The Uncontrolled Implosion at VW

volkswagen_logo_bleeding_by_greenbob1986VW has been embroiled in a massive controversy. Here is the summary:

  1. VW has been marketing “clean diesel” technology on the basis of being environmentally friendly while also being fun to drive.
  2. Independent testing done by West Virginia University revealed that VW diesel cars were not in fact clean when compared to competitors, and exceeded EPA regulations governing emissions.
  3. VW asserted that the tests were inaccurate and offered to perform voluntary recalls to address specific issues.
  4. The EPA threatened to withhold certification for 2016 models – meaning VW would not be able to sell them.
  5. The company then admitted that they had engineered a defeat device which detected when the vehicle was undergoing emissions testing. In normal driving, the required emissions equipment was turned off.

The EPA has threatened the company with $18b in fines, which won’t come to fruition. BP paid just a 1/3 of that for their massive environmental disaster in the Gulf. It is hard to see how VW would be subject to a fine that equates to $37,344 per vehicle affected.


The damage to the VW brand is incalculable right now, but I predict it will be a death blow to them in the U.S. market. Their problem is twofold, the first is that their market share here has been stuck in perpetual single digits across categories. With the U.S. being the most competitive car market globally, every point of share comes at great cost.

The second problem is that they are now on record admitting to a conspiracy to deceive regulators and consumers alike. They have been marketing a clean diesel product that they knew was not, and worse, had engineered components in the vehicles themselves to perpetuate that deception.

This scandal is spreading, fast. The company has already admitted that they know 11 million vehicles globally have this defeat mechanism installed. Countries are opening up their own investigations daily, the damage to the brand is no longer contained the U.S.

For the foreseeable future every news story about VW will be about a scandal, every car review, even in the bought off automotive media, will be compelled to append articles about VW cars, and current customers will have to navigate recalls and sarcastic comments about their choice of vehicle.

What reason does anyone have to buy a VW in light of these revelations? While not alone in the annals of recent car company scandals, the VW one is the most brazen in concept. Toyota and GM have both suffered scandals of incompetence with air bags and ignition switches respectfully, and in all fairness a lot of people died as a result of those failures, which is not the case with VW. Toyota and GM also have market leader positions while VW is a third tier player in the U.S. market, which doesn’t provide the company with much inertia to ride this out.

I think they are done. Call the moving company and buy your tickets back to Wolfsburg. At least they still have Audi and, thus far, they have not been implicated in this scandal.

The Delicate Nature of Trust and Brands

If you look at what is going on in our global financial markets and many large business sectors (airlines and auto manufacturers in particular) the disease they are suffering from is a lack of trust among consumers.

The financial markets have witnessed wholesale capitulation by retail investors who understand that the market is functioning not on the basis of fundamental business strength and weakness, but at the mercy of large fund traders who are capable of moving any large stock 10% up or down on any given day irrespective of what the circumstances surrounding that business are. The retail investor sees these bear raids and bull runs are for what they are, insider dominated trading.

Volatility increases as the number of participants in a market decreases. Retail investors are sitting this out and the SEC and Congress are not helping, on one side is the SEC which has done little to create level playing fields in markets and Congress has distorted the markets with trillions of dollars of your money being committed to companies and industries that should not be getting free money. Insiders have polluted and corrupted every one of the bills that deal with economic stabilization, the latest outrage being provisions inserted into the auto failout bill that would provide a pay raise to federal judges and a provision that would let transit agencies off the hook for illegal SILO tax shelter tansactions.

On the business side, industries like American auto manufactures and airlines have done everything within their reach to tarnish their brands over the last 20 years and irrespective of whatever financial propping up they receive from Congress, the fact remains that their biggest obstacle to success over the long run are not credit markets or labor costs, it’s a lack of trust among consumers.

American cars and trucks are without a doubt competitive on quality benchmarks, every customer satisfaction and quality survey reveals this fact. Having had a wide range of these vehicles myself, I have no complaints about GM and Ford quality, in fact the GMC Denali that we owned at one point did not have a single issue that required service, beyond regular maintenance, and it was one of the best equipped and most comfortable vehicles we have ever owned.

If you look at the model lineup GM and Ford in particular you will see a strong portfolio of high mileage vehicles. Chevrolet offers 88 models (yeah that’s somewhat of a problem in itself) with an average fuel economy across the entire portfolio of 23mpg, while Toyota’s 55 models comes in at 21mpg. GM’s efforts on Flex-fuel (E85) have led the industry, 6% of their volume is now Flex-fuel vehicles (hybrids are 2% of Toyota’s shipments). GM alone has invested $750 million in development of the Volt, advancing state of the art not only in powertrain technology but also in battery technology.

What are the two biggest complaints that critics throw up on GM and Ford? They make crappy cars and the have not invested in fuel efficient cars and low emissions technology.

Even if GM survives (Ford is not in as bad a crisis and Chrysler simply won’t survive) the bigger challenge they face is that consumers don’t value their brand anymore. The same applies to the big airlines, while Southwest and JetBlue were cultivating their respective brands, UAL and Delta were doing just the opposite. Running new advertising, remaking the corporate logo, and self-flagellation among executives won’t change any of this.

Congress is in no better condition either, the public not only gives this Congress historically low approval ratings, they also have little confidence that Congress will be a constructive player in our current economic downturn.

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