Volkswagen's scandal and the car industry

During the first meeting of the Economics and Enterprise Society, we discussed the recent scandal that has engulfed Volkswagen (VW).

The German carmaker was found to have installed hidden software on 11 million of its diesel cars worldwide in order for them to pass America's strict nitrogen oxide emissions test. But after passing the test, the software would deactivate their emission controls, causing them to spew up fumes at up to 40 times the permitted level. As the authorities investigate the matter further, it is probable that this could provoke a wider range of claims about emissions and fuel efficiency. This could, therefore be a blow to much of the industry that might be large enough to reshape it. This scandal will affect other car producers, other countries and potentially the future of diesel itself.

The chief executive of VW, Martin Winterkorn has stepped down and the company is setting aside €6.5 billion to cover the coming financial hit. Regardless of whether Winterkorn was personally involved in the scandal or not, it was appropriate that he should lose his job over it. This is because he is an engineer renown for his attention to detail. He should have known that this was going on. The sale of 'Clean Diesels' was at the heart of VW's plan to crack the American market, which in turn was part of the strategy to surpass Toyota as the world's largest carmakers. Winterkorn's grand plan is now in ruins. Besides that, VW's share prices have fallen by one-third (see chart) in the first four trading days since the scandal broke out on September 18th, cutting its value by €26 billion. America's Department of Justice decided to conduct a criminal investigation into the company, and rightly so. Other countries should follow South Korea and investigate what VW has been up to on their patch.

A change at the top and a large fine must not be the end of the matter. The prosecutors in America should chase those responsible for corporate crimes, instead of only punishing the companies' shareholders by imposing huge fines. Earlier this month, the Department of Justice made public a $900 million settlement with GM, the largest carmaker in America, because they didn't recall cars with an ignition-switch defect that caused crashes which killed at least 124 people and injured 275. Prosecutors claimed that the managers had put profit before safety and ignored the defect. Despite this, they announced no charges. Luckily, American authorities recognise that this needs to change. Sally Yates, America's deputy attorney-general, said that from now pursuing criminal and civil charges against individuals would take priority over fining businesses.

Yet the effects of the scandal will be most felt in Europe. VW's mischievousness raises the question of whether other carmakers have been up to similar tricks. Carmakers such as Mercedes and BMW insist they have not. However, the emissions testing system in Europe is a joke. Carmakers can commission their own tests and regulators allow them to do things like removing side mirrors during testing and taping the cracks around doors and windows to minimise drag and make the cars burn less fuel. Regulators also tolerate software similar to VW's that detects when a car is being tested and goes into "economy" mode.

At least unlike Europe, America's regulators perform their own tests to confirm the carmaker's findings. But with outrage at its peak, this is the moment to act. The system should be replaced with independent testing in driving conditions that are realistic. European regulators must change their attitude to diesel, which is what half of the cars sold in Europe runs on. The problem with diesel is that although it can be economical on fuel (therefore less carbon dioxide), the trade-off is that nitrogen oxide emissions will increase. That trade-off has been decided in diesel's favour by Europe's poor testing system and more lenient standard of nitrogen oxide emission.

Even if other makers of diesel cars did not get involved in the same scandal as VW, the scandal could mean that diesel cars will find it difficult to reach standards applied rigorously to both carbon dioxide and nitrogen oxide emissions. There are those who claim that this may be the "death of diesel". But there is still scope to switch to clean-energy cars that run on electricity, methane, hydrogen or are hybrids. A multi-billion-dollar race is under way between these various technologies. VW's scandal may finally lead to the beginning of the age of the electric car.