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[Shin Yong-bae] Volkswagen’s malfeasance

Sept. 30, 2015 - 18:19 By KH디지털2

The emission-rigging scandal involving German carmaker Volkswagen is sending shockwaves through the global economy on the heels of a U.S. move on a Fed rate hike and China’s sudden devaluation of its currency.

It was not simple corporate fraud. The case appears to now pose a grave threat not only to the auto giant, but also the healthy German economy, which has played a lead role in salvaging Europe from the eurozone debt crisis.

The stocks of Volkswagen, the world’s top carmaker with about 270,000 employees just in Germany, have taken a nosedive of nearly 40 percent over the past 10 days after the revelations on Sept. 18. 

The company is also expected to be slapped with astronomical fines from governments of countries its diesel-powered vehicles in question were exported. Not to mention a flurry of expected lawsuits from global consumers and related organizations.

Probably few believed Volkswagen, the pride of Germans, would have installed illegal software in its 11 million diesel-powered vehicles sold worldwide to manipulate emission levels, which led to the resignation of its CEO and the recall of about 500,000 cars sold in the United States.

The diesel scandal seems unlikely to fizzle out. German prosecutors immediately launched a full investigation into Volkswagen and some other European countries are moving to follow suit.

On the economic front, a number of German suppliers of components for Volkswagen’s diesel engines may face a drastic decline in demand, and the rigging scandal could be a blow to other major German carmakers including BMW and Mercedes-Benz. The impact could be worse than ever imagined, given that Germany’s highly competitive car industry has been one of the major pillars of the its robust economy. 

It is against this backdrop that some foreign analysts and editorials describe the scandal as a bigger downside risk for the German economy than the Greek debt crisis, or as its auto industry’s Lehman Brothers case.

But the dearest price Volkswagen may have to pay for the scandal is the collapse of consumers’ trust in the 77-year-old carmaker, which owns luxury and super car brands Audi, Porsche, Bentley and Lamborghini.

Consumers who bought “clean diesel-powered” Volkswagen cars must have been embarrassed and infuriated when they found out their vehicles are emitting pollutants up to 40 times the permissible limits.

The cheating scandal is also becoming a hot issue in Korea, as the Seoul government has launched its own probe into diesel-fed Volkswagen and Audi vehicles sold here.

The wrongdoing was revealed at a time as three major German carmakers -- BMW, Volkswagen and Mercedes-Benz -- have been basking in the surge in sales in Korea’s imported car market for years.

Market predictions are that the scandal will throw a wet blanket on the German car boom in Korea, tarnishing the trio’s premium image.

I was surprised, too, to find out that the culprit is the world’s top carmaker from Germany, which is an EU leader famous in Korea for its pursuit of perfection, high technology and craftsmanship, as well as a model country for Japan when it comes to a World War II apology.

Although Volkswagen promised to provide technical solutions to the problematic cars this month, it may take some time to win back public trust as shown in the case of Toyota in 2009. The Japanese carmaker saw its brand reputation plunge after more than 12 million cars were found to have defects in their braking system. Its management’s belated admission and recall further eroded the trust of the public. As a result, Toyota was dethroned from the title of the world’s top carmaker.

As far as Korea is concerned, the Volkswagen scandal may provide a good opportunity for Korean automakers represented by Hyundai and Kia to expand their overseas market shares.

But there are voices, however, saying that Korean carmakers should use this case as a chance to have a thorough in-house review on whether their cars or their brands are winning the trust of consumers.

It takes a long time for a company to build or earn public trust for its brand or product. But losing it comes in a twinkling. At least, the Volkswagen scandal is a lesson for Korean companies: Don’t make the error of suffering a big loss in going after small gains.

By Shin Yong-bae

Shin Yong-bae is the business editor of The Korea Herald. He can be reached at shinyb@heraldcorp.com. ― Ed.