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Abu Dhabi, UAEWednesday 26 September 2018

Armour-plated VW proves impervious to 'dieselgate' scandal

Despite global outrage at the firm's admission in 2015 of cheating on emissions, between In 2014 and this year, its brand value soared and sales are at a record high

A VW Touareg 4x4. Despite the huge cost of the emissions cheating scandal, the German car maker is now as polished as ever and seems to have comfortably ridden out the debacle. Clemens Bilan/EPA
A VW Touareg 4x4. Despite the huge cost of the emissions cheating scandal, the German car maker is now as polished as ever and seems to have comfortably ridden out the debacle. Clemens Bilan/EPA

On September 20, 2015, Martin Winterkorn, then Volkswagen Group chief executive, told a stunned global audience: “I personally am deeply sorry that we have broken the trust of our customers and the public."

For almost any company, a self-inflicted scandal that caused it multibillion-dollar injuries and a stock market plummet that wiped billions more off its value, the outcome would be inevitable: commercial destruction. But VW is not just any company.

In fact, less than three years after the "dieselgate" emissions cheating revelations broke, about which Mr Winterkorn was apologising and which ultimately cost him his job, it appears to be all but bulletproof.

"The quarterly results confirm we are on the right path," current CEO Herbert Diess said in April. "It is now a matter of pursuing this course in a strong and focused manner."

Armour-plated

Mr Diess, who unexpectedly took over from Mr Winterkorn's replacement Matthias Mueller as chief executive earlier the same month, said VW booked a net profit of €3.22 billion (Dh14.01bn) between January and March, which was admittedly down nearly 3 per cent on the same period a year earlier. Revenues, though, hit €58.2bn, up 3.6 per cent year-on-year, as the group with its stable of 12 brands including Lamborghini, Porsche, Audi and Bentley, delivered a record 2.7 million vehicles in the first quarter.

But if its financials appear armour-plated, its reputation seems utterly non-stick. Between In 2014 and this year, Brand Finance's ranking of the German car maker ended just one place down at fourth globally. VW's brand value, according to the researcher's annual report, rose from $27.06bn to $33.67bn over the same period.

It’s still hard to envisage such an automotive juggernaut running the risk of self-annihilation. VW has more than 100 factories worldwide, it makes 355 models and employs more than 600,000 people who generate $284bn in annual revenue.

So why did it employ the defeat devices?

Hans Dieter Poetsch, chairman of Volkswagen AG (VW), pauses during the automaker's annual general meeting in Berlin, Germany, on Thursday, May 3, 2018. VW Chief Executive Officer Herbert Diess pledged to step up integrity and compliance efforts as part of the German manufacturer’s deepest overhaul since the diesel-emissions scandal came to light in 2015. Photographer: Krisztian Bocsi/Bloomberg
Hans Dieter Poetsch, chairman of VW. Krisztian Bocsi/Bloomberg

On December 10, 2015, newly appointed Volkswagen chairman Hans-Dieter Poetsch said some company engineers decided to cheat on emissions tests in 2005 because they couldn’t find a technical solution within the company’s “time frame and budget” to build diesel engines that would meet US emissions standards. When the engineers did find a solution, he said, they chose to keep on cheating, rather than employ it.

That resulted in diesel vehicles giving false readings - over a decade - of pollution emissions that were in fact above legal limits, astounding the industry and, not least, infuriating affected VW customers worldwide.

Yet today, despite colossal compensation and repair costs relating to 11 million cars, the world’s biggest auto manufacturer is in the rudest of health. In 2017, VW sold 10.7 million vehicles, a 4.3 per cent increase on the previous year.

While the worst is obviously over, some painful legacies remain. VW still faces thousands of investor and customer lawsuits that will keep it in court for several years yet and there are ongoing criminal inquiries into certain aspects of the diesel fiasco.

epa06710188 (FILE) - Former CEO of German car manufacturer Volkswagen (VW), Martin Winterkorn, fixes his tie prior to the start of the balance press conference in Berlin, Germany, 12 March 2015 (reissued 04 May 2018). Former Volkswagen CEO, Martin Winterkorn, has been indicted on fraud charges in the US over its efforts to conceal compliance with US federal emission standards. EPA/JOCHEN LUEBKE GERMANY OUT
Former CEO of VW, Martin Winterkorn. Jochena Luebke/ EPA

As the cheating was unveiled, Mr Winterkorn initially blamed the wrongdoing on "the terrible mistakes of a few people" that affected a few tens of thousands of cars. He was subsequently forced to stand down. This week, Reuters reported the US Justice Department has filed criminal charges against Mr Winterkorn, accusing him of conspiring to cover up the wrongdoing.

Some 39 individuals including Mr Winterkorn are being investigated over suspected emissions fraud, with the former CEO also being probed for suspected market manipulation together with Mr Poetsch, who was the group's finance chief before becoming chairman in November 2015, and Mr Diess. Neither Mr Poetsche or Mr Deiss have commented on the investigations but VW has said it considers the proceedings unfounded.

Global standing

Aside from the personal downfalls, just how did VW not only survive but prosper post-dieselgate? Part of its ability to rebound came because, once VW accepted the enormous scale of the problem, it acted fast. The company held an in-depth internal investigation and publically agreed compensation packages. In addition, Bill Carter, chief systems and innovation officer at Autodata Middle East in Dubai, tells The National, the firm’s long-held global standing as a car maker of quality was a key feature.

