Volkswagen Emissions Scandal: Impact on Business

The assignment provided is an in-depth examination of the Volkswagen emissions scandal, including the science behind it, the regulatory and financial fallout, and the company's attempts to regain customer trust. The document also includes references to articles, books, and journals that discuss the scandal and its impact on business. A suitable assignment title has been generated based on the topic and content of the assignment.

ACADEMIC AND
PROFESSIONAL SKILLS

EXECUTIVE SUMMARY
The case of Volkswagen associated with cheating emission tests was revealed in 2015
which was admitted by company. Report will discuss about how this emission scandal had
affected company's reputation and various factors are analysed which are affected the most.
Moreover, recommendation is provided on how organisation can regain public trust in effective
manner by providing vehicles based on regulatory standards. This will rebuild its lost reputation
and sales will be injected leading to attainment of more profits and maximising overall financial
performance.

Table of Contents
INTRODUCTION...........................................................................................................................1
ANALYSIS......................................................................................................................................1
CONCLUSION................................................................................................................................5
RECOMMENDATIONS.................................................................................................................5
REFERENCES................................................................................................................................7

INTRODUCTION
The regulations need to be followed by company in order to attain operational activities
without any interruptions. Present report deals with VW (Volkswagen) which is a leading
German car manufacturer who is in-charge of twelve brands such as Skoda, Audi, Seat, Bentley,
Porsche, Commercial Vehicles, Man, Scania, RIO. These are brands of VW Group which
accomplishes profits from various divisions in the best manner possible. VW in order to pass
emissions tests, made 'defeat device' which led to cheat with regards to real emissions of the
diesel cars. The standard set by US and EU regulators were not achievable and as a result, it had
cheated people and stakeholders. It sold 11 million cars under this fake emission tests which it
admitted in September 2015.
Post-announcement of the news, there were bad consequences on company which were
imposed on it. In this report, overall analysis with regards to company's revenue, regulators,
share price and customer's elements will be assess. Moreover, to how much extent, reputation of
company was harmed due to the effect of such scandal will be discussed. Furthermore,
recommendation to firm would be provided on how it can rebuild its brand image and reputation
in effective manner. Stakeholders' viewpoint will be used to assess how much firm's brand image
is affected in a negative way. Conclusion will be made with regards to providing overall content
of report. Thus, overall post-scandal analysis of VW will be made and appropriate
recommendations will be provided in order to regain lost trust of stakeholders towards it.
ANALYSIS
The case of VW was that in order to pass emissions tests, it made 'defeat device' which
led to cheat with regards to real emissions of the diesel cars. However, these cars were not
meeting standard, so to pass emission tests, firm made such device which passed car in the test.
This was admitted by company in 2015 and overall reputation was affected.
Revenue
The Volkswagen company which is engaged in automotive sector producing and selling
vehicles to people in order to attainment of satisfaction. It is required that VW should attain
revenue for covering its costs in a better manner and accomplish profits with ease (Annual
Report of Volkswagen 2016. 2016). However, development and implementation of 'defeat device'
for easily passing emission tests was influenced the reputation of company to higher extent. The
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scandal has led to decrease in reputation of business in front of its stakeholders. VW admitted
that in 11 million cars worldwide, this device was implemented for passing emission tests. Since,
this news came in the market, people were disheartened and direct impact was seen on sales
revenue of organisation.
The profit was down by 20 % after diesel emissions scandal was occurred in September
2015. Profit Before Tax was €3.2 billion in three months to March 2016 which were down by €4
billion in previous year. On the other hand, it can be analysed that revenue was effectively gone
down to 3.4 % and reached to €51 billion. This was due to decline being noticed in sales of
vehicles and also the effect of negative exchange rate (VW profits down 20% after diesel
emissions scandal. 2016). This clearly shows that revenue has come down up to a high extent
showing direct impact of diesel emissions scandal. In relation to this, due to decline in sales, VW
attained first annual loss in its operations of 20 years in 2015 after paying double amount for
setting aside payment of costs in relation to scandal to €16.2 billion in the financial year. The
car-maker admitted that it has installed software for surpassing real emissions in effective
manner.
The firm has entered under deal struck with US Department of Justice that it will buy
