Volkswagen recall: The damage runs deep as car giant pollutes its reputation

The emissions test scandal will cost the German giant untold billions and could drag the whole industry down

David Connett,Jamie Merrill
Friday 25 September 2015 09:04
‘Endlessly sorry’: the words of VW’s boss Martin Winterkorn ring true as the costs could spiral
‘Endlessly sorry’: the words of VW’s boss Martin Winterkorn ring true as the costs could spiral

“It’s not easy being green” was Kermit the Frog’s lament in the Audi TV ad broadcast on prime-time US networks at the weekend. The Volkswagen boss Martin Winterkorn, manufacturer of the Audi and VW models, now knows only too well exactly how hard it can be.

Only hours earlier Mr Winterkorn had acknowledged that VW, the world’s current No 1 car maker, had cheated on US car exhaust tests on its diesel cars to make them appear more environmentally friendly than they were.

His embarrassment was compounded by the prominent slogan used in the company’s advertising – “Truth in Engineering”.

VW engineers had deliberately used a “defeat device” – computer software that controlled the diesel engines of many of its best-selling models so it would appear they were spewing out fewer of the noxious gases that contribute to climate change and are said to be behind spiking levels of respiratory illnesses such as asthma.

The software, designed to work under US regulatory test conditions, switched on the vehicles’ full pollution controls – making it appear they were 40 times cleaner than when the cars were driven normally on the road and the software switched the controls off.

VW’s initial admission had been terse, with the company confining itself to saying it was co-operating fully with investigators.

A better idea of the scale of the crisis became clearer after the company issued a profit warning. It said it had set aside £4.7bn to cover the fall-out and that 11 million cars around the world could be affected.

Last year VW had global sales of £146bn and a pre-tax profit of £10.7bn on the 10 million vehicles it sold.

Many speculated that the figure set aside was too conservative as investigations were launched in countries from South Korea to Italy. Experts say that in the US alone the Environmental Protection Agency has the power to fine VW up to £11.7bn. On top of that, there could be fines from the US Department of Justice if it brings criminal charges, as well as civil court cases from the millions of car buyers who thought they were buying environmentally friendly vehicles.

As the mounting crisis engulfed the German car maker, Mr Winterkorn, a man famed for his attention to the details of VW’s massive industrial operation, promised a thorough investigation and said he was “endlessly sorry”.

Other VW officials were more brutal in their assessment. “We have totally screwed up,” said Michael Horn, VW’s chief executive in the US. “We must fix the cars to prevent this from ever happening again, and we have to make this right. This kind of behaviour is totally inconsistent with our qualities.”

Exactly how sorry the 68-year-old Mr Winterkorn will be may soon become clearer; VW’s supervisory governing committee met on Tuesday night, and any recommendation made by the committee will be presented to the full 20-member VW board.

But the company, based in Wolfsburg, has suffered a 37 per cent plunge in its share price in two days, wiping £18bn off its value, and regulatory investigations have fanned out from the US across the world like a virulent rash. As result, auto analysts were not giving odds on his chances of survival.

“We don’t see any stop to this bloodbath unless there is a change at the head of VW and full co-operation with authorities. Some heads need to roll to get investors buying back VW,” Vincenzo Longo, an analyst at IG Group in Milan, told Bloomberg News.

The wider board will undoubtedly take account of the reputational damage being sustained by VW, which has long been ranked among the world’s most responsible companies.

“Brands are all about trust and it takes years and years to develop. But in the space of 24 hours, Volkswagen has gone from one people could trust to one people don’t know what to think of,” the brand consultant Nigel Currie said.

Marcel Fratzscher, the president of the German Institute for Economic Research, warned that the financial cost to VW could represent just a fraction of the wider problems arising from the scandal. “The damage is not only to VW’s image in the US, but globally. This means jobs at VW and many of its suppliers in Germany will be at risk. VW has been a showcase for ‘Made in Germany’,” he said.

More immediately, the threat of contagion is to the rest of the motor industry. Speculation and politicians’ pronouncements have already embroiled other car makers, regardless of truth. Shares in Germany’s Daimler, the manufacturer of Mercedes-Benz cars, dipped 6.5 per cent. BMW’s share price fell 5.4 per cent and France’s Renault was 7 per cent lower.

On the upside, shares in the South Korean car makers Kia and Hyundai accelerated as it was anticipated that their sales would benefit from VW’s woes.

The ultimate beneficiary of VW’s crisis should be car buyers and the environment. But that may take time

Car manufacturers have been chasing more efficient and cleaner diesel engines since the 1990s – to the extent that in the UK they now make up more than half of all cars sold. However, the latest revelations have left the car industry scrambling to defend its emissions tests.

Many emissions experts warn that Europe’s fragmented testing regime is laxer than in the US. Last month a study by the environmental group Transport & Environment reported that, on average, new European diesel cars produce emissions around five times higher than the EU limit for nitrous oxide in diesel models – 80mg/km. VW’s Audi, voted green car of the year in 2010, was the worst offender, emitting pollutants 22 times greater than the limit, it said.

The consequence, the report warned, was that “much urban air in Europe is not fit to breathe”.

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