Taking us for a ride: The fallout from VW’s emissions cover-up

The ripples from Volkswagen’s emissions cover-up scandal are continuing to spread. Millions of cars are affected, lawsuits are being prepared, and the financial costs as well as costs to the environment and public health are only just beginning to be calculated.

Meanwhile while the scale of the deceit and cheating involved is truly shocking.

The maker of the ‘people’s car’, it seems, has been deliberately and systematically deceiving the people

Volkswagen was born in the 1930s to develop a ‘people’s car’ – the literal translation of the firm’s name. Despite dubious political origins, VW emerged from the ashes of war to build a global reputation epitomising the technical excellence of ‘brand Germany’.

Its TDI diesel technology in particular was touted as industry-leading and the firm was held in high regard by consumers who saw it as a solid, reliable and trustworthy manufacturer.

Deception device

Little wonder then that revelations VW knowingly set out to fool tests for harmful vehicle emissions have shaken the auto industry and the business world in general. The maker of the ‘people’s car’, it seems, has been deliberately and systematically deceiving the people.

vwcircuitThe engine computer was deliberately designed to deceive emissions testsIn fact, VW now admits, more than 11 million cars have been fitted with a device designed to deliberately trick lab tests for emissions of toxic nitrogen oxides (NOx) – a pollutant implicated in up to 58,000 premature deaths annually in the US alone.

Moreover it was recently revealed that Audi, itself owned by VW, had a similarly configured device on more than two million of its cars. Thousands of cars from other VW-owned brands such as Seat and Skoda are also affected.

VW’s senior leadership have been quick to respond. The CEO of the firm’s US arm admitted it had “totally screwed up” and went against VW’s values. Days later the firm’s powerful CEO, Martin Winterkorn, resigned.

Whether he or any other senior VW figures were aware of the deception is unclear. That perhaps is a moot point. If top bosses knew about it but did nothing, they could be held criminally responsible; similarly if they were not aware when such large scale fraud was taking place, then they were negligent in their duties.

Crisis-management

From a crisis management perspective then, VW’s response so far could be seen as well-managed. It took responsibility – at a corporate level at least, if not individually – and has pledged full cooperation with investigators.

vwlogoThe wheels have come off VW’s aim to be the world’s top car markerIn terms of actual damage-limitation though, it will take time before the real scale of the harm can be fully assessed.

In the days after the initial revelations, VW’s stock lost around a third of its value – US$29 billion – suggesting serious investor concern about the future of the company and its brand value.

Add to that the cost of likely fines, penalties and lost sales and it’s a high price given the original deceit was driven by short-sighted cost-savings of around US$100 per car. Even more so given VW already had the technology for engines that meet the most stringent standards.

Uphill struggle

For several years, VW senior management had set its sights on becoming the world’s largest car maker. Some analysts have even cited the firm’s single-minded focus on this mission as one of the root causes of the scandal.

The case has cast a broader light on the often questionable practices involved in vehicle testing itself

With vehicles recalled and sales plunging, that goal will now be well out of reach. But while there is little doubt that VW will survive, it faces a long and costly uphill struggle to regain customer trust.

Reputation is hard won and easily lost. In today’s world of social media-driven consumer empowerment corporate behaviour is under unprecedented scrutiny and public trust in business at an all-time low.

In such conditions recalls resulting from faulty products can do significant damage to a firm’s standing. It is far worse when the wrongdoing is found to have been so brazen and deliberate.

In the case of VW, affected consumers had been led to believe that they were buying precision-engineered cars powered by “clean diesel” engines. The reality is, by VW’s own admission, rather different.

‘Bad apples’

That said, we have seen previous egregious business behaviour forgiven or forgotten by consumers, and in this case many car buyers may soon find that VW cars at reduced prices will be difficult to resist. Buyers in Asia in particular, may be more sensitive to prices than the cost to the environment or concerns over corporate cheating.

ThinkAloud4Nonetheless as the full scale of the cover-up emerges, so inevitably will conclusions be drawn that this was not just the act of “a few bad apples” operating in isolation.

Whether that was the case will only be resolved by an independent investigation, But the fallout from the scandal is unlikely to be confined to diesel cars nor to VW alone.

Indeed the case has cast a broader light on the often questionable practices involved in vehicle testing itself.

VW’s device was able to fool US emissions tests because its software was able to recognise the very specific, controlled – and generally unrealistic – conditions in which testing is conducted.

Likewise in vehicle mileage testing it is widely known that test results rarely reflect on-the-road reality. This is largely because it regulators allow carmakers to conduct a range of fixes to their vehicles to reduce drag and create more favourable results.

It may be therefore that the shockwaves from the VW scandal will help push regulators towards a more realistic testing cycle, perhaps using standard vehicles picked at random from the production line or showroom.

Certainly those responsible for the VW deception should be held accountable. But beyond the immediate backlash there are also broader regulatory lessons from this scandal that should be acted on as well.

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