Federal violations. An international conspiracy. Police raids. Plunging share prices. Shamed CEO. That pretty much sums up the last few months for German automaker Volkswagen, which has been entangled in one of the biggest corporate scandals in recent memory.

“Dieselgate”

On September 18 the United States’ Environmental Protection Agency said Volkswagen (VLKAY) had violated the Clean Air Act by rigging its cars to pass emissions tests. Starting with the 2009 model year, a staggering 11 million vehicles worldwide were equipped with pollution-cheating software. Dubbed “Dieselgate” by the press, the scandal encompasses many of Volkswagen’s most popular models, including the Jetta, Passat, Golf, Beetle, Beetle Convertible and Audi A3.

Although Dieselgate may have surfaced only recently, there have been several question marks raised about Volkswagen’s so-called “clean-diesel” over the years, According to Forbes*, in 2013 a non-profit group called the International Council on Clean Transportation tested Volkswagen’s “defeat device” only to find that the cars were emitting far more pollutants than was permitted by US law. When the group approached Volkswagen with their findings, they were quickly dismissed.

Volkswagen engineers later admitted to installing defeat devices on 500,000 diesel vehicles sold in the US.* A few weeks later company CEO Martin Winterkorn announced he was “endlessly sorry”* for equipping not just 500,000 cars with defeat devices, but 11 million.
“Millions of people across the world trust our brands, our cars and our technologies,” Mr. Winterkorn said in a video message on September 22. “I am endlessly sorry that we have disappointed this trust. I apologize in every way to our customers, to authorities and the whole public for the wrongdoing.”*

Share Prices

Dieselgate cost Volkswagen $26 billion in market capitalization after share prices plunged 35% over two days, something unheard of for a DAX blue chip. Share prices have yet to fully recover and are now 50% below their 52-week high.

Aftermath

It goes without saying that Martin Winterkorn resigned as company CEO shortly after the scandal came to light. Mr. Winterkorn admitted no personal wrongdoing and said he was “stunned” by the extent of the misconduct. Matthias Muller was named as new company CEO on September 25. Less than a month later police raided Volkswagen’s offices in France in order to seize documents and computer hardware. Back home in Germany authorities said they had identified fewer than ten suspects in the scandal.*
With the exception of diesel vehicles, which are under a stop-sale order, Volkswagen dealers haven’t reported a massive exodus of customers. Although sales are down from typical volumes, consumers don’t appear to have boycotted Volkswagen showrooms. CEO Matthias Mueller says it’ll take two years for Volkswagen to fully recover from the scandal.*

What’s next?

The impact of Dieselgate on Volkswagen extends far beyond a slowdown in sales. A total of eight countries are investigating the automaker, including the United States, Germany, Canada, India, Australia, Norway, South Korea and Switzerland. Fines for emissions violations can be extremely stiff in these countries. In Canada, for example, violating the emissions cap can cost up to $6 million per offense.*

According to Bloomberg, criminal investigations are already under way in the United States, with Congress and the Department of Justice launching formal inquiries. The Environmental Protection Agency and California Air Resources Board are also gathering vehicles from other manufacturers to test for manipulation.*

If there are any other data manipulators out there, the aftermath of the Volkswagen scandal may reveal them. It remains to be seen whether the scandal is limited to Volkswagen or extends to other manufacturers. According to an analyst at BNP Paribas, “The artificial gaming of emissions tests threatens to become the car industry’s Libor.”*

Libor was an interest rate fixing scandal that costs global banks billions of dollars.