“Once the story broke … they were proactive in dealing with the situation. It also helps in having products with a good reputation for build quality," Mr Carter says. "This keeps customers loyal even through a crisis.

“They bought back or reprogrammed the vehicles affected and this was part of their efforts to minimise the adverse publicity. It appears to have paid off.”

On top of that, says the Dubai-based automotive analyst Gautam Sharma, the company went on a charm offensive. "VW rolled out attractive incentives across its model range to arrest a sales slump in the immediate aftermath of the scandal," he tells The National, but he agrees that reversing the damage has come at a heavy cost.

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That has not deterred the company. While the US has hammered VW with multibillion-dollar fines - and with a looming UK deadline nearing over the next few months for affected parties to make a case - the multinational has worked hard to mitigate the effect of the debacle on its bottom line. With an incident of this size there will always be some need for a reset, says Mr Carter. "Whether this means cutting back on development or changing model and market strategy, only time will tell," he says.

It’s estimated that VW sold around 9 million cars fitted with similar cheat software in Europe but, according to Mr Sharma, Germany’s transport ministry has reportedly approved a recall-and-fix programme whereby after a short procedure the vehicles will be made compliant with all applicable emissions standards.

"In light of the regulatory approval, it’s believed the chances of European litigation against VW are relatively slim," he says. As for VW containing the fiscal fallout, Mr Sharma says it’s a case of cutting costs across its vast operations wherever possible "and, of course, of boosting its sales, which it has done".

Despite the outrage Deiselgate prompted worldwide, it could be argued the scandal acted as a catalyst that will have positive global repercussions for everyone. Prior to the revelations, few would have predicted the UK, France and Norway would state that no new diesel or petrol-powered cars will be sold - in Britain and France by 2040; and in Norway reportedly by 2025. Meanwhile, China has said it plans a ban "in the near future", India has reportedly set a target of selling only non-fossil fuel powered cars by 2030; and even the home of diesel, Germany, this year passed legislation allowing its cities to ban cars powered by the fuel should they wish and the country's federal council the Bundesrat passed a resolution calling for a nationwide ban on combustion engine vehicles, also by 2030.

"All car manufacturers have to find ways to make their vehicles 'green'," says Mr Carter. "Legislation has decreed change and change will happen."

Fight harder

Given that the only real mass-market source of green power for cars in the near future is electricity, it is perhaps little wonder VW, along with most motor manufacturers, is committed to spending billions of dollars on developing battery-powered models. With an intended target of having 50 per cent of its offerings powered by electricity by 2025 and a goal to sell 3 million such vehicles per year by then, the company is investing $25bn in its efforts to maintain its top slot globally even as the electric revolution gathers pace.

China is already the company's most important market, one it will now have to fight harder for given Beijing's moves to open up more of the world's biggest car market to overseas manufacturers this year. VW in April pledged investments in China of €15bn in electric and autonomous vehicles by 2022, in cooperation with local joint-venture partners.

The Chinese market also happens to be one VW is familiar with. The firm already has a strong presence there as it was the first international car maker to partner with the Chinese automotive industry and set up a local manufacturing base in the country, points out Mr Sharma.

"Shanghai Volkswagen Automotive has been building cars in China since 1985 and currently turns out about a dozen different models across the VW and Skoda brands." China is now the brand’s most successful market, with 3.18 million cars sold there last year.

And VW is already making new strategic moves to cement its position there. This year, the firm reported its VW-owned Spanish brand Seat is returning to China after playing a leading role in the development of the E20X electric crossover marketed under a new brand called Sol.

Specific target

Due to go on sale in the second half of this year, the E20X will be the first car built by VW's new joint venture with domestic car maker JAC. Seat briefly shipped a few cars from Europe for sale in China before pulling out by 2015.

The move will help VW reach mandatory targets in China for "New Energy Vehicle" (NEV) credits under Beijing's stated aim to make all cars in the country zero-emission. From next year new rules specify NEV credit targets for two years: 10 per cent of the conventional passenger vehicle market in 2019 and 12 per cent in 2020. Depending on the number of vehicles it sells annually in China, each manufacturer will be given a specific target. But, similar to California’s ZEV mandate, these are not for NEV sales, but for NEV credits. Each NEV is assigned a specific number of credits depending on metrics including a car's electric range, energy efficiency and rated power of fuel cell systems. Better performing vehicles get more credits, capped at six per vehicle. The E20X would qualify for four NV credits under the new policy.

Herbert Diess, chief executive officer of Volkswagen AG (VW), speaks during the automaker's annual general meeting in Berlin, Germany, on Thursday, May 3, 2018. Diess pledged to step up integrity and compliance efforts as part of the German manufacturer’s deepest overhaul since the diesel-emissions scandal came to light in 2015. Photographer: Krisztian Bocsi/Bloomberg
Herbert Diess, chief executive VW. Krisztian Bocsi/Bloomberg

VW AND emissions

"He has to make sure that the company is seen as open, honest and accountable," says Mr Carter. "Whether the effects of the scandal will completely disappear remains to be seen.

"But It is now 'old' news and the world has moved on."

Mr Sharma concurs, saying most of the necessary measures have been put in place, so all that remains is to continue to instil confidence in VW by operating in an atmosphere of transparency and, "obviously, avoiding any engineering shortcuts that could later prove to be a source of embarrassment".

"The public has a short memory - what's big news in the moment is forgotten a few months later."

For VW's accountants and some 11 million customers, the memories might not fade so quickly.

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