“Problems Likely to Snowball from Here,” at World’s Second Largest VW Factory

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

Mexico, the biggest provider of VW vehicles to the U.S. market, is particularly exposed to the spreading fallout. As WOLF STREET warned in the immediate aftermath of the crisis:

When Volkswagen struggles, so does the state of Puebla. The huge manufacturing plant built on the city’s outskirts 50 years ago provides roughly a quarter of local GDP. Its supply chain consists of 150 companies, generating 78,000 jobs – most of them secure and highly paid, at least by local standards. What’s more, Volkswagen recently built a huge new state-of-the-art plant for its Audi subsidiary in San José Chiapa, Puebla.

In the words of my mother-in-law, a born and bred Poblana, there is not a single family in the city of Puebla that does not have some level of exposure to the VW plant.

Now Puebla’s worst nightmares are beginning to come true. VW has already cancelled Saturday shifts at its Puebla plant, the largest factory producing VW vehicles outside company HQ, in Wolfsburg, Germany. The news has predictably fuelled fears among the company’s 15,000 workers about the security of their jobs.

“Volkswagen has shafted us all,” 29-year old Alfredo Rodríguez told EL Financiero. He’s afraid that as a relative newcomer to the plant he will be among the first to be laid off.

The company has already put a halt to all new staff hirings, according to Mexico’s Chamber of Commerce. VW is yet to comment on how it plans to manage the global withdrawal of the roughly 11 million diesel cars containing the “defeat device” that deceived consumers and regulators in the US and elsewhere for years. Around 20% of the 207,000 vehicles dispatched from Puebla to the U.S. market in 2014 contained the device.

“They are going to reduce production,” warned José Quintana, president of the workers union Coparmex. “Both at state and local government nerves are fraught because they have bet everything on Volkswagen and the new Audi plant.”

The State of Mexico has offered to soften the blow by buying 200 cars straight off the production line, which will be used as police patrol cars. Unfortunately, 200 cars are unlikely to make much of a dent in the company’s coming shortfall, or by extension save much in the way of local jobs

The problems are likely to snowball from here, said Armando Soto, the president of Kaso Associates, a Mexico City-based automotive consultancy. If vehicle exports fall, it will “affect both the GDP and economic performance” of Puebla. The state has been one of Mexico’s fastest growing regions, attracting investment – in particular in the real-estate sector – from many of the country’s more unstable (that is, narco-infested) regions.

Turning a Crisis into a Disaster, the Spanish Way

Another country that has fallen prey to the VW blues is Spain, where Volkswagen manufactures Seat cars (in Catalonia) and has (or at least had) plans to expand production of its Polo model in the northern region of Navarra. The company’s total investment in the country is (or was) expected to reach €4.2 billion by 2019, roughly €3.2 billion for SEAT and €1 billion for the Polo plant in Navarra.

Since the scandal broke, everything is up in the air. Or at least it was until yesterday, when Spain’s heroic Minister of Industry, Energy and Tourism, José Manuel Soria, came back from a meeting with assurances from the Volkswagen Group’s new president and chief executive, Matthias Müller, that all the projects in Spain were “guaranteed.” On one proviso: that the government promises to keep plying the two plants with generous public subsidies to support VW’s “innovation.”

The triumphant news was cause for celebration in a nation that has been decimated by unemployment. Spain has consistently placed second in unemployment rankings for both the EU and the OECD. Only Greece is worse off. Just six moths ago, Spain was proud home to the five European regions with the worst levels of unemployment. Even now, at the height of Rajoy’s “economic miracle,” the national unemployment rate still hovers on the wrong side of the 20% mark.

Unfortunately, the Minister’s champagne moment did not last long. Within hours, a seemingly irate VW spokesperson had spoken to an industry magazine denying his claims, saying that the company had “made no commitment to guarantee its investments in Spain.” As La Vanguardia reports, the car company was far from pleased that the Minister had spoken so openly and indiscreetly about the government’s plans to subsidize Volkswagen’s activities.

In principle, state assistance for private corporations is illegal in the EU; in reality, it is permitted, but only to support innovation. What kind of innovation? Does it include the sort of innovation that is designed to deceive consumers and regulators worldwide about the true extent of pollution emitted by millions of vehicles? We don’t know either.

Given that VW is responsible for one of the most audacious corporate frauds of this century – all made possible by cutting edge “innovation” – the last thing the company probably wants right now is to be seen pressuring a government into forking over corporate subsidies for “innovation.”

