Too big to fail. Is Volkswagen systemically important for the German Economy?

Essay, 2016

15 Pages, Grade: 3,0





1 Introduction

2 Systemic Importance
2.1 Definition
2.2 Impacts of systemically important companies on economies
2.3 Examples of government Help in Germany

3 Volkswagen
3.1 Main Facts
3.2 The emissions issue
3.3 Impacts on VW due to the emissions issue

4 Analysis of Systemical Importance of VW

5 Conclusion

Reference list



Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

The Volkswagen Group (VW) is one of the world´s leading automobile manufacturers and the largest carmaker in Europe, based in Wolfsburg, Germany (VW, 2016c). On September 18th, 2015, the U.S. Environmental Protection Agency (EPA) issued a press release regarding a “Notice of Violation” (NOV) of the Clean Air Act (CAA) to the Volkswagen. Due to these recent emissions issues, especially in the North American Regions, an essential question is: “What would happen in case of a failure of VW?” With regard to this question, subject of this academic paper is an analysis whether VW can be categorized as a systemically important company. For this, firstly a definition of “systemic importance” will be given in chapter 2. Subsequently the main indicators, which characterize a company as systemical important, will be introduced. Furthermore various examples of government interverntion in Germany, like for example the rescue of the construction company Holzmann, will revealed at the end of the second chapter. The third chapter concentrates on VW per se. Intention of this chapter is to provide a brief overview of the main facts related to VW. Therefore firstly the key figures of VW will be introduced in terms of volume data like for instance sales volume, sales revenue or workforce as well as in terms of financial data, like for instance operating earnings. Subsequently the key points of the emissions issue related to various diesel engines will be depicted. Chapter 2.3 focusses on the impacts due to the emissions issue on VW. Content of chapter four is an analysis of systemical importance of the VW Group, which will be conducted based on the collected set of information about VW in chapter 3, with regard to the indicators for systemical importance, introduced in chapter 2.1. Subsequently a critical statement on the main question of this academic paper, “Is VW systemically important for the German economy?” will be infered based on the results of the analysis. Finally chapter 5 summarizes the main findings, gained by the analysis of systemical important characteristics of the Volkswagen group.

2 Systemic Importance

Intention of the following chapter is to provide understanding of “Systemic Importance. There in sub-chapter 2.1 firstly a definition of systemic importance will be derived by various indacotors to categorize a company as systemically important. Secondly sub-chapter 2.2 shows impacts of a failure by a systemically important company on economies, which will be clarified by arguments of an in 2013 conducted study by Sean P. McAlinden and Debra Maranger Menk of the Center for Automotive Research. Chapter 2.3 deals with wellknown examples of government help in Germany, like the rescue of Holzmann, the rescue of Commerzbank as well as with the case of Opel, in which the German government declined an intervention.

2.1 Definition

Since the recent financial crisis in 2008 the word „Systemical Importance“ has taken greater significance, especially in context of the regulation of financial markets. With regard to this several definition approaches have been developed in recent years. The majority of definition approaches concentrates on the determination of criteria for systemically important companies in the financial sector. Such companies would in case of insolvency be hazardous for the entire economy of a country. A broader and more general definition has been erected by the „Commission of Experts
for limiting the economic risks posed by large companies“ (SIF, 2010, pp. 12-13). According to the commission of experts, a company can be sector-independently categorized as systemically important as soon as it fulfills the following criteria:

- “The company provides services that are central and indispensable for the economy”
- “Other market participants are not able to replace the systemically relevant services within a period that is appropriate for the economy” (p. 12).

