Volkswagen Goes Green?

By Kayleigh Yerdon, Summer Intern 2015, Cornell University As far as press time goes, not many companies have had press time comparable to that of Volkswagen since September of last year. Even worse (if you recall the major scandal) is that the majority of the company’s press coverage was negative. Now, in some recent news, it seems that the car manufacturer is out of the frying pan and into the fire. Will a recent mandate from the EPA serve to hurt the company more?

First, if you’ve forgotten about the scandal, here’s a short recap:

In September of 2015, Volkswagen was accused of one of the largest emissions scandals in history. The United States Environmental Protection Agency (EPA) alleged that the carmaker had programmed its diesel engines to respond to specific emissions controls only during laboratory testing. What does this mean? Basically, some eleven million Volkswagen cars worldwide between the years of 2009 and 2015 were programmed to test well, and then give off up to 40x more nitrogen oxide than the allowable EPA standard. Not good looks for the German carmaker!

 

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Ultimately the carmaker admitted to deceiving its customers and issued a public apology. But, that didn’t stop the company’s stock from dropping over 20% the next day. The day after that, Volkswagen announced that it would spend over $7 billion to fix the scandal (including the recall of all 2009-2015 cars), and its stock declined another 17%.

Following the scandal, discussion was sparked and tests were conducted to evaluate the pollution that was being emitted by a wider range of carmakers. It was actually found that vehicles produced by many car manufacturers worldwide deviate from the accepted legal emission limits. However, even though it was determined that other carmakers also broke the rules, the bad press continued to focus primarily on Volkswagen. Further inspections of Volkswagen after the initial scandal showed more “irregularities”, this time with the carmaker’s CO2 emissions and gas mileage numbers.

Now, in February of 2016, the expenditure for the car manufacturer continues:

Just this week, the EPA went public with an idea that might change Volkswagen indefinitely: the production of more electric vehicles. It is currently believed that the increased production of electric cars at Volkswagen’s Chattanooga, Tennessee plant, along with the creation of a nationwide network of charging sites for electric vehicles are two of the EPA’s negotiating points in its settlement of the VW diesel-emission scandal.

While these two settlement points seem like a reasonable fix for the scandal, by encouraging the carmaker to actually “go green”, we cannot overlook the immense cost of this demand. For a company that is already out billions of dollars and has faced its largest stock price decline in history within the past year, how will these extra costs affect the manufacturer?

 

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As investors, I think that we can look at this case in two ways: by the short-term effects and the long-term effects. Immediately, the extra costs to Volkswagen (if this deal with the EPA is made) will continue to hurt the company– a fact which some of us might agree is well deserved. It’s unlikely that such a large expenditure will be instantaneously positive for a company that is already suffering to get back on its feet.

However, in the last 10 years, we as consumers have already begun to see a turn towards the demand for electric cars. So, I would argue that the production of both electric cars and charging stations could help Volkswagen make a come back in the long run. The immediate costs might be harmful, but I believe that getting further into the electric car industry now could benefit the car manufacturer later.

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