Effects of the 2015 VW emissions scandal on non-VW German automakers

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The 2015 Volkswagen emissions scandal wasn’t just a blow to VW’s reputation, but it also severely damaged other German automakers’ reputations and profits, according to a working paper released by the National Bureau of Economic Research.

Researchers found that Volkswagen’s wrongdoing reduced US sales of other German auto manufacturers – BMW, Mercedes-Benz, and Smart – by about 105,000 vehicles – worth $5.2 billion.

According to the abstract of the paper, “The decline was principally driven by an adverse reputation spillover, which was reinforced by consumer substitution away from diesel vehicles and was partially offset by substitution away from Volkswagen.”

Rüdiger Bachmann at the University of Notre Dame, and his co-authors said:

“We find that the VW scandal reduced the sales of the other German auto manufacturers.

“…Specifically, the overall effect on those manufacturers amounted to a decline in sales of 104,661 vehicles valued at $5.2 billion in 2016, based on the list prices in the data.”

Volkswagen was the most profitable automaker in 2015. In 2014, the company reported net profit of €2.5 billion.

One of the reasons it was so successful was the reputation it had built for its efficiency and reliability. The company would often highlight the value of “German engineering” in its advertisements.

However, VW’s hard-won reputation among consumers corroded after it was discovered that the automaker had used ‘cheat’ or ‘defeat’ devices in diesel engines to manipulate emission tests.

Substitution away from VW for cars by other German automakers wasn’t enough to offset the collective reputation damage 

The paper’s authors noted that substitution away from Volkswagen should have increased demand for other German cars. However, this substitution away wasn’t enough to overcome the negative reputation effect of the scandal, suggesting that even though BMW and Mercedes weren’t implicated in the scandal, their sales took a severe hit because of their association with VW.

The researchers concluded that collective reputation matters.

“Our paper shows that the scandal’s effects on non-VW German automakers were unlikely to be driven by information. Rather, the scandal must have tarnished the reputations of the other German auto manufacturers through their association with Volkswagen, consistent with the notion of a collective reputation,” the authors write.

Citation

“Firms and Collective Reputation: a Study of the Volkswagen Emissions Scandal” – Ruediger Bachmann, Gabriel Ehrlich, Ying Fan, and Dimitrije Ruzic – NBER Working Paper No. 26117 – July 2019.