Volkswagen (VW) has faced hurdles in the company’s almost 78-year history. As a company formed under infamous Nazi leader Adolph Hitler’s vision and direction, reformation was in order for the car to ultimately live up to its name as the “people’s car.” However, after World War II ended, the company did succeed in creating well-built, affordable cars.
Now, VW is facing another hurdle that may be worse than previous ones. VW was recently exposed for using software to “rig” diesel emissions tests in the United States and across Europe. The software was used to cover-up emission outputs in order to meet the emission regulations of countries in which their cars and products were sold. Over 482,0000 vehicles in the U.S. are thought to be affected by this scandal and estimates of up to 11 million cars effected worldwide. In the U.S., alone, the carmaker could face penalties from the Environmental Protection Agency of up to $18 billion, and, again, that is only from the less than 500,000 cars affected within the U.S.
Germany is currently considered the most economically sound country within the European Union, has often been looked to for bailouts for other countries, i.e. Greece, and has been at the forefront of most recent EU stimulus and growth plans. The Country may now be in for a massive storm.
One in seven workers in Germany are dependent on the car industry, 274,000 of those workers are employed directly by VW, and 18% of Germany’s exports are VW cars and parts. VW has already admitted to “rigging” emissions tests on 2.8 million vehicles in Germany. Results from European Road Tests showed a 40% higher nitrogen oxides emission than standard allow and was advertised by the company. Due to these revelations, VW stock has dropped over 34% as of September 25th, 2015 and the threat of astronomical fines and consumer lawsuits that are very likely to arise or have already been filed, looms large over Germany and her citizens. If VW is not able to pull through this scandal or has to sell-off additional assets or subsidiaries, there is no telling what the damage might be to Germany’s economy, and, in turn, the EU as a whole. Additionally, in regards to the current migrant crisis and Germany at the helm of plans to relocate and assimilate such people, the depression of the German economy may thwart governmental plans and avenues for which support and jobs may have been provided.
The fall-out is likely to reach other countries as well, and, in fact, has already affected some industries in China and Japan. Some stocks in the Japanese markets fell as much as 16% and carmakers across the board saw dips in their shares. The most affected stocks were manufacturers of car parts and specifically parts used in diesel engines.
Another aspect of the fall-out of this massive scandal will be trust in corporate social responsibility programs. In Volkswagen’s 2014 Sustainability Report, environmental issues are named as a top priority. The quote leading the Environmental section of the report is as follows: “We have set ourselves ambitious targets with regard to environmental protection, because we’re aiming to be the leading player in ecological terms.”
The company touts its accomplishments of being the first automobile manufacturer to commit to the EU’s emission standards, with an achievement of this goal by the year 2020. While the company still has time to reach such a goal, however unlikely, one has to wonder if they committed to such high expectations with the thought of mind to cheat the system and will likely be skeptical of all future goals and sustainability reports.
Not only did Volkswagen damage the image of their own Corporate Social Responsibility programs, but investors and consumers across the globe may now question the motives, intentions, and sincerity of good deeds committed by all corporations and wonder whether the company is contributing as they say. With a growing distrust of corporations due to greed and massively disproportionate wealth and power, many consumers now a day are researching what they buy, from whom they buy, and many are deciding to “buy local” so as to avoid just this type of deception. This type of scandal reinforces the need for consumers to spot check corporations and holds them to higher standards. Volkswagen has severely damaged their image as the “people’s car” and has likely destroyed their ability to meet any of their goals, including becoming the most “successful, fascinating, and sustainable automobile manufacturer in the world.”
Current Investigations and Potential Liability
At this point in time, it is unclear how far up the ladder the deception at VW went. It is not known whether the CEO, Winterkorn, who has since resigned, directed the use of the rigging devices or if he knew the devices were in use. There are clues that he was or should have been aware, as evidence has surfaced that the company was previously warned against their usage. If there was deliberate fraud or malfeasance, Winterkorn and other directors and officers of the company may become personally liable for damages.
An investigation regarding the company’s liability for Securities fraud is also underway. Investigators are attempting to determine whether VW provided intentionally false information to investors and the public as a whole. A lawsuit has already been commenced claiming such fraud; however, there does not seem to be enough information, as mentioned before, to determine the intentionality of the misleading and deceptive information or who within the company was aware of the use of the “rigging” devices.
Additionally, any product liability or product recall insurance VW may have held will likely not pay out on any or most of the claims against the company. Because of the deliberate nature of the act, the company will most definitely pay fines and legal fees out of their own reserves and future profits.
Criminal charges are likely also pending against all involved in the scandal, both officer and director level and engineers or other workers involved in implementing the illegal devices. The U.S. may have trouble prosecuting those involved, however, because most of the activity involved, occurred overseas and European countries will likely have first “dibs” on prosecutions.
VW has hired Kirkland & Ellis LLP to defend against all charges. The firm defended BP after the oil spill disaster in the Gulf Coast in 2010. It is yet to be determined if any defenses will be put forth or if a settlement will be forthcoming. One quote from Volkswagen’s Corporate Social Responsibility Report sticks out as a great way to end this blog: “One-time certainties are being consigned to the past; uncertainty is becoming our constant companion.” Hans Dieter Potsch, Member of the Group Board of Management responsible for Finance and Controlling.
It will be interesting to see how or if Volkswagen may recover from the greedy and deceitful actions of the company’s leadership and how Europe will react to the scandal over the long term. Uncertainty will definitely remain a “constant companion” to VW, Europe (specifically Germany), VW consumers, environmentalists and corporate- watchdogs, alike, well into the future.