Unless you’ve been on an off-the-grid, end-of-summer vacation, you’ve almost certainly heard about the emissions scandal that hit Volkswagen.
The automaker implemented a tech "fix" on diesel vehicles that kicked in during emissions testing to allow those cars to pass, while polluting well above acceptable levels, during normal operation. The issue has already cost Volkswagen's chief executive his job and will have far reaching effects financially, on its brand reputation, and perhaps even impact diesel vehicles overall.
Here’s a breakdown of the scandal and what it might mean for Volkswagen.
What did Volkswagen do?
The entire scandal opened with Volkswagen admitting that some U.S. diesel vehicles were outfitted with software designed to cheat emissions testing by detecting when testing devices were hooked up to the cars and reducing emissions below acceptable levels. Once those vehicles were taken off the testing equipment the emission rates rose far above passing levels during normal operation of the cars – in fact emitting 40 times the standard levels of nitrogen oxides. This past Tuesday the situation escalated when it became apparent affected vehicles weren’t limited to the U.S. market, but instead 11 million cars worldwide had the software installed.
It turned out the software issue dated back to 2009 and involved the diesel TDI versions of the Golf, Jetta, Beetle and Passat. Right now Volkswagen faces potential fines of up to $18 billion from the EPA as well as possible criminal charges. It has halted sales of 2015 and 2016 year models of diesel vehicles and has set aside $7.3 billion to deal with the scandal.
What is the fallout from the scandal?
Predictably, Volkswagen’s stock price has taken a serious hit, losing a third of its market cap during the week, but the highest profile casualty was CEO Martin Winterkorn who resigned on Wednesday after the scale of the scandal became apparent.
In a statement, he said, "Volkswagen needs a fresh start – also in terms of personnel. I am clearing the way for this fresh start with my resignation. I am shocked by the events of the past few days. Above all, I am stunned that misconduct on such a scale was possible in the Volkswagen Group.”
Members of Volkswagen’s board have also stepped down, and Winterkorn could face criminal prosecution in Germany after members of Volkswagen’s supervisory board said they would refer the case to German authorities.
Another obvious casualty of the scandal is Volkswagen’s line of clean diesel vehicles now that the 2015 and 2016 year models have been pulled from the market, and owners going back to at least 2009 likely lining up for some sort of compensation. Caught in the crossfire oft this negative publicity is the diesel industry as a whole. Clean diesel has been popular in Europe for years, but was banned in California until recently because of the smog producing effect of the nitrogen oxides Volkswagen’s vehicles were spewing in massive amounts and unknown by the car’s owners as well as environmental agencies protecting the public.
The diesel industry as a whole is going to take a hit because Volkswagen’s duplicity will call a great deal of attention to the harmful effects of nitrogen oxides and how they produce smog, and also call into question if “clean diesel” is truly a realistic possibility as Volkswagen’s lineup was seen as a breakthrough in that technology.
What can Volkswagen do?
One early casualty was the Brooklyn Navy Yard party for the unveiling of the 2015 Volkswagen Passat, an event that ended much more somber than originally intended.
At the Passat unveiling, Michael Horn, VW’s U.S. CEO, opened with, “In my German words, we totally screwed up.” This was a stronger apology than outgoing worldwide CEO Winterkorn offered in his resignation statement that only alluded to “irregularities” and denying any knowledge of wrong doing on his part.
Horn made a good PR move with the open apology that somewhat disarmed the journalists at the event ready to attack. Of course, Volkswagen has a ways to go at the moment. The YouGove BrandIndex tracking consumer protection found Volkswagen's buzz at its lowest point since January 2009. It had previously held steady around 10 or 11, but has fallen to negative two and YouGov expects it fall even further.
In a brand crisis management effort – and this definitely qualifies as a brand crisis – it’s going to be important for Volkswagen to stay in front of the story, be transparent as possible throughout the process, and hopefully be able to retain some brand advocates who loved their VW cars before the scandal and are willing to stick with the brand overall.