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VW Owners in Malawi Aren’t Going to Like the Fixes for Their Diesels

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German carmaker Volkswagen has announced that it will make a provision of 6.5 billion euros ($7.3 billion) in the third quarter following the revelations last week that it had misled authorities over the emissions of its diesel cars.

The company added Tuesday that this provision was subject to revaluation and that it was working with the relevant authorities to clarify the irregularities in the software that recorded emissions in the carmaker’s diesel engines.

Up to 11 million vehicles could be affected in the scandal, the German auto giant added.

Frankfurt-listed shares in Volkswagen closed down nearly 20 percent on Tuesday on the news of the profit warning. This followed declines of 18 percent on MOnday.

The scandal surrounding Volkswagen‘s emissions data has raised fears that damage may not be limited to the automaker. There could be another casualty: Germany’s hard-won reputation for reliability, efficiency and trustworthiness is at stake.

Handelsblatt, the German financial newspaper, dubbed the scandal “eine Katastrophe für die gesamte deutsche Autoindustrie” (“a catastrophe for the entire German car industry”) in an editorial Monday, and with good cause.

Vorsprung durch Technik (advancing through technology) may have originally been an Audi slogan, but it came to epitomize much of what was believed about German manufacturing capability and reliability across its car industry, the cornerstone of Germany’s post-war economic miracle. Close to a fifth of German exports are in some way linked to the industry.

The Volkswagen scandal looks set to permanently damage that image. Small wonder that Germany’s politicians are calling for blood, with Lower Saxony’s Economy Minister Olaf Lies warning of “personnel consequences” already.

Deutsche Bank, Germany’s largest bank, downgraded its forecast for the entire Dax index in 2015 on Wednesday, as the scandal unravelled. Deutsche analysts described it as a “huge head-wind to our current view” on the DAX and downgraded their forecast for the index to 10,300 at the end of 2015.

“The whole structure of the VW company looks a bit strange,” Ferdinand Dudenhöffer, professor at the Center for Automotive Research, Universität Duisburg-Essen, told CNBC, as he called for an outside appointment to solve the scandal.

There have even been calls for a special debate in the national parliament over the issue. The German state of Lower Saxony still owns around 20 percent of Volkswagen – a shareholding which has lost close to a fifth of its value since Monday morning.

The escalating scandal was big enough to drag the country’s entire stock market down on Monday, while stock markets elsewhere in Europe rebounded from a week of uncertainty surrounding the U.S. Federal Reserve’s decision on interest rates.

“We expect a widening scandal and an economic impact,” Wolfgang Munchau, president of Euro Intelligence, warned in a tweet Tuesday.

There are concerns that, much like the Libor scandal was initially publicized by Barclays but then found to include other top investment banks, the emissions tampering will not have been confined to Volkswagen. Other manufacturers with diesel as a large part of their business include BMW, with 35 percent of its fleet; Daimler, 45 percent;PSA Peugeot Citroën, 40 percent; and Renault Nissan, 25 percent, according to JP Morgan estimates. The European industry will be disproportionately hit if this is found to have been a problem across the diesel automakers.

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Sean Gallup | Getty Images News | Getty Images

As German automakers have been trying to convince the U.S. of the delights of “clean diesel”, a field where they can claim to lead, analysts are worried that these revelations will likely taint their claims for decades.

South Korea – where Hyundai, one automaker that could benefit from the VW fallout, is based — has already announced that it could expand its investigation of VW emissions to potentially include other German manufacturers.

Volkswagen has already come through one high-profile scandal, involving bribery, brothels and a high-profile trial, which shone an unedifying light on German corporate culture. If this carmaker, potentially the brand most associated with Germany, faces charges which cannot be dismissed as the work of a few rogue employees, the consequences may be felt across German industry.

– By CNBC’s Catherine Boyle

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