The world economy has been doing a see-saw over the last couple of decades and crude is a great driver of money matters. According to some reports, the world vehicle population stood at 1.2 billion in 2014 and is expected to hover around the 2 billion mark by 2035. So, as you’d imagine, vehicular fuel is an extremely crucial component to keep the globe spinning.
The two main fuel types that everyone knows are petrol and diesel. Alternate fuels and electric solutions have been playing catch up for the past few years but aren’t expected to replace conventional fuels any time soon. One of the conventional fuels has been under the scanner for the wrong reasons recently – diesel.
It’s been a much publicised affair that first surfaced when the Volkswagen diesel scandal became a front-page item in the middle of September.
Here are some key points about VW’s Diesel-gate and what it means for India.
The US has extremely strict regulations on emissions and its Environmental Protection Agency (EPA) recently issued a notice to Volkswagen under the Clean Air Act citing limit violation as the central reason. It was found that VW had ‘programmed’ its Type EA 189 TDI engines (1.6-litre and 2.0-litre engines for the average citizen) to meet US emissions tests under controlled laboratory tests while in the real-word application, the same engines produced upto 35 times more nitrogen-oxide. The investigation involved all brand-family cars sold from 2009 onwards that get driven by the EA 189 engine. It is estimated that, globally, around 11 million cars have the ‘cheat’ software installed.
As an immediate response to the emissions violation episode, VW issued an official statement which said that the group had set aside 6.5 billion Euro to “cover the necessary service measures and other efforts to win back the
trust of the customers.”
Martin Winterkorn, Volkswagen Group CEO at the time, resigned and other senior and key officials including the head of brand development Heinz-Jakob Neusser, Audi R&D head Ulrich Hackenberg, and Porsche R&D main man, Wolfgang Hatz, were suspended once the scandal broke.
So far there’s been no word on who signed the dotted line to sanction the installation of the ‘cheat software’, and also there’s not much known on who wrote the algorithm for it.Recently, Michael Horn – VW America’s top man – appeared before a congressional hearing in which he admitted to know of the emissions non-compliance in some of the cars back in the spring of 2014. That’s what is the most troubling matter as it proves that senior executives of the management had at least some idea of this malpractice even if they weren’t directly involved in the matter — and yet nothing was done as a corrective measure.
On a parallel note, an official release by VW UK on September 30, stated that “technical solutions are being developed and will be presented to responsible authorities before the end of October”.
What baffles most people is not the ‘how’ but the ‘why’ of the entire story. Why would a global automotive giant like Volkswagen cheat on purpose knowing full well that the chances of getting caught were quite high?
Diesel has been gaining popularity in the recent past and even the West has embraced the ‘dirty’ fuel — perhaps Volkswagen didn’t want to see red on its sales figures. Also, diesel powered cars have been doing great business for the Volkswagen brands.
More importantly, what does all this mean for VW’s Indian operations and customers?
There are some pundits who will fight in favour of the group saying that the cars ‘under scanner’ here are ccompletely within the Indian emission norms (currently Bharat Stage IV) which are on par with Euro 4 standards
while Euro 5 (Bharat Stage 5) is expected to be introduced only in 2017.
That said, there’s an impending recall in the coming months as a corrective measure. It’s not just the Volkswagen Polo and Vento which use the EA 189 TDI engine, but also a few Audi and Skoda models.
So, what are the financial implications? A global recall may cost VW billions, and the US EPA may fine the German giant heavily (some expect it to be to the tune of $15-18 billion). Credit Suisse expects the cost-to-company to be close to $87 billion. The company’s shares value have dived south by as much as 40 per cent ever since the story broke out in public last month.Volkswagen made over $12 billion in profit last year and has a good pile of financial reserves – close $24.3 billion on hand. The payout, while heavily hurting, won’t be permanently damaging. The big-ticket projects, however, may get halted or worse, binned.