To verify the fulfillment of the above-mentioned conditions, the following three concrete criteria have been formulated by the European Central Bank (ECB) and the Financial Stability Board (FSB), to assess systemical importance (ECB, 2010, p. 149; FSB, 2009, p. 5):

- “Size and market concentration”
- “Cross-linking level”
- “Insufficient substitutability”

To identify the fulfillment of the criteria “Size and market concentration” it is useful to conduct an analysis of the relationship between total assets of the investigated company and the Gross Domestic Product (GDP) of the country in which the company is based. Another approach, especially in systemically important markets such as the financial sector, is the analysis of the company’s market shares. Besides this the “Cross-linking level” of a company has to be considered to, because there might exist a danger of contagion-effects of systemical risks, depending on how complex and distinctive the company is related to other companies in the economy (SIF, 2010, p. 13; FSB, 2009, p. 5). With regard to the criteria „Insufficient substitutability“ especially companies that provide systemically relevant goods or services, such as vital goods are categorized as systemically important, since other market participants are not able to substitute such goods or services in an appropriate period. In the financial sector payment transactions or financial intermediation are examples for economic services that are not substitutable (SIF, 2010, p. 12).

2.2 Impacts of systemically important companies on economies

While the massive impact of a collapse of a cross-linked financial institution is comprehensible, systemical importance of large industrial companies is more difficult to identify. Nevertheless harm on the economy due to an insolvency of a large company outside the financial sector cannot be ruled out. Hence the government would in case of financial distress intervene in large industrial companies, which provide infrastructural services, for instance electricity, gas, oil or telecommunication, since a collapse of such companies could lead to significant harm of the economy. This can be justified since an indefinite amount of market participants would be in case of insolvency affected, although they do not have any contractual obligations with the insolvent company (Jäggi, 2010, p. 6). A further issue with regard to systemical importance of large industrial companies is the large amount of employees in multiple countries. One example is the discussion whether the U.S. government should intervene to save the U.S. automotive industry, since there was a general consens that a failure of General Motors (GM) and Chrysler would cause great harm to the U.S. economy (McAlinden & Maranger Menk, 2013, p. 1.). According to a study of the Center for automotvive Research, job losses were estimated within a range from 2.5-3 million jobs in the first year and 1.5-2.5 million in the second year after the failure. Rising unemployment rates would have an immense impact on the government in terms of a reduction of social security receipts and reduced personal income taxes paid. The estimates of net impact on the government ranged from $49.9-60.1 billion in the first year, and $33.7-54.3 billion in the second year after the failure (McAlinden & Maranger Menk 2013, p. 2.). The mentioned impacts can be economically explained by the fact that a higher umemployment rate leads to leads to less government income, while the government has to simultaniously increase government spending because in addition to the present amount of government spending, the social insurance system has to be rehabilitated by the government. Hence a failure of large industrial compamies could have negative impacts on the entire performance of a country. Furthermore a higher unemployment rate has a negative impact on the revenues of many companies, due to higher savings on the consumer side. As a result companies are forced to ensure their earnings through cost reduction measures (Budde, 2008, p. 11). Furthermore a failure of a large industrial company which can be due to a high cross-linking level categorized as systemical important, would cause significant harm on the smaller suppliers. With regard to the automotive industry and the above-mentioned study, the loss of General Motors and Chrysler business for hundreds, if not thousands, of suppliers would have resulted in an average decrease of 35 percent of revenue, forcing many firms into insolvency (McAlinden & Maranger Menk, 2013, p. 5.).