back almost 500,000 cars and will also compensate owners due to such false practices. This
means that with annual loss in 2015, it will also give compensate amount to customers which
would led to incur more resources and funds incurring higher costs. Thus, scandal had bad
impact on financial performance as revenue is down by higher margin. For upscaling its
reputation, firm will have to produce better vehicles and also manufacture vehicles as per
regulatory standards.
Customers
Customers are to be provided with goods so that desired sales may be accomplished by
firm. Customers of VW had demanded answers and compensation for such scandal being
revealed which is a hefty amount which needs to be paid by company. With reference to UK
market, nearly 1.2 million diesel vehicles in Britain are found to be involved in scandal, out of
which 11 million are worldwide vehicles highlighting that maximum vehicles are purchased in
the UK (VW customers demand answers and compensation over emissions scandal. 2015). It can
be analysed that these large payouts will surely affect company and increment in costs will be
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made. Firm had already put aside €6.5 billion for dealing with recalling cost and repair of
vehicles. Moreover, it also faces threat of legal action from customers and shareholders.
There is greater distress and frustration among VW drivers in the UK as they don't have
information whether their vehicles will be repaired or not. Customers who have purchased such
cars are sent letters from firm stating in that VW is working out plans regarding compensation
and confirmation will be sent once final decisions are taken. The VW customers said that they
made decisions to buy their cars on the basis of higher efficiency and lower environmental
impact. In relation to this, company is unclear with their customers about how they will be
compensated.
For enhancing satisfaction of customers, it is required that reputation of the company
must be focal point in order to ascertain profits and deliver goods to customers at large. Main
issue is that 86 % VW customers are concerned with reference to environmental impact of their
car, while, 83 % are questioned upon resale value and 73 % were feared regarding performance
of their vehicle will get affected. While, more than 50 % customers have made up their mind not
to buy VW diesel car after the defeat device scandal (Burki, 2015). All this put huge impact on
reputation of company which results in its declined profit ratios. Thus, it can be said that firm
will have to clear off their brand image in front of public so that firm may be able to attain profits
in effectual manner.
Share Price
The market environment is quite sensitive and it increases or decreases with every news
which affects company's share price up to certain extent. It can be assessed that VW have noticed
higher decline in sales and profits were declined as well. In similar manner, share prices were
dipped to nearly 30 % since Clean Air Act violations were made by firm in 2015 (La Monica.
2015). It was noticed that stock was more than 50 % below 52-week high that it hit in March.
Moreover, departure of CEO Martin Winterkorn had helped to recover some loss in the short-
term. It is significant that VW was already in the news as 'defeat device' term was used which
started trending on Google and social media channels.
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Illustration 1: VW Scandal: How Has It Impacted Volkswagen’s Stock?
Source: Stash. 2016
The share price was significantly lowered down up to a major extent. It can be analysed
that post announcement of scandal, nearly $20 billion of market capitalisation was shaved and
stock plunged to 30 % virtually overnight. Moreover, VW is down more than 40 % from highs in
May 2015. The graph shows clearly that share was trading above 50 % till July 2015. However,
it sharply declined to 30 % in September 2015 when firm admitted that cheating with fuel
emissions were done. This means that next year i.e. 2016 was challenging one for company in
attaining sales and increase its stock price.
The Credit Ratings Agency Fitch had warned it would downgrade debt of VW due to
diesel emission scandal held. Moreover, credit rating giant said that biggest concern is 'reputation
damage' to the brand and likely hit to its profits and corporate governance had become weaker in
comparison to rivals (Barrett and et.al., 2015). Moreover, share prices will not be hiked at least
in the short-run as recall of 11 million vehicles on worldwide will be expensive for organisation
hitting shares of company and loss would be incur for shareholders as price will dip down.
Regulators
The regulations are to be followed so that uninterrupted operations may be attained in a
better manner. United States Environmental Protection Agency (EPA) had issued notice of
violation with reference to Clean Air Act to VW. This act is developed for controlling air
pollution on a national level and some standards are set by it which should not be violated by
organisation and it cannot produce vehicles not meeting set standard. It is air quality law for
making low impact on environment from getting it polluted (Schiermeier, 2015). The emissions'
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scandal done by company had violated Clean Air Act and firms not complying with the same are
monetary penalised. On per day, EPA could fine administrators up to $37,500 with maximum of
8 days unless it is made mandated by regulator.
Moreover, it can be analysed that German enquiries are also assessed that is EEA
