Riding on the heels of $2.1 billion in criminal penalties assessed to Toyota and General Motors comes another big scandal involving Volkswagen – Europe’s biggest automaker. The most recent scandal appears to have involved a most-concerted effort to blatantly skirt the law while lying to the marketplace. Consumers don’t take kindly to being lied to. Neither do government regulators.
What They Did
The trouble VW is in isn’t along the same lines as the criminal negligence of Toyota and GM, who sold knowingly sold defective cars that ended up killing people.
The company was found to have falsified emissions tests in the United States by installing secret software (regulators call them “defeat devices”) on 500,000 U.S. diesel cars in the 2009-2014 model years. Models that were cheating the tests were the Jetta, Beetle, Golf, Audi A3 and the Passat. These devices were also installed on these models (and others) in foreign markets around the world. Estimates are that up to 11 million vehicles worldwide are affected.
The software worked by detecting when the cars were undergoing emissions testing. It looked for certain clues like the position of the steering wheel, speed, duration of operation and even barometric pressure. When it sensed the clues telling it the vehicle was undergoing testing, it rigged the vehicle’s control system to pass the test. When the car wasn’t being tested, the emissions were much much worse than allowed – for example, the cars emitted up to 40x the legally allowed amount of pollution-inducing NOx gases.
The scheme began to unravel in 2015 when an EPA-certified testing lab looked at data and started to raise questions. Vollkswagen went for more than a year consistently denying that anything was wrong. Then VW did a 180 and finally admitted that yes, it did have defeat devices installed all along. Yes, it was lying to everyone all that time. Shades of Pete Rose.
What VW Has To Do
First, they’ve suspended sales of their diesel cars. Second, they have to recall all those cars in the U.S. and fix them. That’s 500,000 in the United States and millions more around the world. Some consumers may not want to bring their cars in. Both Volkswagen and the EPA has assured consumers that if they don’t do anything, the cars are still safe to drive as usual. But they will have to be fixed eventually, or else they will fail emissions testing.
The Financial Cost
Toyota and GM paid out $2.1 billion in fines for their transgressions. That’s just a small slice of what VW is facing.
Remember that because this was done to cars all around the world, Volkswagen will face penalties in many different countries. But its biggest problem is going to be in the US. Analysts expect them to be fined at least $10 billion in the US alone, and it could be as much as $18 billion.
Additionally, as news of this scandal continues to mushroom, Volkswagen stock plummeted 25% in just a couple of days. It was down 50% a week later, wiping out untold billions of dollars in company value.
The Legal Cost
Volkswagen will also be on the hook for compensation to both consumers (in class-action lawsuits – the lawyers are already lining up out the door) and reimbursements for its dealers. So tack untold billions more onto the penalties.
Individuals in Volkswagen are also looking at criminal prosecutions. It was just announced that the German government is going after the head people in charge of this mess. One person who will rightfully escape is the recent CEO Martin Winterkorn. He was asked to resign by the Board (trying to make a fresh start), but everyone agrees that Mr. Winterkorn actually had nothing to do with any of this and did not know about or authorize any of this fraud.
But Wait, There’s More
Even though we’re up to a $30 or $40 billion bill that Volkswagen is going to be facing, a huge hurdle has yet to be mentioned. Regarding the recalls, Volkswagen is on the hook to fix all those 11 million cars to get them back in compliance with regulations.
And there’s a big problem there.
The VW diesel performance that consumers have known and loved came when the cars were cheating on emissions. VW is going to have to change those setting so the cars comply with regulations. And industry insiders warn that the only emissions system settings that bring the cars into compliance actually make the cars run really bad.
The cars get much worse fuel mileage, they accelerate poorly, the performance isn’t anywhere near to what happy VW drivers have been used to.
So what happens when these consumers realize that in order to get their cars fixed, they’re going to hate them? How much damage is that going to do to VW’s already-sullen name?
Could this be Volkswagen’s funeral?
There are very real fears that this could be the end of VW as we know it. And that’s nothing to sneeze at. They are the world’s largest automaker. They are, in all likelihood, the most important and influential company in the modern history of Europe’s most important state, Germany. They are inexorably intertwined in the German economy in a way that few companies can claim in capitalist states around the world.
Can you imagine if they go bankrupt?
They could be looking at that fate as the bills run up to $40 billion or more. They’re huge, but almost no company in the world can just absorb $40 billion in expense just like that. In 2013, Volkswagen estimated its market value at $95 billion. They can’t afford a $40 billion bill.
If it looks like they are going to be sunk by this, you can bet they’ll be pleading with the German government to help them out. They might get a compromise along the lines of the EU telling them they don't have to fix the cars there. They will still be liable for all those other billions. Some kind of compromise for the European market is to be expected because they are probably too big to fail for the EU.
Where does this rank?
Big. Really big.
The largest (at the time) and most infamous corporate bankruptcy of alltime was Enron in 2001 (Lehman Brothers surpassed them later on). They were worth $70 billion at their peak. VW is likely facing a $40 billion bill.
You have to wonder why these entities have risked so much and put some many people and their own corporate existence in danger. No doubt the industry is really competitive, but that seems like a weak excuse. Are they all just corrupt? No, that’s way too simplistic as well. There may not be an easy answer for this.
What do you think? And does any of these recent scandals turn you off to considering a new VW, GM or Toyota in the future?
You may be interested in these other posts:
- Automakers Get Hi-Tech with New Apps for Your Car
- Tesla Breaks The Consumer Reports Rating System
- Cars that captured our imagination
This post was published on October 1, 2015 and was updated on October 30, 2015.