Volkswagen dieselgate: how a brilliant software cost the german company €30+ billion

Miriam Ferrara

Like a magic trick, illegality disappeared, as did dangerous emissions, while the environment suffered. Let’s find out together how a game that last year cost Volkswagen shocking losses in money and reputation. 

I recently came across Dieselgate and, surprisingly, it turned out to be one of the costliest corporate scandals ever. In this piece of article, we will go into further details, we will discover how a corporate failure turned into a € 30 billion financial restructuring. Which factors had the greatest economic impact on the company? What happened to the company’s stocks soon after the breaking news? 

In 2006, when it became clear the engine of Volkswagen’s car couldn’t meet U.S. emissions standards without compromising performance or cost, engineers began developing and implementing the defeat device. The cheating software was deployed for the first time in 2008, with the introduction of Volkswagen’s EA189 2.0-litre TDI engine, later used for the 2009 model year. Thanks to the system embedded in the engine control system, when the car was being tested in a laboratory, it turned into a “low emissions mode”, but once it returned to normal driving conditions, the software turned off the clean mode, allowing the engine to emit far higher NOx levels. Essentially, cars behaved legally during tests and illegally on the road. 

A crucial point is that Volkswagen had built much of its global strategy around diesel engines, meaning that these were essential for the company’s profitability and market position. In Europe, where fuel prices are high, VW marketed this as a sustainable, cost-saving alternative, while in the U.S. “Clean diesel” was promoted as a technology that balanced performance with environmental responsibility, aiming to differentiate itself from Japanese hybrids. 

Diesel models were generally more profitable because of their higher prices, higher margins and strong loyalty in the key markets, such as Germany, France and the UK. This supported Volkswagen’s goal of becoming the world’s largest car manufacturer, so undermining it threatened both revenue and long-term strategy. Volkswagen eventually admitted that approximately 11 million vehicles worldwide contained the defeat device software, with around 600 000 vehicles in the U.S and the remaining 8.5 million in Europe; this design choice created a cascade of financial consequences. 

The bulk of the damage stems from U.S. financial costs, even though only a small fraction of the affected cars were sold there. Here, buybacks and customer compensation were the single largest expense (around $ 10-12 billion). Moreover, the company bought back vehicles at a market value calculated before the scandal caused depreciation, which, added to expenses due to storage and disposal of cars, made the financial consequence catastrophic. In the U.S., Volkswagen also faced simultaneous criminal and civil actions; in particular, the company was charged a $2.8B criminal penalty for conspiracy and violating environmental laws and a $1.5B civil penalty for breaching the Clean Air Act. Two mandatory programs added major costs beyond fines: the Environmental Mitigation Fund received $ 2.7 billion, and Electrify America received $ 2 billion to fund national charging infrastructure and EV awareness programmes. Finally, U.S. dealers were compensated for loss of inventory value, damaged brand reputation, lower sales volumes and costs associated with holding unsellable vehicles for approximately a $ 1.2 billion expense. 

On the other hand, Europe had a much lighter reaction. Causes of expenditures were the same as in the U.S., but the total amount (of only € 3-5 billion in total) was much lower than the U.S. financial cost. This is because of a less powerful class action system, lighter emission regulations and less political pressure for corporate accountability. 

Other crucial expenses included legal and compliance costs, which exceeded $ 5 billion. Shareholder lawsuits were extremely crucial, given the high defence costs and huge compensation. Defence and litigation costs across dozens of jurisdictions also proved financially significant as simultaneous legal actions require large teams, multiple appeals processes stretch costs over years and criminal investigations require extensive document review and interviews. Moreover, in this case, Volkswagen couldn’t benefit from economies of scale as every country had different legal systems and regulations. 

Last but definitely not least, stock prices and Volkswagen's position in the stock market were widely affected by the Dieselgate. “Volkswagen shares have lost more than a third of their value since the scandal broke out on Sept. 18,” said Stuart Pearson, Senior Auto Analyst, Exane BNP Paribas. It was, in fact, September 18, 2015, when markets reacted violently to the EPA’s notice of violation. Volkswagen's ordinary shares fell ~30-40% in just two trading days, while the market cap dropped by € 25-30 billion almost overnight. After the initial crash, the stock did not bounce back quickly; between 2016 and 2017, shares traded were 25-35% below pre-scandal levels; by 2018, shares had regained part of their losses, but still remained below the pre-2015 levels. 

What matters the most is that right after the scandal, Volkswagen instantly became less valuable in the eyes of investors. The company’s perceived financial strength was reduced (because of the low market cap), bargaining power with lenders, suppliers, and strategic partners was extremely weakened, the cost of issuing new debt increased (which hit an automaker hard because it operates in a capital-intensive industry). Finally, the company scaled back or delayed some projects to maintain cash buffers and stopped using its stock for strategic moves. 

In conclusion, Volkswagen overcame Dieselgate by containing financial damage quickly, rebuilding governance and compliance (creating new risk, audit and ethics systems) and pivoting aggressively toward electric vehicles. These are the steps that allowed the German firm to regain the investors’ trust and reposition itself for long-term growth in a rapidly shifting automotive market. 

“Volkswagen’s response to Dieselgate shows how a company can turn a scandal into an inflexion point. The shift toward electrification wasn’t optional—it became central to rebuilding credibility.”

- Ferdinand Dudenhöffer, Director, Center for Automotive Research (CAR), University of Duisburg-Essen 

“ChatGPT-5” was only used for research purposes and to brainstorm structure; All analysis and fact-checking are my own.