Impact of Emission Scandal on Volkswagen

Reputation of any company helps a lot in creating positive mind-set of the customers and helps them to be a loyal customer of a particular company. A positive reputation of company can create a unique image of the company in the mind of customers as well as in the mind of community in which company is operating its business. This report is about the famous Volkswagen emission scandal that happened in September 2015, and known as “diesel gate” or “emission gate.” In September 2015, it was found that Volkswagen was found to be guilty of breaching the rule that was related to the emission rates. Actually, the company making cars that appear in far less emission than required limit set by the USA, but after an investigation conducted by ‘US environmental protection agency,’ it has been found that VW’s diesel cars were emitting up to 40 times more toxic fumes on streets than permitted (Irwin, 2018). Then the US heads of VW accept the reality that a couple of engineers failed to develop a mechanism that was expected to reduce the emissions on the road and they were failed to do so. However, the CEO of VW, Martin Winterkorn resigned from his post in September and made an announcement that he was fully aware of this scandal. Further, it analyses the causes behind this unethical incident of the company. This report also measures the impact of this scandal on the financial performance of Volkswagen in the third quarter of 2015-16 financial years. In the end of this report, it includes a short conclusion and recommendation that how a company can avoid such type of unethical practices in the organisation by providing perfect training and motivation to them towards the ethical practices in the organisation.

Volkswagen scandal was the famous scandal in the automobile industry and it destroyed the reputation of the company worldwide. VW was the world’s second largest car manufacturer in the automobile industry after Toyota Motor Corporation. The ‘Dieselgate scandal’ also affects its stakeholders directly and indirectly. The impact of the emission scandal was taken seriously by both the US government and European countries as well. Car sales of Volkswagen were down tremendously. After that, VW was felt to deal with different international regulations by hiring Former communications of BMW as a consultant. Apart from this to handle and cope up with this crisis, VW brought in three public relations firm in USA, Germany, and Britain. This scandal influenced the entire automobile industry along with VW.

Automobile Industry

The major impact of this scandal was on the sales revenue and on the share price of the company. The company faced a huge loss after this scandal and a large number of shareholders filed sue against the company for their loss. The emission scandal badly affects the car market, as people were afraid of buying diesel cars, which covers nearly 3% of new cars sold in the USA and almost half of the cars sold in Europe (Volkswagen, 2015). The European countries focus on fuel efficiency and control of greenhouse gas emission. The USP of diesel cars is fuel efficiency with low carbon emission (Anenberg, et. al., 2017). However, the problem is here that these cars also emit nitrogen dioxide that causes asthma and other health-related problem.

The major effect of the Volkswagen emission scandal was on its revenue and sales of its cars. As shown in Fig. 1 and 2 annual reports of the company, sales revenue and profit of the company tremendously declined in the financial year 2015-16 in comparison to 2014-15. In 2014, Volkswagen reported sales revenues of €202.5 billion, up 2.8% year-over-year and operating profits up 8.5% to €12.7 billion (approximate figure). Operating margins of 2014 also improved from 5.6% to 6.3% (Jung and Alison, 2017). The company increased its sales revenue up to 8.5% in the first half of 2015. But after the scandal sales of Volkswagen decrease tremendously with the decrease in sales of its other brands such as Audi and Skoda were also affected because of the emission scandal that causes a decline in total revenue of Volkswagen in the third quarter of 2015 (Cavico, and Mujtaba, 2016). The bad reputation and unethical practice of Volkswagen affected the loyalty of customers, they move to the competitor brands, and it also causes a decline in sales of Volkswagen. According to a report of VW Company, global sales of the company slipped by 3.5% and company worldwide recall its vehicle to change the device used in the cars (Bachmann, Ehrlich, and Ruzic, 2017). After this scandal, Toyota takes the first place in car selling and Toyota sells more than 7.5 million cars in those three quarters and after that General motors sale was increase by 1.% and they sell 7.2 million cars (Tse, et. al., 2017).

The major effect of this scandal was on the share price of the company. VW loses one-third of its share in just 2 days. The unethical practices of Volkswagen scandal directly affected the share value of the company where market capital of the company decreased by one third (Valentini and Kruckeberg, 2018). Company lose billions of dollars in the share market and also face billion dollars penalty by different countries because of the emission by its cars (Moravcsik, 2017). After this scandal, when the Frankfurt stock exchange opens on Monday (21 September 2015), more than $15billion wiped off, because company’s share price dropped. The German government warns that this scandal affects the entire automobile industry worldwide.

