Volkswagen (VW) has become the center of allegations it falsified environmental test results in the United States.
U.S. regulators are trying to make sense of questionable results from VW’s (VLKAY) latest diesel emissions test results by comparing them with actual real-world data.
This has forced the German car maker to confess it had cheated the test.
Analysts speculate the potential repercussions of VW’s mistake might weigh so heavily that they might make waves in countries that depend on Germany, and maybe even the economy outside of the Eurozone.
Most expensive act of ‘stupidity’ in history
The Wall Street Daily quoted one German newspaper calling VW’s actions “the most expensive act of stupidity in the history of the car industry.”
MSN Money went so far as to report: “Carmaker cheating on emissions almost as old as pollution tests.”
General Motors, Ford Motor Co., and Honda Motor Co. also have a track-record in cheating, and faced fines for so-called “defeat devices.”
According to Bloomberg, automakers found ways to cheat almost as soon as governments started running vehicle emission tests. In the 1970s, it was determined some cars were rigged with “defeat devices” that would turn off the emission systems as soon as the air-conditioner was turned on. Others had smart sensors that activated “pollution controls” only when temperatures equal to those of regulators were used during testing.
In 1995, General Motors (GM) Co. agreed to pay $45 million after being accused of circumventing pollution controls on 470,000 Cadillac luxury sedans. Apart from agreeing to pay $25 million in recall costs, GM also paid an additional $11 million fine, and agreed to spend another $9 million on “corporate community service.”
GM committed to buy back older, more polluting cars, and give school districts buses with more environmentally friendly motors — either powered by batteries or natural gas.
Bad boys, bad boys, ‘whatcha’ gonna do
Reminiscent to the lyrics of the song Bad Boys by Inner Circle, many might wonder what will happen to VW now.
Compared to GM’s mild punishment in the past, VW is really in for a beating this time. Before his resignation, former Volkswagen CEO Martin Winterkorn was “endlessly sorry that we have disappointed trust.”
Investors in one of the world’s top-selling car makers responded by “crushing” the company’s shares. The graph below shows how severely the bad news impacted on investor confidence on September 18.
After dropping from around $162 then, the stock seemed to recover slightly several days later, but continued to drop to around $99.30, where it sits today.
According to the Wallstreet Daily, VW has set aside an estimated $7 billion to address the problem. However, economic experts predict the final amount, including what VW will have to come up with for criminal prosecutions and civil lawsuits, will be much higher.
Apparently, GM was able to settle it’s problem with ignition switches for under $1 billion in fines and no criminal prosecutions, even though those switches caused the death of 124 people.
However, it turned out that GM didn’t intentionally design the ignition switches to cause fires. They were just meant to cheat the emission tests.
Bad news worsens
Volkswagen is predicted to shrink as a result of the damage done plus the capital gains tax revenues lost from plunging Volkswagen share prices. Volkswagen workers, who just received fat profit-sharing checks, are probably looking at little to nothing for the rest of this year.
Because the German auto industry accounts for about 15 per cent of Germany’s manufacturing, 3 per cent of its GDP — and 2.5 per cent of its employment numbers — economists fear this mishap could push Germany back into a recession.
Further speculation suggests Germany won’t be able to help out its neighboring countries suffering from a domestic recession and falling tax revenue if VW’s false statements bring cataclysmic outcomes.
As if that’s not enough, some financial experts predict — with the prospect of Europe falling into a recession and China slowing down further — the U.S. economy will suddenly become vulnerable too.
There seems to be an ironically good side to all of this — the more culprits that are found, the less remain to wreak havoc in the end.