Strategic Financial Analysis of Volkswagen Diesel Emissions Scandal

This report analyses the impact of Volkswagen Diesel Emissions Scandal on the company's past and future performances and prospects. It explains Volkswagen's competitive advantage via Porter's 5 forces model and the implications of the scandal on these advantages. The report also discusses the aspects of strategy, governance, and ethics at work.

Strategic financial
analysis

1
By student name
Professor
University
Date: 25 April 2018.
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Executive Summary
A research report has been prepared on the Volkswagen Diesel Emissions Scandal and its impact
has been analysed on the past and the future performances and prospects respectively. As a
junior financial analyst of an investment firm which has invested in Volkswagen, a report has
been prepared for the group of shareholders keeping in mind the aspects of strategy, governance
and ethics at work. Volkswagen competitive advantage has been explained via Porter’s 5 forces
Model and what were the implications of the scandal on these advantages.
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Contents
1. Strategy
a. Volkswagen is one of the pioneer companies known for manufacturing automotive
founded in 1937 in Germany. It was the largest automaker in the world in 2016. It
employs more than 626000 employees. The company has relied on its innovation
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strategies and quality outputs over the year and enjoyed the market leadership. The
company deals in passenger as well as luxury cars and Porter’s five forces analysis has
been explained below:
1. Barriers to entry is High as the automobile industry in itself is huge and there is
insurmountable start-up cost being involved, obtaining license is difficult and above
all creating trust in the brand is the most challenging thing.
2. Power of suppliers is generally low as suppliers so specialise and manufacture parts
only for selected automakers and as a result are heavily reliant on them. It would have
a heavy impact on their business to lose a contract with the automaker (Siano, et al.,
2017).
3. Power of consumers’ ranges from low to medium as there is abundance of substitutes
and consumers do not generally buy in bulk quantities. Instead, government agencies
and large firms do buy in bulk quantities.
4. Availability of substitutes can be said to be medium as the government is promoting
environmental friendly practices like use of public vehicles coupled with the increase
in the gas prices.
5. The rivalry amongst the automobile industry is high as US automobile industry is
considered to be an oligopoly but off late the Japanese automakers have captured a
huge market share making the competition even fiercer (Blackwelder, et al., 2016).
From the above it can be concluded that Volkswagen position is safe in market and is expected
to hold a considerable market share.
b. Following the major scandal that unfolded in the then 78 year old history of Volkswagen,
the company was found to have cheated and illegally pass the emission tests for about 11
Mn diesel vehicles (Bromwich & Scapens, 2016). This had a series of implications on the
company both from present as well as future perspective including criminal proceedings
against 6 employees in US, lawsuit by investors, and ongoing probe in criminal
proceedings in Germany and facing a fine as large as $20 Billion. However, post this the
company reframed its policies and strategy in order to rebuild its tarnished image which
included moving away from the diesel engines which dominated the company’s business
share in the past and also scaling back on all forms of diesel and gas. The company also
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announced of its plan to introduce a 30 battery electric vehicle by 2025 (Ewing, 2017). The
company also promised that the first highly automated vehicle will be on road shortly as
Volkswagen has been known in the past for its technical prowess. This will also help the
company in meeting the emission standards. The company also focused on electric
mobility and set it as one of its major aims going forward and finally the company
delivered 10.3 million vehicles in 2016 edging past the arch rivals Toyota. Further, all
this lead to the non-financial impact of the change in the top management at Volkswagen
and the financial impact of having to pay a huge fine. Due to this, it is also expected that
the people worldwide will move from diesel engine cars to the petrol versions and also
the emission testing methods would undergo the change (Li, et al., 2018).
2. Governance
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To
The Shareholders,
Volkswagen Group.
This is in reference with the check and evaluation of the procedures of corporate governance
measures being practiced at the company. Corporate Governance is one of those significant and
critical areas which needs to be adhered to keeping the future in mind and the concept of
sustainability (Choy, 2018). What has transpired in Volkswagen in the last few weeks is still under
investigation as to who actually were involved behind the scam and from when the same is in
action. The question is whether it is a failure of corporate governance or a management quality
issue. In addition to the laws and regulations for the individual specific countries, there also
exists a number of conventions and the recommendations of international organizations that are
addressed generally to the private state and not the individual companies but the same needs to
be adhered to. Some of these include “Agenda 21 on sustainable development, “the General
declaration on Human rights issued by UN in 1948”, “OECD guidelines for multinational
enterprises”, etc. Besides this, Volkswagen commits itself to “Declaration on Social Rights and
Industrial Relationships at Volkswagen” and the “Charter on Labour relations”. It is clear that
Volkswagen management has not adhered to any of the above mentioned quoted conventions
which has had a significant impact on the Management quality as well (Bachmann, et al., 2018).
Due to the scandal on emission testing, a doubt has been created both upon the internal processes