(European Environment Agency) is governed by EU and laws related to air quality are also
governed by it. This means that US and EU regulations related to Air quality are applied to
company which makes clarity that it is required to follow the restrictions of regulators.
Moreover, hefty payments are to be made to them as well as customers who have bought diesel
cars in this period (Rhodes, 2016).
The US regulators are examining additional suspect software in VW's 2016 vehicles so
that cheating may not be done once again. It is considering whether to approve device or if it is
another 'defeat device' for manipulating results. Moreover, it can be said that newer models of
diesel cars cannot be sold until reviewed and approved by regulators. This restriction has also
cost higher to organisation as thousands of vehicles are marooned in ports only and sales are
decreased. This means that reputation of business is harmed up to major extent and as a result,
restrictions are made so that it may not happen in the future.
It can be concluded from above analysis that firm's overall reputation is highly affected.
For rebuilding the same, corporate governance should be enhanced so that top management may
easily abide by their duties and stakeholders are attracted to it. Furthermore, share price, revenue
will be improvised once trust is regained.
CONCLUSION
Hereby it can be concluded that organisation should effectively meet the regulations so
that no violations may be made. The outcome generated from the report is that firm should focus
on managing its operations as per the standards so that operational activities may not get
interrupted. VW was involved in cheating on emissions' scandal in the diesel cars to pass test
which are on false basis. IT engineers made device which falsely represented upon the vehicles'
emissions, they were unable to meet standard performances and as a result, they sold 11 million
cars worldwide. This has bad consequences on company's revenue, share price, customers and
regulators up to a high extent. Thus, it can be analysed from report that overall reputation of VW
was badly reflected leading to turning point as it had incurred loss for the first time in 20 years in
financial year 2015.
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RECOMMENDATIONS
Hereby it can be recommended that VW is a giant car-maker having diversified brand
portfolio should focus on delivering quality automotive to people so that it may be able to regain
its lost reputation in effective manner. Moreover, organisation will be able to attain desired
profits by taking into account customers' desires. It should not cheat by making manipulative
device making false representation of emissions tests in the best manner possible. Furthermore,
trust can be rebuild by making well-mannered strategy so that customers may purchase cars and
scandal which turnaround them could be revived in a better manner.
It is also recommended that corporate governance should be enhanced so that top
management may easily abide by their duties and stakeholders may regain lost trust on firm.
Moreover, bad consequences are being identified in relation to diesel emissions test and as a
result, firm had to recall all of its cheated vehicles leading to incur higher amount in the form of
payouts affecting liquidity position in the best way possible. Moreover, it can be said that
regulations should be followed else fines and legal actions are imposed that will affect the
overall financial position and reputation of business up to a high extent.
It can be recommended that firm should focus on meeting out standards governed by
regulators so as to enhance its overall position so that reputation of business may not be lost.
Furthermore, it had been found that letters are sent to affected customers of this scandal. In it,
firm has mentioned it is working over it, however, it is required that speedy settlements should
be made in order to regain trust and attain customer satisfaction.
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REFERENCES
Books and Journals
Barrett, S. R and et.al., 2015. Impact of the Volkswagen emissions control defeat device on US
public health. Environmental Research Letters. 10(11). p.114005.
Burki, T. K., 2015. Diesel cars and health: the Volkswagen emissions scandal. The Lancet
Respiratory Medicine. 3(11). pp.838-839.
Rhodes, C., 2016. Democratic business ethics: Volkswagen’s emissions scandal and the
disruption of corporate sovereignty. Organization Studies. 37(10). pp.1501-1518.
Schiermeier, Q., 2015. The science behind the Volkswagen emissions scandal. Nature News.
ONLINE
VW customers demand answers and compensation over emissions scandal. 2015. [Online]
Available Through: <https://www.theguardian.com/business/2015/oct/15/vw-customers-
demand-answers-and-compensation-over-emissions-scandal>
La Monica. 2015 Volkswagen has plunged 50%. Will it ever recover? [Online] Available
Through: <https://money.cnn.com/2015/09/24/investing/volkswagen-vw-emissions-
scandal-stock/>
VW profits down 20% after diesel emissions scandal. 2016 [Online] Available Through:
<https://www.theguardian.com/business/2016/may/31/vw-volkswagen-profits-down-20-
diesel-emissions-scandal>
Stash. 2016 VW Scandal: How Has It Impacted Volkswagen’s Stock? (VLKAY [Online]
Available Through:<https://www.investopedia.com/news/vw-scandal-how-has-it-
impacted-volkswagens-stock-vlkay/>
Annual Report of Volkswagen 2016. 2016 [PDF] Available Through:
<http://annualreport2016.volkswagenag.com/servicepages/downloads/files/
entire_vw_ar16.pdf>
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