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The Dieselgate divulged

Recently, one of the biggest and most know automotive companies – Volkswagen Group has struggled with serious implications connected with revealing a horrifying truth about their diesel engines. In years 2009-2015 VW sold over 11 million defected cars worldwide including models of VW: Beetle, Jetta, Golf, Passat and plenty of Audis and Skodas. Some sources add also BMW X5 and Porsche Cayenne to the list of defected vehicles. The discrepancies1 were revealed after the International Council of Clean Transportation (ICCT) commissioned2 real-world test of diesel vehicles and compared them to ones which were conducted in laboratories. And so the Dieselgate started.

After the disclousure, the investigation against VW has been opened and West Virginia University submitted a proposal to ICCT to continue the tests on VW models. After a while VW fraud3 has been fully exposed to the world. It has been brought to the public that German automaker4 had been installing computer software in diesel cars that made it possible to cheat laboratory emission tests, while during regular drive the cars emitted up to 40 times more nitrogen oxide5 pollutants above what is allowed in the U.S. In 2015 the Environmental Protection Agency (EPA) served VW a Notice of Violation which, connected with numerous lawsuits, severely impoverished6 the company.

The fall of VW

RaphaelaFotografie / Pixabay

Dieselgate scandal certainly violated quite pristine image of VW Group. On the one side of the scandal, we have the second biggest automaker which had fought fiercely for its position for many years and on the other we have customers who no longer have the same amount of confidence in VW products as before. Moreover, there is also governmental side of the scandal (actually in many countries of the world, not only in the US), treating this violation as an assault directly aimed at environment and thereby into customers and their health. Both EPA and the customers demand suitable compensation for damages caused by VW, but even after some remedies7, it is not said that the company’s image will be restored.

VW is (not) so irreplaceable

Hermann / Pixabay

Automotive industry is one of the biggest and most important industries taking into consideration its revenue8. Despite the enormous size and variety of products, we can name few bellwethers9 in this market: VW, Toyota and General Motors have been always competing intensely for the first place in annual10 rankings of the largest automakers in the world. As we know, VW was on second place almost always beaten by Toyota. Now, after the VW’s scandal it is nearly certain that Japanese automaker will try to dominate the car market, especially the diesels (since VW has restricted credibility11 after the emission scandal). Toyota may not be the perfect choice of the customers but the company keeps improving their diesels and in fact they have already several projects coming in 2017 with more than promising results like Tundra pickup truck. Furthermore, just recently Toyota presented its brand-new enterprise that can cause a significant breakthrough in automotive industry – intelligent car capable of driving on its own, sensing driver’s emotions and reacting to them. For the moment, when VW diesels are no longer a thing, Toyota can easily push aside its biggest rival and marginalize VW in the industry using their bright technological ideas. Not so far behind is also Mercedes-Benz with its incredibly efficient E-class diesel defined as a “masterpiece of intelligence with outstanding parameters that take diesels into absolutely new level”. Not talking about interior and exterior design in which Mercedes is just so far ahead comparing to other car brands. Its high-quality materials along with meticulous12 attention to details makes their cars more personalized and unique.

As we know, VW has a worldwide range of services, but so do its biggest rivals – Toyota and Mercedes. Also, as before, Toyota beats VW hands down considering worldwide sales. Though when it comes to other automakers, VW is surprisingly high over General Motors, despite recent infamy13.

How the Dieselgate affected the sales?

© Econopolis.pl

Automotive industry markets are generally heterogeneous oligopolies14, so the competition is multifaceted and fierce. The graph on the right presents change in demand after the emission scandal.

After the Dieselgate the demand for VW cars should have decreased due to the lower credibility of the company and the lack of customers’ trust. When the demand for a certain product changes, the company needs to adjust optimal price and quantity of produced goods that will lead in simplified analysis to a new equilibrium15. That should mean in this case lowered price and quantity of produced and sold cars. On the other hand, VW must make up for lost revenues. So, what’s the golden middle way16? VW came up with creating bigger discounts17 for all their cars (not only diesels) and with other incentives18 e.g. special additional reduction of prices for long-standing customers.

As it was showed before, the customers have a wide range of VW substitutes with equal or better parameters. But the question is: will they want to change brands of their car just because of some bloomer19? Well, there are two options. First, considering their history, VW will now watch itself more than ever and try to win back customers’ trust (as it was described earlier they might be using additional incentives) and the customers will remain with their old choice knowing they will have special treatment and high-standard products with lower price (at least at the beginning before VW will again feel safe on the market). Second, it is also likely that customers will change their car brand due to the lack of trust in German slogans about reliability or high quality and the need of something fresh and innovative. In that case, it is highly possible that some automotive brand may take VW’s hard-fought place in the market. After all, Toyota took 1st place in World’s Largest Automakers of 2016 with a slight advantage over VW.