in Volkswagen as well as the management under whose nose the defeat device meant to give the
test results in advance fitted into the engines was carried out. This has posed major challenges to
sustainability and corporate social responsibility but the strategy of Volkswagen has been revised
and the same is expected to regain the lost momentum and it should help believe the investors in
the company. Some of these include deploying intelligent innovations and technologies and
becoming a leader in customer satisfaction, generating more than 10 Million vehicles a year to
regain most market share, aiming to achieve minimum 8% return of sales before tax, aiming to
be best and attractive employer in the world (Tanaka, et al., 2018). It also has a strategic
implementation of processes and teams in mind as shown below to strengthen the corporate
governance at work.
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It aims to revolutionize the corporate atomic structure itself by making a difference in the ethical
responsibilities and the fiscal responsibilities with the change in the policies and the practices. In
short, it is moving from the traditional corporate governance system to the shareholder value
based orientation. All the collective measures mentioned above should see Volkswagen coming
over the debacle it has faced in the past and once again emerging to the top.
Thanking you.
Regards,
XYZ,
Junior Financial Analyst.
3. Ethics
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The AAA model is based on the concept of Authentication, Accounting and Authorization from
end to end and is a framework for intelligently controlling access to private networks. In the
present context, it may be interpreted as reflecting the true status of the company, its policies to
the shareholders after duly auditing the same. In the given case, since the senior manager has
asked to substitute the inflammatory wordings used in the client letter with a more constructive
one so as not to alarm the clients, the following points have been drafted.
a. The company has been a leading car manufacturer over the past decade or so and has
been delivering excellent financial and non-financial results. It has been meeting all the
shareholders’ expectation and the CAGR targets over the past (Castille & Fultz, 2018).
Along with the same, the company has also represented strong processes and has been a
market leader in terms of the innovative strategies and improving upon efficiency of the
vehicle engines. However, the recent “defeat device scandal” found by Environmental
Protection Agency has put the company’s processes, the testing systems as well as the
management under the scanner but with the renewed approach and constructive policies
and the vision to overcome the tarnished image will help the company to be back as a
leader.
b. From perspectives of the environmental authorities and the pollution control agencies, the
company which affected 11 million cars worldwide with the so called “defeat device” has
set up an internal inquiry and the set aside €6.7bn for covering the costs on account of the
defects and complaints. Besides that the company may also face a penalty as good as $
37500 per vehicle totalling up to $18 billion. This will be having a major financial impact
and the company has also posted a loss for the 1st time in the last 15 years but the Group’s
chief executive office Matthias Mueller, is confident that the company would leave no
stone unturned to gain back the lost market share as well as the investor confidence in the
company (Mun & Shin, 2018).
c. The company has also decided to move away from the diesel engine system to the
electric and battery driven cars and the petrol versions of the car in order to control the
pollution and encourage mobility and sustainability. Just like somebody’s loss is someone
else’s gain, in the similar way, the scandal relating to the diesel engine has given rise to
the market switch to the petrol engines overnight and the company also plans to
manufacture fully automated electric cars by 2025 (Alexander, 2016).
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d. The company has also made major improvements in the testing processes and will be
adopting and adhering to the major conventions which were directed to the individual
companies earlier. This will help in making the process of testing more robust and
making it much closer to the actual conditions on road.
e. Besides all the above processes, the company has also set upon a digital transformation
target for the coming years and has also set a renewed strategy and approach to regain the
lost market share and status (Bizfluent, 2017).
All these factors put cumulatively should see Volkswagen overcoming the past issues and
emerge as a leader in delivering quality and sustainable vehicles to the customers.
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References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Bachmann, R., Ehrlich, G. & Ruzic, D., 2018. Firms and Collective Reputation: The Volkswagen Emission
Scandal as a Case Study..
Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].
Blackwelder, B. et al., 2016. The Volkswagen Scandal.
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management
Accounting Research, Volume 31, pp. 1-9.
Castille, C. & Fultz, A., 2018. How Does Collaborative Cheating Emerge? A Case Study of the Volkswagen
Emissions Scandal. Proceedings of the 51st Hawaii International Conference on System Sciences.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.
Ecological Economics, p. 145.
Ewing, J., 2017. Faster, Higher, Farther: The Inside Story of the Volkswagen Scandal, s.l.: Random House.
Li, L. et al., 2018. Industry-wide corporate fraud: The truth behind the Volkswagen scandal. Journal of
Cleaner Production, pp. 3167-3175.
Mun, K. & Shin, I., 2018. A close look at the role of regulatory fit in consumers’ responses to unethical
firms.. s.l.:s.n.
Siano, A., Vollero, A., Conte, F. & Amabile, S., 2017. "More than words”: Expanding the taxonomy of
greenwashing after the Volkswagen scandal. Journal of Business Research, pp. 27-37.
Tanaka, K., Lund, M., Aamaas, B. & Berntsen, T., 2018. Climate effects of non-compliant Volkswagen
diesel cars. Environmental Research Letters, Volume 13(4).
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