2.3 Examples of government Help in Germany

A government intervention is often justified by a political interest in persistence of the insolvent company (Rengier, 2014 pp. 76-77). In this context there is a distinction between labor market political reasons, industrial political reasons and competition political reasons (Rengier, 2014, p. 75). The main reason for government assistance is the politcal relevance of market, which is justified by the in chapter 2.2 mentioned impacts of unemployment on government spending (Rengier, 2014, p. 77). Industrial political reasons for government help are given since the insolvent company provides technologies or services which are important for the government, for instance the armor industry (Rengier, 2014, pp. 78-79). Competition political reasons for government rescue are for instance given, if government intervention is necessary to avoid duopols or monopols, due to a high market concentration. With regard to this aspect the rescue of Chrysler has been justified, since a failure of Chrysler would have led to an immense market concentration in the U.S. through the market shares of GM and Ford (Rengier, 2014, p. 79). A popular german example of government intervention was the rescue of the construction company Holzmann in 1999, which was mounted by the former german Bundeskanzler Gerhard Schröder. In cooperation with Deutsche Bank and other financial institutions, Gerhard Schröder developed a package for financial recovery of 4,3 billion Deutsche Mark (DM), which included 250 million DM, contributed by the German government. With regard to this example 14.000 of 17.000 jobs in Germany had been saved. Only three years later Holzmann finally had to file for bankruptcy in 2002 (Brückner and Przyklenk, 2013, pp.106-108). In consequence of the financial crisis in 2008 the German Commerzbank made use of program for stabilization of financial markets, initiated by the German governement, since the increasing risk of risk weighted assets was not sustainable anymore (Pressemitteilung, 3. November 2008). The bank received financial support in the amount of EUR 18,2 billion (Jost and Kunz, 2013). The German governent at the present time still has a stake of around 15% in the Commerzbank AG (Commerzbank, 2016, p. 25). With regard to an international study, published in 2009, government intervention in the financial sector seems comprehensible, since short term cost of an insolvency of a systemical important bank would amount to 15 – 30% of the gross domestic product (GDP) (Vimentis, 2009, p. 1). Due to the financial crisis in 2008 there was a risk that GM as parent company could not be able to provide its subsidiary Opel with liquidity anymore. Opel without proprietary entrance to the capital could get into serious liquidity problems, which would be dangerous for the stability of the company and hence would be a danger for many jobs in Germany (Homann, 2011, p. 80). In this case the result was that no government rescue occured, since the German government was not willing to issue a pledge to ensure the liquidity of Opel. One decisive argument against a bail out was the fact, that GM at this time already had sufficient financial liquidity at its disposal, to restructure its subsidiaries by its own efforts. Furthermore the automotive market was characterized by significant overcapcities. Regarding this government assistance could have led to job losses within other manufacturers, which would have caused massive competitive distortions (Homann, 2011, p. 88).

3 Volkswagen

This chapter explains the main facts regarding Volkswagen. Firstly sub-chapter 3.1 concentrates on the key figures of VW. Sub-Chapter 3.2 gives an overview over the emmissions issue, which came to light in mid-September 2015. Intention of sub-chapter 3.3 is to show the impacts on VW, which are related to the emissions issue. For this, firstly impacts on the share prices will be shown, before the impact on VW´s operating result as well as the charged provisions will be depicted. Furthermore personal changes in managent, related to the emissions issue will be shown.

3.1 Main Facts

Volkswagen AG is the parent company of the Volkswagen Group. Besides the production and distribution of vehicles, it develops vehicles and components for the Group’s brands. As the parent company of the VW Group, Volkswagen AG holds indirect or direct interests in AUDI AG, SEAT S.A., ŠKODA AUTO a.s., Dr. Ing. h.c. F. Porsche AG, Scania AB, MAN SE, Volkswagen Financial Services AG. In addition VW has a large number of further subsidiaries and in Germany and abroad (VW, 2016b, p. 58). As one of the leading multibrand groups in the automotive industry, VW runs business activities in Automotive and Financial Services divisions, which focis on the development, production and distribution of cars, light commercial vehicles, trucks and busses. VWs product portfolio contains motorcycles as well as fuel-efficient small cars and luxury vehicles (VW, 2016b, p.58). As the figure shows (see appendix, Figure 1), VW employed 610,076 with date to December 31, 2015. VW delivered almost 10 Million vehicels to its customers and was able to increase its sales revenues by more than five percent to 213´292 million €. With a total of € -4.069 billion the operating result decreased significantly, due to negative special items totalling 16,9 billion, compared to 12.697 billion in 2014 (see appendix, Figure 1). Without these special items, the operating result would have slightly exceeded the prior-year level (VW, 2016b, p. 7). Divided into market regions unit sales of VW Group moldels increased 2.1% to 4.5 million vehicels in 2015, while sales revenue increased 7.9% to €132.5 billion, compared to the reporting period 2014. Theese effects can be justified due to increase in volume as well as in exchange rate effects.
With regard to North America, the Group sold 0.9 million units, which means 7.0% more than in the year before, while Sales revenue increased 28.1% to €35.4 billion. Even in the North American region theese effects can be justified due to the increase in volumes, the stronger US dollar and positive mix effects. The continiously detoriating economicc environment in the South American region caused negative effects on vehicle sales and sales revenue in this region during the reporting period. Sales volume in the South American region decreased by –32.0% to 0.5 million saled vehicles, while sales revenue decreased by 26.8% to €10.1 billion. This negative development can be described as a consequence of lower sales figures and negative exchange rate effects.
Regarding the Asia-Pacific markets in fiscal year 2015 demand for vehicles of the VW Group was lower compared to 2014. Sales volume, excluding the joint ventures in China since these are accounted for using the equity method, decreased by 7.6% to 35.2 billion. The sales volume, including Chinese joint ventures, was 4.0 million vehicles in 2015 (VW, 2016b, p. 22). Regarding recent regulatory and legal issues as a consequence of the emmissions issue „Dieselgate“, the former chief executive officer (CEO) of VW, Prof. Dr. Martin Winterkorn, resigned his function on September 25th, 2015. With effect from September 26th, 2015 the board of directors appointed Mr. Matthias Müller as the new CEO of the Volkswagen AG (VW 2016a, p. 16).

