Meaning of the Volkswagen Scandal

In the 19th century, “Made in Germany” had been introduced by the British to mark inferior goods coming from Germany. However, this label has since evolved into a seal of quality and product reliability.

As Germany emerged as Europe’s largest economy and the world’s second largest exporter, the automobile industry has served as an economic engine employing 775,000 people in 2014.

On September 18, the EPA addressed a notice of violation to the German car manufacturer Volkswagen Group, claiming it violated the Clean Air Act by manipulating the emissions testing software used for testing its products’ quality since 2009. After the resignation of CEO Martin Winterkorn and suspension of top managers, Volkswagen Group announced it would spend $7.3 billion to rectify the costs of the scandal, which will cover only a fraction of Volkswagen’s total costs. Although 11 million affected vehicles are already an enormous burden for the company, Volkswagen must prepare itself all the more for future costs coming from other potential sources.

The cost of recalls and rebuilding affected products will likely be Volkswagen’s smallest concern. Due to its international presence, Volkswagen is facing consumer law violations coming from multiple countries including the U.S. and Australia. The scandal set off an avalanche of class action lawsuits demanding Volkswagen buy back its affected vehicles at their original prices. In response, investors dumped their shares causing the stock price crash by over 40%, marking a four year-low. The accumulated expenses for lawsuits, high fines, shareholder compensation, and lost future revenues could make this the most difficult chapter of Volkswagen’s history. Credit Suisse estimates the best and worst scenarios to be $26 and $86 billion respectively, overshadowing BP’s Deepwater Horizon oil spill disaster in 2010 that totaled $53.8 billion in charges.

Beyond merely the Volkswagen Group’s struggles, the German economy faces a risky future due to lost goodwill in its brands. While the consequences of the emissions violations by Volkswagen remain uncertain, the scandal does not only influence Germany’s biggest enterprise, its employees, and its clients, but also the goodwill regarding the country’s reputation for manufacturing quality goods. The auto industry serves as a pillar for many other industrial suppliers including mechanical engineering, metalworking, and related textile and chemical sectors. In 2014, automobiles and associated equipment accounted for most of the nation’s exports. Germany sold three-fourths of its auto products to foreign countries that will now question what “Made in Germany” stands for, possibly reconsidering purchases in favor of U.S., Chinese, and Japanese production. Now that its most important industry is shaking, Germany has not only endangered its trust and reputation but also threatened the recovery and growth of the already weakened Eurozone. After all, it has played a central role within the European Union by managing the financial and economic crisis that emerged from the Eurozone. As the geographic heart and driving force, a stable Europe cannot exist without a strong Germany. In that sense, it is essential for the nation to restore lost popularity from the Volkswagen scandal, regardless of its magnitude, by quickly clearing the situation rather than shirking responsibility.