The Volkswagen Effect

Volkswagen better known as VW is the second-biggest carmaker of Germany and a brand known and famous for its quality all over the world.

Recently, the name Volkswagen has been in news for many wrong reasons. National Green Tribunal (NGT) has issued a notice to Volkswagen, Ministry of Heavy Industry and Ministry of Environment to cease the manufacture and sale of all Volkswagen cars in the country. NGT has asked the Centre and Volkswagen India to respond by December 23. Moreover, Automotive Research Association of India (ARAI), the apex testing agency is conducting tests to verify whether any of the Volkswagen cars have flouted the Bharat Stage IV norms in the country. But the initial findings of ARAI indicate the diesel cars manufactured in India by Volkswagen being fitted with ‘defeat device’, leading to excess harmful nitrogen oxide (NOx) emission levels in on-road vehicles. With this Volkswagen India is reported to recall over 3,20,000 of its diesel cars from the Indian market.

VolkswagenEarlier, on 18th of September 2015, the United States Environmental Protection Agency (USEPA) convicted Volkswagen for installing Engine Control Unit (ECU) software improperly, determined to be a ‘defeat device’, in violation of the Clean Air Act to circumvent environmental regulations of NOx emissions by diesel engines of its 2009-2015 year Volkswagen and Audi cars. Long time CEO of VW Group had to resign for this scandal. The damage to VW, the world’s biggest carmaker, is cataclysmic. The company’s shares have collapsed by a third since its chicanery surfaced.

This is may sound very technical and very industry specific news, but industry experts feels it can have ‘Domino Effect’ on ‘Brand Germany’. A quick look at overall picture and history of Volkswagen will give us a fair idea of this as VW is associated with rise of Germany as power house of manufacturing and leader in automobile industry. In German, Volkswagen means ‘people's car’. Volkswagen considered as an icon of Germany – a country which was struggling for identity and self-respect in the post-World War I period. It had established base in Wolfsburg, Germany. In fact Adolf Hitler was instrumental to start Volkswagen unit in Germany in 1930’s to push his development agenda for the people of Germany. From 1948 after the Second World War, Volkswagen became an important symbol of West German robust economy. By the time of 1990’s Volkswagen was manufacturing iconic models like the Beetles, Golf and Passat.

Post 2000’s emission and global warming became global issues, which resulted in stricter emission norms which impacted auto industry. United States was ahead in putting forth strict norms and Europe followed it soon. Clean and green vehicles became the sale strategy for all major automakers. Emissions beyond a certain specific limit of Carbon Monoxide and NOx were termed hazardous. And this is exactly where Volkswagen breached its own standards, installing the cheat devices which would not allow detection of these emissions from its vehicles. But this cheating is believed to have dented the image of brand ‘Made in Germany’ more than it will dent ‘Brand Volkswagen’.

VolkswagenAlso in pure financial terms there are many things at stake for Germany. The auto industry is the largest industrial sector in Germany, contributing about 2.7% of its GDP. Some 20% of Germany's exports are made up of vehicles and parts. Domestic auto sales and exports for Germany were worth 368 billion euros ($411 billion) in 2014. Importantly most German auto sales came from the Volkswagen group, which reported over 202 billion euros in revenue in 2014. Roughly 70% of Volkswagen vehicles are sold outside German borders. Volkswagen employs nearly 6,00,000 people around the world, and more than a third of the Germans working in the auto-industry.

Volkswagen had revealed earlier that nearly 11 million diesel cars worldwide will be recalled for rectification as a result of this scandal. But the catch for VW is that the hardware required to fix this emission problem will ready only by September 2016. Also each country will have different legislation to deal with this problem.

In the on-going UN climate change conference in Paris, emission limits and adaptation of renewable energy are being hot topics. India has already committed to reduce carbon emission intensity by 33 to 35% by 2030 and produce 40% of its electricity from non-fossil fuel energy sources. It is clear India has committed much more than so called ‘developed nations’. The Volkswagen scandal and India’s promise to the UN shows the difference in attitude of the developing and the developed world and their mindsets.

It will be interesting to see how Germany copes up with this crisis and rebuilds its reputation. The odds seem to be somewhat against this comeback considering the stiff competition it now faces from the local manufacturers in countries like India who have become regional automobile powerhouses, the compensation and penalties that VW will require to pay and the current situation of Europe, which is going through financial, immigration and secessionist crises. Time will only tell where will this issue take Volkswagen, Germany and Europe.

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