By John Gallagher,
International Business Writer
Earlier this fall, I wrote an article praising Volkswagen for the release of two new electric vehicles under the Porsche and Audi brands. Since then, the news surrounding the company has shifted to the emissions scandal where Volkswagen cheated on their emissions tests on their diesel vehicles. The BBC reported that many VW cars being sold in America had a “defeat device,” which is software that, in diesel engines, could detect when they were being tested to change their performance accordingly, which improved results. VW previously launched a marketing campaign praising their diesel models’ low emissions, and now it is clear that that is not the case. Currently, there are 11 million Volkswagen cars worldwide and 482,000 in the United States that have cheated the emissions test.
So what implications does this have for Volkswagen? They are facing millions of vehicles being recalled throughout the world as well as fines and lawsuits brought on by regulators and customers. In order to remedy this, Reuters said that VW has put in place a plan to cut spending by $1.08 billion per year through 2019. Unfortunately for some of the lower level Volkswagen employees who had nothing to do with the scandal, one of the easiest ways to cut costs is to lay off workers. In Germany, workers are given a much more influential role in corporate affairs than in the United States. Handlsblatt reports that meetings have been taking place for the last week among top management to discuss cost-cutting strategies, but the worker’s representatives have not been included in the meetings. The New York Times reports that VW has 614,000 employees which are almost twice as many as Toyota, a company that produces the same amount of vehicles. A move to lay off thousands of workers will affect many people, but the company should be able to rebound.
One of the costs that VW is required to pay back is the tax breaks that its customers received from European countries. They have allocated over $8 billion to cover up-front costs in addition to the annual $1 billion they are planning on cutting from future costs in order to recover from the repercussions felt from the scandal.
Volkswagen has lost the trust of consumers around the world and will have to find ways to win customers back in the very competitive automobile industry. In addition to the fines they are required to pay, their stock price, which represents the value of the firm has decreased substantially. Since the news released on September 18th of this year, VW’s share price has dropped 43 percent from $169.95 to $96.35, erasing $35 billion of market value.
In addition to the sharp decrease in share price, top rating agency, Fitch, decreased their credit rating from an A rating to a BBB+ per a Bloomberg report. They are still an investment grade company, but due to corporate governance, management and internal control issues, they are slightly less credit worthy.
The full extent of Volkswagens troubles are yet to reach full effect, but they have already issued recalls for over 540,000 cars in Germany, and they have offered a $1,000 voucher to owners of rigged diesel cars in the United States.
A version of this article appeared in the Tuesday, November 17th print edition.
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