Volkswagen: what went wrong?

Volkswagen has been rocked by revelations that software "defeat devices" in its diesel cars were used to beat US emissions standards testing. There's a timeline of the sorry saga on the right, but in short, VW has lied to regulators and consumers in an effort to sell more cars. The big question is: how did it happen and what are the implications?

How did this happen?

A scandal this systematic and deliberate affecting around half a million cars in America and 11 million worldwide surely can't be down to one rogue engineer. It will no doubt take time to unravel, but the FT suggests that a desire to "break" the American market where VW's market share had fallen to just 3% may have driven the corner-cutting. The plan was that "clean" diesel would allow VW to compete with popular Japanese hybrid vehicles. So pressure to perform probably had something to do with it.

But this is not the first scandal to envelop VW. In the mid-2000s, Germany was gripped by the "perks and prostitutes" scandal company funds had been used to bribe trade union officials with secret bonuses and sex parties, in return for cooperation on changing working practices. And index provider MSCI gave the company a very low corporate governance ranking, worse than 72% of companies globally.

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"External shareholder concerns have often taken a back seat to the wishes of VW's family owners, its workers and the state of Lower Saxony," notes the FT. More than 50% of VW's voting rights are controlled by Porsche (even though it owns less than a third of the shares), which is in turn controlled by the founding family.

The state of Lower Saxony owns a further 20%, despite holding 13% of the shares. The company is now reportedly looking at decentralising the decision-making process "by strengthening regional operations and its 12 brands".

Might VW go bust?

This is going to be expensive. There will be huge fines the Environmental Protection Agency in America could levy as much as $18bn. Customers are also likely to demand compensation on the grounds that they were misled by the false emissions figures. But as Oliver Schwarz of Warburg Research told petrochemical news site ICIS: "I don't expect the company to go bankrupt even in a worst-case scenario."

And as Lex notes in the FT, the initial slump in the share price probably accounts for the worst-case scenario in terms of fines and recall costs. However, what it doesn't account for is the long-term damage to the VW brand, which is harder to predict. Future profits are likely to be squeezed, both by tighter emissions testing and hits to sales as a result of the scandal.

What about the broader car industry?

Other car firms deny any involvement. But credit ratings agency Fitch reckons the scandal could have "lasting repercussions" for the entire industry. For a start, the testing regime will become stricter. That means added expense and research and development costs. There's also the potential for a move back towards petrol engines, particularly in Europe (one reason why the price of palladium, used in petrol engine catalytic converters, has shot up since the scandal broke). That would hurt diesel-dependent manufacturers most. But it's also potentially good news for electric vehicles and other "alternative powertrains" as the race to find an alternative that bolsters corporate "green" credentials picks up pace.

Can I get a cheap VW?

There may be a silver lining if you'rein the market for a VW and you'renot too worried about its emissions,you'll find that second-hand cars are abit cheaper. Autocar reports that motoring trade publication Glass's Guide reckons the value of used diesel VWsfell by 0.2% last month, in a monthwhen the value of other models went up by 2.8%.

How thescandal unfolded

Nov 2012: The International Council onClean Transportation (ICCT) plans toconduct a study to prove that US dieselcars are cleaner than those in Europe(as emissions rules are tougher).

Early 2013: The tests are carried out,using two VW cars and a BMW. But theICCT research team finds that the VWcars have much worse "real world"emissions than the lab tests suggest.

May 2014: The ICCT team publishes itsfindings online.

Summer 2014: The US EnvironmentalProtection Agency (EPA) approachesVW to discuss the findings.

Dec 2014: VW issues a voluntary recallcovering half a million vehicles, to fix"various technical issues". But testingfinds that the "real world" emissionsremain higher than expected.

July 2015: The existence of "defeatdevices" is acknowledged by theGerman transport ministry, after aquestion is raised in parliament.

Sept 2015: With the EPA threateningto withhold approval for its 2016range of diesel vehicles, VW admits torigging emissions tests by using defeatdevices. When the news is madepublic, VW shares plunge by 20% asthe markets react. VW announcesit has put aside €6.5bn to deal withthe scandal. By the middle of theweek, CEO Martin Winterkorn stepsdown, saying he's "not aware of anywrongdoing" on his part. By the endof the week, he has been replaced byMatthias Mller, head of Porsche.