European car manufacturers: reeling from the after-effects of Dieselgate

The credit for any scandal having the word “gate” after its name goes to the former US President Richard Nixon. The infamous Watergate scandal of the early ‘70s will always be remembered as a dark spot in American political history. Likewise, ‘Dieselgate’ will always haunt Volkswagen, which is one of the largest car manufacturers in the world. The company’s crime was not simple. It was a sophisticated engineering scheme to deceive vehicle emission testers.

The Dieselgate scandal has been very expensive for Volkswagen. It had to pay billions of dollars to the US government authorities and billions of Euros to the EU authorities. Volkswagen group, along with its brand Audi is still reeling from the after-effects of Diesel Gate.

Who detected the fraud?

Spiegel Online (23 October 2017), a German news magazine covers this interesting story. Arvind, Hemanth and Marc were students at the Centre for Alternative Fuels Engines and Emissions (CAFEE) in West Virginia, USA. They discovered “unacceptable” levels of gases emitting from the exhaust of Volkswagen group manufactured vehicles, which according to the claim of the vehicle manufacturer were using “clean diesel” as fuel. Their discovery laid the foundations of the Dieselgate scandal.

A term “defeat device” is widely used when talking about Diesel Gate. There is no such physical device. The whole gimmick was a coded program designed by Volkswagen engineers and integrated into the car electronics to give false readings “when vehicles were boarded on automated emission testing platforms”.

Audi

Audi’s parent company is Volkswagen. The Volkswagen group has embarked on a cost-cutting drive. Audi has been tasked to contribute €15 billion to this endeavour.

Reuters latest financial news

Reuters Business News (14 March 2019) reports,

“Audi will make greater use of vehicle platforms and technologies developed with Porsche and Volkswagen as it embarks on a €15 billion cost-cutting and efficiency drive, Chief Executive Bram Schot said on Thursday”.

Volkswagen group’s key research division was based at Audi’s premises. After Dieselgate scandal emerged, the group fired many top-level engineers from their jobs, thus leaving a loosely knitted engineering department at Audi despite the company’s slogan “Vorsprung Durch Technik” (Advantage through Technology).

The new CEO of Audi, Bram Schot, laid out his cost-cutting strategy:

“We are discussing what we do ourselves and where we share resources with other parts of Volkswagen. We ask ourselves: Do we need to do this in-house, is it standardised technology, and is it unique from the customer point of view”.

This new strategy shows that the Volkswagen group is moving towards merging common engineering and manufacturing activities.

Design and development of Audi’s driverless cars, an automotive field in which Europe lags far behind the US, has been handed over to the engineers at Volkswagen group, whereas Audi will carry on with its strategy to manufacture semi-autonomous vehicles at its own manufacturing facility.

Schot’s cost-cutting measures also include increasing research and technical collaboration with Porsche, which is also a Volkswagen group brand. Both Audi and Porsche are working together for the production of a premium electric sports car known as PPE.

Jobs at Audi

Audi has guaranteed its workers that there will be no layoffs until 2025. The company is consulting labour unions and is charting a job cuts scheme where employees of the company will be offered early retirement under a “voluntary redundancies” plan.

The payroll cost-cutting factor is important because Audi aims to switch over to manufacturing electric vehicles in the coming decade. Electric vehicle (EV) manufacturing requires a lower headcount of mechanical engineers because EV’s are built using electrical components. There is little use of mechanical parts. The company plans to offer 30 electric vehicle models by 2025.

Expected returns

Reuters Business News (14 March 2019) gives the following expected returns figure of Audi’s business operations:

Short-Term

7 to 8.5% operating return on sales

Long-Term

9 to 11% operating return on sales

Outlook

Though Volkswagen has taken over the top spot in the car manufacturers list, it takes time to recover lost trust. With a charge of billions of Euros in its financial statements, cost-cutting is the only option left with the Volkswagen group to operate efficiently.

Volkswagen group is embarking on electric, self-driving and semi-autonomous vehicle projects. All three projects are challenging and require a zero-tolerance policy which should be drafted and implemented across the board. Any more mischief by the engineers will lead to a corporate disaster.

Electric Vehicles

Elon Musk’s Tesla electric vehicle brand is the pioneer of the electric vehicle (EV) industry. It has gone through lots of challenges and bitter experiences. If European automakers want to enter the American EV market in the future, they must keep tabs on Tesla’s past, present and future developments. For competing on American turf, it is important to set an American company as a benchmark and then develop something superior to that benchmark.