Lessons from Volkswagen

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So the big story today is the Volkswagen scandal claiming its first biggest scalp in the resignation of Volkswagen chief executive Martin Winterkorn.

It’s going to get worse. Volkswagen are facing time in jail with US authorities planning criminal investigations after discovering that the company had programmed computers in its cars to detect when they were being tested and alter the running of their diesel engines to conceal the true level of emissions.

Volkswagen is also facing $18 billion in fines. And there will be class action,

This will hit Germany, the engine room of Europe’s economy, because the auto industry plays an important role in Germany, both politically and economically.

Germany’s automobile sector includes the world’s biggest and best-known names, from VW itself to high-end makers like BMW, Daimler/Mercedes-Benz, and Opel, the German arm of US giant General Motors. It also includes some of the world’s leading parts suppliers, such as Bosch, Continental and ZF Friedrichshafen as well as myriad small and medium-sized enterprises all along the value chain. All up, the sector clocked up combined annual sales of 385 billion euros ($430 billion) last year, or 14 percent of Germany’s gross domestic product.  Already some industry observers, such as analysts at CMC Markets, are expressing concern about the “spill-over effects” the Volkswagen scandal will have on the wider German economy and Europe in the weeks and months ahead.

As CMC writes in its blog:

“Of all the factors that we saw yesterday the one that is most likely to be a particular worry is the spill over effects this drama surrounding Volkswagen will have on the wider German economy in the weeks and months ahead at a time when their appears to be some evidence that growth may well be slowing in the euro area.

“It is estimated that 1 in 6 German jobs depends in some way on the car industry, as well as 17.9% of German exports, and this week’s events have put a huge dent in the panel work of how the German automotive industry is perceived by its customers globally.

“It is going to take quite a lot of skilled panel work to repair the dents in the “Made in Germany” brand, particularly given this scandal has exposed a deliberate attempt to deceive. What can they have been thinking?

“The implications for German GDP growth could well be significant in the coming months, if global trust is lost, not only for VW but also the rest of the European car industry, if evidence is uncovered that we aren’t seeing an isolated case.

“With Europe’s second biggest economy in France already struggling, with GDP expected to be confirmed at 0%, Europe can ill afford a setback to its main growth engine of Germany.”

At the same time, Volkswagen’s deception is a warning for every company.

John Gapper reminds us in the Financial Times that the car industry is not alone in such behaviour.

“The same thing happens in many industries, from banking to pharmaceuticals. A few companies decide gently to bend the rules and stretch regulations and others soon follow. They know it is a little dodgy but it becomes normal practice and regulators turn a blind eye. Then, one day, someone goes too far and scandal erupts.”

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