German automaker Volkswagen appears to have been involved in a complex scheme to cheat emissions tests in the United States. Between 2009 and 2014, the company sold nearly half a million of the supposedly clean diesel cars, potentially costing up to $18 billion in fines leveraged by the EPA. Of a more pressing concern is the 20+% decline in Monday morning stock valuations following the Friday revelation.
No matter how you feel about the EPA, regulations, or the environment in general, what VW did – VW executives admitted this month to installing software designed to cheat on EPA tests – is tantamount to fraud. Volkswagen is likely to take a hit in the near term; its stocks plummeted 20% Monday. However, expect the fallout to be less severe than the current news cycle is portraying.
The final sum of fines doled out is likely to be far smaller than speculated $18 billion, given the company’s economic clout:
The Volkswagen Group of America employs 6,000 people directly in the US, not including those employed by its 1,000-dealer network. The company claims that its Chattanooga plant alone creates almost 13,000 direct and indirect jobs and generates $12 billion in income growth in Tennessee. This should provide the automaker with some significant bargaining power in trying to drive down a fine that, at $18 billion, would dwarf its 2014 profit margin. The prospect of slowing or ending Volkswagen’s planned $7 billion North American investment will give pause to both politicians and regulators alike.
None of this means Volkswagen will walk away unscathed. In addition to what is still likely to be a hefty fine, Volkswagen is sure to take a hit in the court of public opinion. VW’s reputation as a trusted eco-friendly car producer is no more. However, if we’ve learned anything from the recent Blue Bell incident, it’s that Americans have a short memory when it comes to business misconduct. Even if this scandal isn’t easily forgotten, consumers will set their idealism aside if they assess that a Volkswagen is a reliable vehicle and a sound investment.
VW’s admittance – coming only after the EPA threatened to withhold approval for Volkswagen’s new 2016 models – is an embarrassing setback that will impact the automaker’s bottom line. But Volkswagen is bruised, not beaten.