Conclusion

Market share capitalization dropped by 35 billion dollars from $95 billion to $65 billion in just 10-12 days. Thus, the share price of Volkswagen decreases by $52.50 to $28.25 per share in the duration of just 10 months (Wang, Jerrett, Sinsheimer, and Zhu, 2016). The share price declines clearly show that it was a tremendous failure of the company towards the social responsibility and fake emission test of the company. In the month of September and October (2015), share price of company was on its lowest level and dropped to almost $23 dollar per share (Clearly shown in fig. 2).

Shareholders of VW directly feeling the effects of emission scandal as shares were dropped since the scandal was surfaced. Shareholders of the company claimed for the damages that company did by their frauds through emission scandal. More than 1670 sue filed by the shareholders against the company and asked for the compensation of $9.2 billion dollars that they were lost because of company’s fraud emission testing and irresponsible behaviour towards the environmental protection (Griffin and Lont, 2018). The failure of the communication system with the shareholders was also displayed after the scandal and company had to face huge amounts of fine by different countries and regulatory authority for the unethical emission scandal.

The global growth in the automobile industry was 1.6% per year with the increase increased from $1.9 trillion to $2.5 trillion till 2015 (Nemeth and Carvalho, 2017). However, emission scandal not only affects the Volkswagen’s sales revenue rather it also affects the entire automobile industry worldwide. Actually, Volkswagen is one of the largest car manufacturer companies in the world and other close competitors were giving very close competition to the company (Rhodes, 2018). That mistake of VW turnaround to be a big opportunity for other car manufacturing companies. The result of such fault of VW give a boost to other car manufacturer and their sales were increased (Cruden and Cruden, 2016). Toyota, which was a close competitor of VW, increased their sales by up to 3.4%. Sales of Ford car was increased by 0.4%. GM sales were up 1.5% in the US. Nissan North America sales were up 3.8%. Chevrolet sales were up 4.8%. America Honda Motor sales were down 5.3%, due to a drop in Acura brand sales (Fracarolli and Lee, 2016).

Conclusion

Volkswagen is one of the well-known companies, but despite being a large and reputed company, it installed faulty software in more than 11 million diesel cars after manipulating the pollution test. The result of such emission scandal was the loss in sales and decreasing revenue of the company that impact the entire automobile industry worldwide because it includes some major car companies such as Audi and Skoda. Another impact of this scandal was seen as loss in share market. The prices of shares were continuously fallen and the company loses its credit rating as well with losing its image in the public. The result of this scandal was that company had to fire its top executives with some senior engineers who involved in the faulty software testing. As far as the regulators are concerned, they put a heavy penalty on the company and make strict rules and regulations to prevent such type of worst incidents in future.

From the analysis of this case, it is clear that the main cause of this scandal was organisational culture and its structure. The company should implement following practices to prevent such scandals in future:

1. To prevent the decline of share price, companyshould launch an immediate press conference to their shareholders about the scandal and should assure them that everything will be all right after a strict action taken by company against the defaulters.
2. This step helps the company to control the decline in revenueof the company worldwide because of the customer belief and loyalty. Overall, to stop and prevent declines in revenues and improve the sales of the company, it should be essential for the company to give importance to their employees and develop ethical behaviour in them. The company should also conduct several training programs that train their employees about the emission technology that ensures them to maintain the level of pollution and emission. This helps to increase the loyalty of customers and their belief that results in increasing sales and revenue of the company. Role of regulators are also important such as US-EPA must take some strict actions to prevent such unethical practices that cause many health-related problems for the people. The emission regulatory body should consider the emission standard on such level, which is feasible for the companies and no company, involves in such type of unethical practices.
3. The company should inform their shareholdersabout the problem and suggest them do not worry about the situation. It stops them to sell their share from the market and assure them about the company responsibility towards society and about its shareholders. Employees of any company play a vital role in the success of the company, thus it is essential for a company to motivate them towards ethical practices and actions in the organisation. The modern business practices are totally based on ethical practice and far different from our traditional business practices. The company failed to treat their employees ethically and they were afraid of losing their jobs, thus they involved in unethical practices.

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