The subscribed capital of Volkswagen AG amounted to €1,283,315,873.28 at the end of the reporting period 2015. The shareholder structure of Volkswagen AG in terms of distribution of voting rights for the 295,089,818 ordinary shares, was on December 31, 2015 as shown in figure 2 (see appendix). While Porsche Automobil Holding SE, with 52.2% held the majority of the voting rights, the State of Lower Saxony as the second largers shareholder held 20.0%, followed by Qatar Holding LLC with 17.0%. The remaining 10.8% of ordinary shares were held as free float by other shareholders.

3.2 The emissions issue

On September 18, 2015, the U.S. Environmental Protection Agency (EPA) issued a press release regarding a “Notice of Violation” (NOV) of the Clean Air Act (CAA) to the Volkswagen. Content of the NOV was that four-cylinder Volkswagen and Audi diesel cars from model years 2009-2015 include software that circumvents EPA emissions standards for certain air pollutants (Valentine, 2015). In this context a separate and autonomously investigation has been announced by the California Air Resources Board (CARB). These announcements by EPA and CARB have been follwed by various other authorities worldwirde, starting their own investigations. Volkswagen policy released an acknowledgement to irregularities September 22, 2015. (VW, 2016b, p. 49). On September 25th, 2015 EPA updated it announcement in terms of a more detailed description of the mentioned software. According this announcement the affected vehicles contrain cars software that turns off emissions controls when driving normally, while turining these control system on in case of an undergoing emission test. This so called “defeat device” causes emissions ut to 40 times the amount of nitric oxide compared to the boundary values that the standards allow.NOx standards are in place to ensure public health is protected (Valentine, 2015). An additional NOV of the CAA was issued to VW on November 2nd, 2015. The NOV alleges that VW developed and installed a defeat device also in certain VW, Audi and Porsche light duty diesel vehicles equipped with 3.0 liter engines for model years 2014 through 2016. In this case the defeat device causes an increase in emission of nitrogen oxide up to nine times EPA’s standard. The vehicles covered by today’s NOV are the diesel versions of: the 2014 VW Touareg, the 2015 Porsche Cayenne, and the 2016 Audi A6 Quattro, A7 Quattro, A8, A8L, and Q5 (Valentine, 2015). Even in this case CARB issued a letter announcing its own enforcement investigation in this context (VW, 2016b, p. 49). On November 19, 2015 members of the VW and Audi management admitted to EPA that the on November 2nd, 2016 identified issues extend to officials told EPA that the issues all 3.0 liter diesel engines from model years 2009 through 2016 (EPA, 2015). On January 4th, 2016 the U.S. Department of Justice, on behalf of EPA, today filed a civil lawsuit in federal court in Detroit, Michigan against Volkswagen. Content of this allege is that around 600,000 diesel engine vehicles had illegal defeat devices installed. The complaint further alleges that Volkswagen violated the Clean Air Act by selling, introducing into commerce, or importing into the United States motor vehicles that are designed differently from what Volkswagen had stated in applications for certification to EPA and CARB (Allen and Valentine, 2016). VW reacted to these allegations by ordering internal as well as external investigations in order to clarify the facts. For independent and comprehensive external investigation of the diesel issue VW engaged the US law firm Jones Day. In addition the Supervisory Board of VW established a special commtiee that coordinates all activities relating to the emissions issue (VW, 2016b, p. 49). During its internal inquiries of all diesel engines VW additionally found that irregularities with CO2 emission of several engine types could have been possible. Only one month later, on December 9, 2015 VW announced that the possible irregularities had been clarified (VW, 2016b, pp. 52-53). As reaction to these internal inquiries of the diesel issue VW amongst others resolved to make comprehensive changes to testing practices on the technical side. Hence, VW has decided to engage exclusively independent third parties to evaluate emission tests in the future. Furthermore real-word random tests of emissions on the road will be introduced (VW, 2016b, p. 51). Besides this various technical solutions have been prepared to to counteract the increased emissions (VW, 2016b, p. 50).

