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James Bryant

Will the Volkswagen Scandal Be a Drag on the Entire Auto Industry?

by James Bryant | Dun & Bradstreet Editor

September 30, 2015 | No Comments »

Volkswagen logo on front of carMost marketers would agree that having one’s brand likened to the behavior of a publicly disgraced sports figure is not ideal. But that’s exactly what happened when analysts at Bernstein Research recently referred to Volkswagen as “the Lance Armstrong of automakers.”

That stinging bit of criticism came as the blast radius around the German carmaker grew since it admitted it rigged software on clean diesel engines in order to fool emissions testing equipment.

Now-former Volkswagen CEO Martin Winterkorn fell on his sword and resigned last week while insisting he personally had no knowledge of any wrongdoing. The company has since named Porsche boss Matthias Müller as Winterkorn’s replacement, and VW is now the subject of a criminal probe by German prosecutors.

The company plans to issue a global recall of up to 11 million vehicles after being caught by the EPA, which has said there are about 500,000 VWs on US roads that are in violation of US emissions standards. But the larger damage will be in Europe, where diesels are much more popular than they are in the US.

Vehicles with affected engines have been yanked in Belgium, Italy, the Netherlands, Spain, and Switzerland, and Sweden is looking at opening a corruption investigation. The German government has given VW until October 8 to provide specifics about how the company plans to bring that country’s 2.8 million diesels into compliance, or it will demand the cars stay parked.

The emissions-rigging scandal is by far the worst PR nightmare in Volkswagen’s history. It threatens to undermine the company’s status as the world’s largest carmaker — a title it won at the expense of Toyota, which was toppled from the top slot in the first half of 2015 when it sold 20,000 fewer cars than VW did.

The controversy also cuts to the bone of VW’s German-engineering market proposition. Consumer confidence is likely to suffer if buyers feel VW is better at gaming the system than it is at actually engineering clean diesel engines.

Industrywide Fallout

The worry in automotive industry boardrooms is that the Volkswagen debacle will wind up being a public referendum on the whole notion of “clean diesel” — especially in Europe, where diesel is cheaper than gasoline. A sudden shunning of diesel models could leave them piling up in showrooms, lead to steep discounting, and throw capacity and production schemes into shambles.

Slower sales in Europe would come at a bad time, as China’s demand for new cars is in freefall. During the global recession, carmakers turned to new markets like China and Brazil to maintain sales volumes as demand dried up in North America and Europe. Now that situation is reversed. Some economists believe China’s demand over the next few years could shrink by a third.

Industry watchers also expect that Volkswagen’s actions will almost certainly ratchet up emissions regulations worldwide. It has been noted that the auto industry may be entering a period not unlike what happened to banking in the wake of the global financial crisis.

Growth markets were hard to come by, reams of new regulation sent costs up and margins down, and the integrity of an entire industry came into question.

James Bryant is an industry editor for Dun & Bradstreet. Based in Austin, Texas, he writes about issues affecting the global manufacturing sector. He’s been the company’s specialist on the auto industry for 15 years.

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