© Econopolis.pl

The graph on the left presents changes in supply of VW’s cars. After the Dieselgate supply of the cars has decreased, because of the scandal VW had to cut down the production of diesels massively to save money. Additionally, the price elasticity of demand20 will change as well, but the situation is slightly more complicated. “Price elasticity of demand measures the responsiveness of demand to changes in price for a particular good”, and we should take into consideration some generally described car market. Before the scandal demand for cars had relatively small elasticity (customers were less likely to react upon changes in price). Customers knew the prestige of the company and products so price changes did not affect the demand to a large extent. However, after the Dieselgate, customers started to be more attentive to21 what is happening with the prices, even small changes were noticed and it all affected the demand of cars (the demand became more elastic).

This situation presents also a very specific case of cross elasticity of demand22. Big part of the customers, feeling more insecure about buying VW as a next car would want a change, but it does not certainly decrease the revenue of the whole company. We can assume that the customers will look for something similar to VW if they were satisfied before and may unconsciously choose i.e. a Skoda or a Seat which they think were not involved in the emission scandal, not knowing that these brands belong to the VW AG.

The summary

scottyuk30 / Pixabay

It is tough to say what exactly may happen with VW AG because we cannot predict everybody’s actions. As it always is in economy, there are few possible variants. First is, that VW will continue the discount policy to keep current customers and create new high-quality products to gain new ones. However, money is not the only thing that VW needs to get back, they should also work on wining back their customers trust. The other option is that they will fail to get back on the market due to lack of creative ideas. They are no longer a competition when it comes to diesel market and Toyota has already dominated electric and hybrid car market. So, the only thing left for VW is to invent some new technology which is not the easiest task to do.

In case of elastic demand, lowering the price (which VW did through discounts) makes the total cost higher and may decrease the revenue of the company which is not profitable for VW right now.

Another strategy for VW AG is to invest and focus more on their other brands, not held directly in disrepute e.g. Seat or Skoda and that would probably keep the company going without bigger obstacles. After a while when the whole Dieselgate thing would go silent, VW could make a big comeback with something so innovatory and unique, that the customer would take it without asking any questions, which in my opinion is the best strategy for VW. As for now, we can only observe, and draw conclusions.

Co-operationMarceli Wac

Further reading

https://www.bloomberg.com/news/articles/2015-09-21/volkswagen-drops-15-after-admitting-u-s-diesel-emissions-cheat

https://www.bloomberg.com/news/articles/2015-09-19/volkswagen-emissions-cheating-found-by-curious-clean-air-group

http://fortune.com/2016/10/26/settlement-vw-diesel-scandal/

http://www.independent.co.uk/news/business/Leading_business_story/volkswagen-diesel-emissions-scandal-the-toxic-legacy-a7312056.html

http://www.autoexpress.co.uk/volkswagen/92893/vw-emissions-scandal-recalls-compensation-is-your-car-affected-latest-news

http://www.bbc.com/news/business-34324772

https://en.wikipedia.org/wiki/Volkswagen_emissions_scandal

https://www.mercedes-benz.com/en/mercedes-benz/vehicles/passenger-cars/e-class/the-new-e-class-the-most-intelligent-business-saloon/

http://www.forbes.com/sites/bertelschmitt/2016/09/28/worlds-largest-automakers-2016-toyota-pulls-ahead-of-volkswagen-by-a-hair/#23131417d404

https://www.dezeen.com/2017/01/06/toyota-concept-i-car-anticipates-drivers-needs-ces/

Dictionary

  1. discrepancy (noun) – rozbieżność
  2. to commision (verb) – zlecić
  3. fraud (noun) – oszustwo
  4. automaker (noun) – producent samochodów
  5. nitrogen oxide (noun) – tlenek azotu
  6. to impoverish (verb) – zubażać
  7. remedy (noun) – zadość uczynienie
  8. revenue (noun) – przychód
  9. bellwether (noun) – prowodyr, herszt
  10. annual (adjective) – roczny, doroczny
  11. credibility (noun) – wiarygodność
  12. meticulous (adjective) – skrupulatny, drobiazgowy
  13. infamy (noun) – niesława, hańba
  14. heterogeneous oligopoly (noun) – oligopol heterogeniczny
  15. equilibrium (noun) – równowaga
  16. golden middle way – tutaj: złoty środek
  17. discount (noun) – rabat
  18. incentive (noun) – bodziec
  19. bloomer (noun) – wpadka, gafa
  20. price elasticity of demand (noun) – cenowa elastyczność popytu
  21. attentive (adjective) – dbały o…
  22. cross elasticity of demand (noun) – elastyczność mieszana popytu