3.3 Impacts on VW due to the emissions issue

After the emergence of the emissions issue, both classes of shares, preferred shares as well as ordinary shares, fell significantly in mid-September 2015 (VW, 2016b, p. 102). With a highest daily closing price of €255.20 on March 16, 2015 and a lowest daily closing price of €92,36 on October 2nd, 2015, preferred shares closed the end of 2015 at €133.75, which means a year-on-year decrease of 27.6%. The ordinary shares also reached their highest closing price of €247.55 on March 16, 2015, while the lowest daily closing price for the year 2015 with €101.15 was recorded October 2, 2015. Compared to the 2014 closing price, the ordinary shares decreased by 21.0% at a closing price of €142.30 on the last day of trading in 2015 (VW, 2016b, p. 103). With regard to the operating result for 2015, VW had to charge provisions totaling €16.2 billion to operating result, primarily for pending technical modifications, for repurchases, and customer-related measures as well as legal risks (VW, 2016b, p. 53). The majority of these provisions accrue on various legal risks, associated with the diesel issue, which partially subject to substantial estimation risks. The difficulty of estimation these legal risks is given by the complexity of the individual factors, the ongoing approval process with the authorities and the fact that the comprehensive, exhaustive investigations have not yet been completed (VW, 2016b, p. 53). Moreover the emissions issue caused several personal changes within the VW Group. One of the most important was the already mentioned resignation of Prof. Dr. Martin Winterkorn, who was followed by Martin Müller as new CEO of the VW AG. As an internal consequence in view of the diesel issue, the Group Board of management announced a realignment of the group, which contains for instance involves that the VW management will be more decentralized in future, with greater independence for brands and regions as well as a realignment of culture and management practices, defined by open and honest communication, a constructive approach to dealing with mistakes and greater courage (VW, 2016b, p. 54). Regarding the first Quarter of 2016, VW Group started the year with an enhanced sales volume. In the first three month 2,5 million have been delivered to customers, which means a plus of 0,8% compared to ther first Quarter of 2015. Except of Volkswagen, all brands within the VW Group have been able to increase their sales singnificantly in the first quarter. Due to the lasting success of Audi and Porsche, the decline in sales was within limits in the United States on an overall view (VW, 2016d, p. 1).


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Too big to fail. Is Volkswagen systemically important for the German Economy?
Private University of Applied Sciences Goettingen
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VW, Dieselgate, Too big to fail, Volkswagen
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Anonymous, 2016, Too big to fail. Is Volkswagen systemically important for the German Economy?, Munich, GRIN Verlag,


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