to grow at 1.8 percent this year. Germany already has to face up to the slowdown in the Chinese economy.
"Should automobile sales go down, this could also hit suppliers and with them the whole economy," industry expert Martin Gornig from the Berlin-based DIW think tank told Reuters.
In 2014, roughly 775,000 people worked in the German automobile sector. This is nearly two percent of the whole workforce.
In addition, automobiles and car parts are Germany's most successful export -- the sector sold goods worth more than 200 billion euros ($225 billion) to customers abroad in 2014, accounting for nearly a fifth of total German exports.
"That's why this scandal is not a trifle. The German economy has been hit at its core," said Michael Huether, head of Germany's IW economic institute.
"MADE IN GERMANY"
There are also voices, however, that say the impact on the economy as a whole should not be exaggerated.
"I don't think that the German automobile industry will be lumped altogether," Commerzbank chief economist Joerg Kraemer told Reuters.
"There won't be a recession just because of a single company," Kraemer added.
The German BGA trade association also tried to calm the public by saying there were no signs that customers abroad were starting to doubt quality and reliability of German companies.
"There isn't a general suspicion against goods labeled 'Made in Germany'," BGA managing director Andre Schwarz told Reuters.
But he acknowledges there is a degree of concern among German companies that the scandal over cheating on U.S. diesel emission could have a domino effect on their businesses, eroding the cherished 'Made in Germany' label.
Some observers also see some irony in the scandal.
While the German economy defied the euro zone debt crisis and, so far, the economic slowdown in China, it could now be facing the biggest downside risk in a long while from one of its companies.
"The irony of all of this is that the threat could now come from the inside, rather than from the outside," Brzeski said.
Adapted from:
Russell Hotten, Volkswagen: The scandal explained, BBC New, 27 July, 2105
Michael Nienaber, EU could toughen car emission tests after VW scandal: officials, Reuters, Sep 26, 2015