Nor does it look good for the government, which in its haste to please voters has ended up putting at risk vital business investments in the country.

“It seems that the government’s electoral campaign is more important than the interests of the country’s workers and citizens,” said Matías Carnero, the president of Seat’s business committee, adding that the Minister’s intervention had “pissed everyone off.”

The Volkswagen blues has only just begun. By Don Quijones, Raging Bull-Shit.

Big Brother leashed? Read… Did the European Court of Justice Just Torpedo the Mother of All US Trade Agreements?

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  7 comments for ““Problems Likely to Snowball from Here,” at World’s Second Largest VW Factory

  1. Bruce Adlam says:

    Yes governments and big business have a lot to answer for. The mismangement of the us and the world economy is criminal. The sad fact is they won’t end up in jail for it. They will end up being paid off what justice is that. Which is why the world keeps making the same mistakes

  2. hoop says:

    Wondering if the chairman who now left with a few million will keep all. I assume he is responsible for the damage. I think he will have to file for personal bankruptcy.

    • night-train says:

      Hoop: The former VW chairman is a member in good standing of the kleptocracy. They take care of each other. Us little fish are the only ones who are sacrificed at the alter of greed. They will find some lower echelon hapless manager to throw to the wolves of Wolfsburg. Pun attempted.


  3. MC says:

    I strongly suspect the EU will have to change the law regarding subsidies from “innovation” to “survival”.
    I am strongly convinced the US Government, for political reasons only, has decided to make an example of VAG. There are rumors the inevitable fine will be on the crippling side: from as “little” as US $10 billion to as high as US $18 billion. Switzerland will also impose a fine and, most likely, put VAG executives to trial. And this is without taking into account the lost sales and how much it will cost to recall/buyback all incriminated cars. To this it must be added the stock carnage. During this week worldwide rally, based on absolutely nothing as the past few ones, they rebounded somewhat and are now a smidge over €100. Considering the were trading at well over €160 before the scandal broke out it’s nothing to write home about.
    And finally there’s the issue of credit: VAG at the moment still cannot issue new bonds. It has to make do with bank loans and whatever cash they have at hand.

    I am personally convinced in the EU VAG will get away with nothing more than a slap on the wrist and the promise to “never do it again”: too much rides on German exports and cars at the moment to allow something as trivial as the most embarrassing corporate scandal of the past decade to stand in the way. Also, should authorities go all the way, they may uncover things nobody really wants to see, like where that so called cheat code came from, who authorized its use and who knew all along.
    Other manufacturers, which are just as guilty, will get a free pass with just a quiet warning of not being caught red-handed in the future.

    Now if you forgive me I have to go fill up on oxygenated (ethanol-laced) fuel: it’s more expensive that regular gasoline, it spoils fuel mileage and it fattens ruthless corporations. But, hey, it saves the Planet in exactly the same way VAG cars do.

  4. Sam Grant says:

    Excuse me? Martin Winterkorn, former CEO of Volkswagon, did not resign with a few million. He resigned with $32 million!!! The kleptocracy indeed take care of their own.

  5. Real unemployment in Spain is higher than the actual unemployment in the United States. Half of the statistics is comprised of people collecting benefits and work informally without their employers pay taxes and social charges . Beyond that , it is true that the Volkswagen affair has just begun.

  6. nonplused says:

    I suspect that all turbo charged engines including gasoline engines exceed NOX limits when on the road. You just can’t go to those compression ratios without making it, especially in a lean burn scenario where there isn’t enough fuel to consume all the available oxygen. Urea seems to be the only solution but it isn’t currently installed on anything smaller than a 3/4 ton truck.

    So, this is a witch hunt. Politics are at play. They aren’t going to hook these NOX detectors up to a Ford Eco-Boost engine because they aren’t after Ford, they are after Germany.

    Also, if you have experience with diesels, you know that the first thing the dealer itself recommends when you bring it in for work after the warranty expires, is to delete the emissions controls. It is a simple update to the computer code. Until the warranty expires they are required by law to fix it if the sensors or whatever breaks, but once off warranty why spend money on something that reduces fuel economy and performance considerably? Just change the computer program.

    The urea vehicles are mostly still all under warranty but I’m guessing once they start coming off warranty they will offer a delete for that too. It’s just a simple change to the computer code, an “update” if you will, and then you don’t have to fill the urea tank anymore.

    Urea wouldn’t be so bad if you could just pee in the tank but apparently it has to be highly concentrated.

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