Stain on Made in Germany label

'No one could have imagined the scale of the damage to the industry'

By TT Bureau in Berlin
  • Published 23.09.15
Heaps of scrap metal lie on a boat in front of the Volkswagen power plant in Wolfsburg

Berlin, Sept. 22 (Reuters): Until last Friday, the mighty Volkswagen brand symbolised German engineering prowess and reliability.

In just four days, that has changed radically. A scandal over cheating on US diesel emission tests has engulfed the company and many Germans worry it will have a domino effect on their businesses, eroding the cherished "Made in Germany" label.

Volkswagen chief executive Martin Winterkorn. (Reuters, AFP)

Following a series of other blows to Germany's reputation - from repeated delays in Berlin's new airport to a string of financial misdeeds at flagship lender Deutsche Bank - Germany's business image looks tainted.

"Made in Germany is quality and trust. Now that trust is lost," said Ferdinand Dudenhoeffer of the University of Duisburg-Essen. "No one could have imagined the scale of this and the damage it will cause for German industry will go on and on. This is just the tip of the iceberg."

Top-selling Bild daily described VW as the crown jewels of German industry and said its success must not be gambled away.

The reality, however, is that VW has been caught deliberately misleading the US environmental watchdog and US consumers over emissions from its diesel engines.

Its shares have tumbled 33 per cent in the last two days. Earlier today the Wolfsburg-based firm said it would set aside some 6.5 billion euros in provisions this quarter to cover costs related to the scandal. Media are reporting that chief executive Martin Winterkorn will go.

The impact of such a scandal is especially great in Germany, Europe's biggest economy, because of its reliance on exports which make up more than 45 per cent of gross domestic product.

"The great success of the export nation of Germany rests on the quality label 'Made in Germany'," said Marcel Fratzscher, head of the DIW economic institute in Berlin. "VW stands for this German quality - for perfection, reliability and trust."

"Even if we don't know how much the VW case will affect the German economy, the risk is high due to a reliance on exports."

Germany's auto industry accounts for roughly one in five jobs. It accounted for 17.9 per cent of Germany's 1.1 trillion euros in exported goods last year, according to Deutsche Bank, and has enjoyed above-average export growth since 2009.

German economy minister Sigmar Gabriel has also expressed concern about the reputation of the car industry overall, although VW rivals Daimler and BMW were quick to say the accusations against VW do not apply to them.

Brand consultancy Interbrand says VW is worth 10 billion euros and is one of the most valuable German brands. The top 50 German brands are worth more than 170 billion euros, says Interbrand, and carmakers dominate the top ranking, with Mercedes-Benz, BMW, Volkswagen and Audi taking first, second, fifth and sixth position respectively.

Highlighting the PR battle it faces, German television has been showing a frequently-aired US television commercial in which VW not only boasts that it is the top diesel car brand in America, but also asks: "Isn't it time for German engineering?"

The scandal undermines VW's whole push into clean diesel which has been the pillar of its efforts to develop environmentally-friendly technology, a strategy shared by other German carmakers BMW and Daimler.

Volkswagen's US chief Michael Horn said the company had "totally screwed up" and promised to make amends.

Part-owned by the state of Lower Saxony, VW has shaken off a 2005 corruption scandal involving prostitutes and luxury trips for members of the company's works council. Earlier this year it overtook Toyota as the world's biggest carmaker by sales.

Its path, from its creation in 1937 when it was tasked with building an affordable "people's car" in Hitler's Germany, came to epitomise the country's post-war regeneration thanks to models from the Beetle to the ubiquitous Golf and Passat.

Politicians frequently fete its expansion into the US and China as contributing to Germany's export strength.

Some experts say VW now needs to apply a strategy like Mercedes did after the 1997 "elk test" when a Swedish motor magazine found Mercedes' new A Class tended to flip over when undergoing an evasive manoeuvre test.

Mercedes responded by recalling the cars and adding new safety features but it took time for the brand to recover.

Yet this scandal is different to the "elk test" and other car recalls as it exposes not incompetence but a deliberate attempt to mislead.

After a spate of scandals at German firms and organisations, it is starting to look as if malpractice is not limited to a handful of isolated cases - although Germany is no laggard in international rankings.

Corruption watchdog Transparency International gives VW a relatively high score of 5.5 out of 10 in its ranking of global corporate transparency - a score that put it just outside the top 10 companies. But Germany's image is getting dirtier.

Last year, ADAC, Europe's largest car club, was found to have falsified the results of its coveted annual car award - which had gone to VW's Golf. The order of results had not been tampered with, said ADAC, only the total number of votes but it still caused an uproar in Germany and in the auto world.