By Jerry Mooney
Elon Musk recently said VW could overcome their emissions scandal best by ramping up the production of electric cars. The recent discovery that Volkswagen has been circumventing environmental standards in their diesel cars came as shocking news. Not because companies don’t try to maximize profits at every opportunity, but because the scandal seems so out of character. Volkswagen recently overtook Toyota to become the largest auto maker in the world, and that is largely due to the company’s reputation. This reputation implicitly stems from the history of quality engineering, high performance and fuel economy. But it also includes the perception that Volkswagens are environmentally friendly...at least as far as driving a car can be.
This is why the Volkswagen story is so confounding. Since World War II, the German company has increasingly grown in sales and in the perception of quality and reliability. Yet here we are, trying to wrap our brains around the unraveling of Volkswagen’s attempt to circumvent environmental standards.
What they did: Volkswagen designed software and “defeat devices” that gave false signals in emissions tests. The design was to have software and defeat devices govern emissions on the car while they were subject to the treadmill pattern driving used to test emissions, but then revert to normal performance and subsequently higher emissions upon return to standard driving. This is very clever, but it is also illegal. This tactic allowed their diesel cars to pollute 40 times the allowable levels and get away with it. Until September 18, when the EPA‘s discovery of the workaround was first reported and the fallout began.
It has been estimated that the total economic cost to the international car company could approach $87 billion. This is difficult to comprehend considering it is over four times the magnitude of BP’s Deepwater Horizon oil spill, which wrecked the economy of the gulf coast along with tarnishing the pristine landscape.
Up until September 16, the stock had been in decline from a YTD high of $255.20. By the end of the first full trading day after the report, their stock had plummeted to $92.36, a 64% loss of the YTD value and a single day plunge of nearly $80 a share.
Volkswagen has reportedly set aside $7 billion in cash just to deal with disgruntled customers of the approximately 11 million cars affected world wide. The Justice Department is also expected to levy a potential $18 billion in fines.
Additionally, VW’s credit rating by Standard a Poor’s and Moody’s was lowered from A/A1 to A-/A2, which will cost them not only in borrowing, but in lending.
Volkswagen offers consumer loans as a way to increase sales, but they are also a lender for other, smaller European car companies. With a suffering credit rating, their ability to offer enticing loans for their car sales will put additional stress on their ability to sell cars further reducing a highly profitable revenue source.
Those are the trackable economic facts. These numbers can be put into spreadsheets and calculated with ease. What is harder to determine, and what might be the bigger story in the end, is the soft numbers.
How will Volkswagen’s soiled reputation cost it? It is well documented that loss of brand value is the cause for 15% of companies going bankrupt. VW is too large, though, to be really concerned with such an extremity. And we can speculate that this will be harmful in various aspects of the company’s financial health, It is extremely difficult to determine how consumers will respond to events with hard facts. Some consumers will boycott VWs in the future out of principle. Others will determine they still like the qualities of the German sports car. Others will keep a side-eye on the company, watching its response.
The business sector is a little easier to predict. Wall Street and the various banks are risk averse. By violating their trust, they will continue to punish Volkswagen until it becomes obvious that they have a clear path out of this perception debacle. Until then, Volkswagen provides the example of how not to operate within the economics of trust.
Photo Courtesy of Flickr.com
Jerry Mooney is a co-founder of zenruption and the author of History Yoghurt and the Moon. He studied at the University of Munich and Lewis and Clark College where he received his BA in International Affairs and West European Studies. He has taught Language and Communications at a small, private college recently and has owned various businesses, including an investment company that made him a millionaire before the age of 4o. Jerry is committed to raising the floor of our world economically and zenrupting the forces that block social and economic justice. He can also be found on Twitter @JerryMooney