We thought we knew a thing or two about corporate greed. We have seen world-class companies like Enron and Danone cook their books using fiction and a Xerox instead of good accounting. We have seen Big Oil devastate coastal communities and banks selling derivatives to clueless civil servants and worthless mortgages to the world. We have seen them fraudulently manipulating interest rate, foreign exchange and gold markets.
Yet when we learned last month how Volkswagen had systematically cheated US emission tests, it had a different quality all together. Germany’s most iconic company, the paragon of engineering excellence, corporate honesty and environmental brilliance had developed software to lie to governments, to the public and to their loyal customers.
Volkswagen was plying its trade like a snake oil seller. This shocked beyond belief. What weighs so heavily in this case is the clear intent. A large corporation, a reliable German one for that matter, went out of its way to lie and cheat about the harm of its product. This was as if tobacco companies had advertised the health benefits of cigarettes and published over years completely invented clinical tests, and got away with it.
The victims of Volkswagen’s fraud were people like you and me, gullible consumers – not far-away governments, stupid politicians or a rather abstract environment. What VW’s devious algorithms did was to boost the power and lifetime of the engines.
These cars are genuinely fuel efficient and low in CO2 emissions, but the downside is that they are high on the emission of NO2s and produce more soot than allowed by law. We all knew that all car manufacturers were ‘preparing’ their cars for emission tests, yet we had no idea that Volkswagen outdid them all by blatant lying about its NO2 emissions.
Every trusting, little VW customer will suffer a financial loss from falling resale prices as a result. And there are 11 million of them.
Volkswagen, on the face of it, has reacted with due speed. It took only a week for CEO Martin Winterkorn to be ousted. It will recall all affected US cars, and 8.5 million diesel cars in Europe.
It is eagerly cooperating with the US Environmental Protection Agency, which triggered the scandal, the US Department of Justice and the California Air Resources Board, to name but a few of the governmental authorities which have now mobilised against Volkswagen.
The bankruptcy of Volkswagen may trigger a worldwide recession
And it set aside €6.5 billion to cover fines, legal costs and to finance the refitting of all its diesel cars. Will all this steady the boat? I am afraid not.
As Wolfgang Munchau from the Financial Times estimated a few weeks ago, the potential losses facing Volkswagen could easily exceed €100 billion. He did not elaborate how he had calculated these horrific losses, but it is easy to come up with figures even higher than that.
Take environmental fines, criminal fines, consumer losses, legal costs in class actions and for managers standing trial, falling sales, withdrawn licences, redevelopment costs, recalls and such, and multiply all this by 11 million cars. Then add to this a shrinking Chinese market and collapsed sales in Russia and you’ll get the picture.
Volkswagen is a good company: good to its employees, good to its communities, good to its suppliers. Alas, a terribly profitable company it is not. With an estimated return on sales in 2014 of 5.5 per cent it is one of the less profitable car manufacturers. Losses of the size being predicted will wipe out Volkswagen and all its divisions forever.
In due time stockists will have reduced the value of their stock to zero. This is bad news, but not only for VW’s shareholders and its 600,000 workers worldwide.
This is also bad news for many million of workers in Volkswagen’s supply industry – all the companies making bearings, brakes, door handles, paints, or the electronic parts we have found cheating. Many of these secondary industries are concentrated in countries of the former communist block, like the Czech Republic, Hungary, Slovakia, Romania and Poland. These economies depend on Volkswagen to such an extent that their GDP is estimated to shrink 1.5 per annum if Volkswagen fails.
I fear worse. I am scared that the bankruptcy of Volkswagen may trigger a worldwide recession, like the collapse of the investment house Lehman did seven years ago. Today, sadly, after years of austerity, no government, and certainly not Germany, will be financially healthy enough to provide the necessary bailouts.
Is this scenario very likely? The longer the story will drag on, the more likely it will become.
While the world is still stunned, VW will have to act swiftly and radically. VW’s feeble claim that “a small group of rogue engineers” are the sole culprits is not a good start for a plausible clean-up operation.
VW, and all of us, can only pray that car manufactures in other countries will be implicated too. This could deflect from this one single company, ease the damage done to ‘made in Germany’ and maybe force other car producing nations to be more lenient on Volkswagen.
After all, no political administration will want to be seen as the destroyer of one’s own industry. Sadly, nobody was producing more numerous, and more sexy diesel engines than the Germans.
This, therefore, is an unrealistically slim hope for VW, its investors, its respective national governments and us, the people. Too slim to be true.
Andreas Weitzer is a journalist based in Malta who writes for Condé Nast and other leading publications.