What’s bad for VW …: Cheating scandal bodes ill for German economy

What's bad for VW …: Cheating scandal bodes ill for German economy

BERLIN — The Volkswagen emissions scandal has damaged Germany’s reputation for high-quality, environmentally sound manufacturing, shaking the credibility of both the automaker and domestic industry as a whole.

     More broadly, Dieselgate threatens to put a damper on Europe’s biggest economy at a time when the region is trying to reignite growth.

     The leading European automaker quickly revamped management following revelations that its diesel cars passed U.S. emissions tests by underhanded means. But earnings have yet to feel the impact of the shocking admission. Many of the suspect cars were sold in Europe — at least 2.8 million will need to be checked for the cheating software in Germany alone. Costly recalls loom.

     So does the threat of fines. The global financial crisis has galvanized public opinion in rich countries against corporate wrongdoing, and the authorities are eager to throw the book at violators. Volkswagen may also get hit with lawsuits from shareholders hurt by its crashing stock price. And with a tarnished brand, its new-car sales will likely suffer.

     The automaker’s strong balance sheet will stand up to considerable financial hardship. The company is expected to try avoiding payroll reductions through a variety of methods, such as shortening work hours, in the event of production cutbacks. But the potential for job losses remains a concern. Jobs are under threat at not only Volkswagen itself, but also at its suppliers, said Marcel Fratzscher, president of the German Institute for Economic Research.

     Employment in the nation’s auto industry has grown an annual 2-3%, which works out to almost 20,000 new jobs a year. Should this driver of job creation slow as a result of Volkswagen’s self-inflicted wound, domestic demand may slacken, dragging on the entire European economy.

The contamination spreads

Beyond that, the scandal cuts to the heart of Germany’s image as a manufacturing superpower. The country prides itself on innovations like the diesel engine, developed at the end of the 19th century by its own Rudolf Diesel. A national effort is underway to take manufacturing to a new level, Industrie 4.0, where hardware and computing meld to reduce costs. Anything that discredits Germany’s technological pursuits may sap a vital source of its economic momentum.

     All of this poses a very real problem for the European countries economically dependent on Germany. In neighboring Poland, where the Volkswagen group employs more than 10,000 people, media outlets have been covering the scandal in depth. Economy Minister Janusz Piechocinski said he wants an explanation from the automaker, according to a local media report.

     Volkswagen’s corporate culture has been blamed for driving it to cheat. CEO Martin Winterkorn, who resigned last week over the scandal, was described as “arrogant” and “authoritarian.” Some compared the top-down way in which the organization is run to the Prussian bureaucracy.

     But expecting the automaker to fall behind in its home market would be premature. Domestic makes like Volkswagen, Daimler and BMW dominated new-car sales last month. Japanese and other rivals are unlikely to make quick inroads.

     The government went so far as to rescue Opel, a local subsidiary of U.S. automaker General Motors, in 2009 out of concern for domestic jobs — and voter opinion. This shows the strength of the public’s bond with the auto industry.

Economic engine

Born out of Nazi-era economic policy, Volkswagen began work on its first factory in 1938. It was run by its home state of Lower Saxony after World War II until its privatization in the 1960s. The group now employs some 600,000 people worldwide, about 270,000 of them in Germany.

     Under Winterkorn’s leadership, which began in 2007, German operations grew on the back of swiftly rising exports. Domestic output totaled 2.56 million vehicles last year, up 32% from 2006, despite little demand growth in the home market. The group’s domestic workforce expanded by 90,000 over the same period.

     The automaker’s research and development budget — about 11.5 billion euros ($12.8 billion) as of last year — consistently ranks among the highest in the corporate world. Engineers skilled in such fields as environmental and information technology have been recruited in recent years.

     Germany is home to other big names in autos, including Daimler and BMW. Its automakers racked up a record-high 367.9 billion euros in sales last year, making their business the biggest domestic industry, with roughly a fifth of the total size, according to the German Association of the Automotive Industry. Exports account for two-thirds of this value. A weak euro has helped sell more German cars abroad in recent years, complementing their reputation for quality and safety.

With additional reporting by Takayuki Kato in Frankfurt, Germany.

What's bad for VW …: Cheating scandal bodes ill for German economy