Volkswagon Case

Volkswagen (VW) has recently been a culprit to an emissions scandal involving its cars. The US Environmental Protection Agency (EPA) discovered 482,000 VW cars in the US were not emission-friendly. Upon this discovery, VW has admitted to tampering with over 11 million cars to illegally pass an emissions test. These vehicles include the Audi A3, Jetta, Beetle, Golf, and Passat. Essentially, VW implemented a software device in the car’s computer that could sense test scenarios by monitoring speed, engine operation, air pressure, and even the position of the steering wheel. When the car was being tested, the device would put the car in to a “safety” mode, allowing the engine to run below normal power and performance.

The discovery made by the EPA shows that the diesel vehicles are emitting approximately 40 times more toxic fumes than are permitted by law. As a response to the discovery, VW has recalled almost all of the 482,000 cars in the US and has set aside an emergency fund of over $7 billion to cover costs. However, the EPA has the ability to fine up to $37,500 per vehicle, allowing the possibility of up to $18 billion in fines.

Additionally, VW is starting to face increased financing costs and less flexibility to offer loans. VW’s lending and leasing contracts are backed by its cars; therefore if the value of a car drops, the financial services unit will have to book a write-down. As expected, the scandal resulted in the decline in value of VW’s cars. Due to the complexity of the situation, the company is working on coming up with an appropriate write-down number. To make matters worse for VW, credit-rating firms are not optimistic on VW’s outlook because of the emissions scandals. For example, Moody’s downgraded VW’s outlook from stable to negative, resulting in a rise in potential funding costs for VW financial services.

Lastly, VW’s CEO, Martin Winkerton, has stepped down from his position, even though he does not admit to any wrongdoing. Instead of...