VW in Mexico Doing Well Despite Emissions Scandal

By Graeme Stewart

The Volkswagen gas emissions scandal was one of the biggest business stories of 2015, sparking outrage and dismay in the industry. But how have the revelations affected VW in Mexico?
There is one very qualified man to answer that question and that is Thomas Karig, Corporate Relations and Strategy Vice President of VW Mexico, a man who has spent more than 30 years with VW in Mexico.
MexicoNow caught up with him at the MexicoNOW’s Automotive Summit held recently in Leon, Guanajuato and the German told us: “Up until now, we have been producing normally, though of course we have to wait to have more data, especially from the US market. It also depends on how fast we can reach an agreement with the authorities in the US but the intention of the company is to move forward in the US market which is still one of our biggest growth opportunities.”
For anyone who has been living in a cave for the past year or so, here is a brief update on what happened: Volkswagen is being sued in the US in a claim that could see it facing penalties of more than US$20 billion, dwarfing the amount the car maker has set aside to cover the fallout from its emissions scandal.

Acting on behalf of the Environmental Protection Agency, the Department of Justice filed a civil complaint in the Detroit Federal Court alleging nearly 600,000 VW cars with 2 and 3-litre diesel engines had “illegal defeat devices installed that impair their emission control systems and cause emissions to exceed EPA’s standards, resulting in harmful air pollution”.

VW – which also includes the Audi, SEAT and Skoda brands – has admitted fitting cars with devices which recognize when emissions tests are being carried out and turn on full pollution controls.

However, in normal driving conditions they are switched off, meaning up to 40 times the permitted amount of pollution is pumped out.

The scandal wiped US$15bn off VW’s market value when the company said it had fitted cars with the “defeat devices” and its troubles worsened when it admitted up to 11million cars worldwide could be affected.

The lawsuit reveals that VW could be fined up to US$37,500 for each affected car and up to US$2,950 per defeat device, theoretically putting VW in line for a hit well in excess of US$20 billion. The company said it had set aside €6.7 billion in provisions to cover the costs of the scandal and at that time VW said it expected to face criminal and civil charges from national regulatory authorities, class action or individual civil lawsuits from customers, and class action or individual civil lawsuits from investors.

The US lawsuit warns “all appropriate remedies against VW will be pursued” as it seeks “redress for violations of clean air laws.”

Mr. Karig was well aware of the need to revise VW’s corporate image and he said: “We have to launch new models as fast as possible. There are several new models coming in 2016 and 2017 and we have to get them on the market as quickly as possible. I’m not going to pretend that it won’t take some time to get over the scandal and next year will be complicated but there are projects that have already been decided on. For example, the T1 production, different to the European T1, will be produced in Puebla for the world markets.”
“That will be a very important project which gives a mid-term prospective that is positive for the company.”
Always the optimist, a glass half full kind of guy, Mr. Karig continued: “But I have to say that, despite the scandal, 2015, especially in the Mexico market, has been very good for VW. The Mexico market has been exceeding expectations. That’s something we always predicted and hoped for because we know that this market has a huge potential and we are very optimistic that the trend will continue over the next couple of years, especially as the Mexican Government has taken decisive actions against importing used cars in big numbers from the US.”
According to AMIA, the National Association of the Automotive Industry, VW sales in Mexico in 2015 reached over 218,000 units, up almost 12% from 2014; but exports decreased 1.18% in 2015 from 2014 to 393,263 units.
“Also, the amount of credit available to the Mexican customer has increased to 20 per cent so the Mexican market has been a very positive story. In fact it has been outstanding, especially in a Latin America context.”
“Of course, Mexico is a vital part of the North American Free Trade Association but in market structure, Mexico is more like other Latin American countries.”
And he had this to say on the supply chain, logistics and infrastructure: “The supply chain is something we have been working on for decades, always trying to increase our Mexico and North American value added. With every new project, we take a step further towards more integration and as the industry grows, it attracts a lot of new suppliers. It’s also attracting a lot of other German companies as you now have Audi, BMW and Mercedes which increases the attractiveness for production, and also for medium sized companies, in a very important way.”
“Logistics and infrastructure are always a challenge, especially for them to keep up with the growth of industry, but we also have to recognize that a lot has been done over the past 10 years so that today, in general terms, we have no operation problem in terms of logistics but we are seeing that as the industry continues to grow, we must be in very close contact with the Mexican government to ensure that the authorities make the necessary decisions in time so that we don’t have bottlenecks in the future.”
“But I think they see that and in the talks we have had with the Mexican government, they seem to have a clear picture of what has to be done. Of course, it is something we have to follow up very closely.”
A final word on the Big Issue: “Coming back to the situation of Volkswagen, I think we are doing everything necessary to remedy the situation both for the clients involved and those that are in possession of those cars. For Europe, the remedy has already been finalized. We are very clear what has to be done in Europe and the next step will be for VW to reach an agreement with the US authorities for the US clients.”
“This will also be a catalyst to make important changes in the structure of the company and I am confident that at the end of it all, in a couple of years’ time, Volkswagen will be a better company.”