Volkswagen’s share price seems to have reached its lowest ebb, after a 35% drop on Monday and Tuesday.
But the emission scandal that has engulfed VW is far from over — and far from limited to just the German car maker.
In the aftermath of the revelation that VW’s was juicing the emission figures for its diesel cars, analyst have been trying to work out just how badly it will hit the company and Europe’s car manufacturing industry more widely.
The answer? Very badly.
To recap: the US Environmental Protection Agency (EPA) announced on Friday that 500,000 vehicles on US roads that had initially passed emissions tests were actually in violation, after more rigorous real-world tests.
It’s since emerged that this happened because of a clever piece of software that could identify when it was being tested and reduce harmful exhaust so it looked like the cars met requirements
Speculation began over the financial hit the company could take, with a potential fine running to $US18 billion (£11.76 billion).
But the problems go further than just fines, say analysts, and won’t even end with VW — every major auto maker in Europe will feel the pain.
In fact, they already are. While Volkswagen lost a third of its value in recent days, the Euro Stoxx 600 automobiles & parts index has dropped 10%, signalling that there is something of concern about the whole industry:
Bernstein researchers Max Warburton, Yu-Yu Lin, Robin Zhu and Gavin Kennedy called Volkswagen “the Lance Armstrong of Automakers,” a veiled jab at the doping scandal that engulfed professional cycling.
In a September 20 note, Bernstein interviewed an ex-EPA emissions export, who told them he didn’t know if other firms would face the same issues: “I would hate to accuse another OEM of any wrong doing without some justification.”
But he added: “I am quite sure, however, that other German OEMs’ products will be looked at using Portable Emissions Analysers on the road. There’s blood in the water.”
In a follow-up note on September 22, Bernstein said there’s a serious risk that not only would VW be found to have been doing something similar in Europe, but that “the whole industry is likely to face a rapid increase in test standards, intensity, and enforcement,” leading to lower profitability.
The good news for VW is analysts seem to agree that there’s far less risk of a massive fine, simply because the US regulators are much more clear that what the company has done is completely forbidden.
In the words of Bernstein’s researchers: “The ambiguity of the European rules suggests to us that even if VW were found to have used complex software to ‘cheat’ the tests, it would be difficult to fine the company.”
But the reputational damage and scrutiny from angry regulators is likely to be severe.
Even without the US’s regulatory infrastructure, European ministers have been climbing over each other to express their outrage. Barclays researchers summed up some of the reactions:
- “France: Environment Minister Segolene Royal has announced a comprehensive investigation as to whether VW bypassed regulations in France”
- “Italy: Environmental Minister Gian Luca Galettii has asked VW for evidence that it has not tampered with its Italian-sold cars — and has said that otherwise it should recall the vehicles and stop selling them in Italy.”
- “UK: Transport Secretary Patrick McLaughlin has called for an EU-wide investigation.”
What almost everyone agrees on is that regardless of what happens with European fines, the regulatory regime is about to get tightened severely. The “real world” tests that tripped up VW will become EU-standard in 2017, and there will undoubtedly be political pressure to make them as stringent as possible.
European auto manufacturers have invested billions in the image of and technology behind diesel cars, and this scandal risks unravelling a huge amount of that. The idea of “clean diesel” may become as tarnished as the idea of responsible financial capitalism was after 2008.
In fact, what’s about to happen to the auto industry may be similar to what happened to banks in the post-financial crisis era. Difficulty finding growth markets, a pile of additional regulation, and constant reputational concern about the industry will all drag on performance for years.
A research note from Deutsche Bank’s auto analysts shows how damaging the effect of additional regulation could be on the company, and by extension every other auto manufacturer with a similar structure:
We think the impact on the operational business — namely volumes, residual values, pricing and costs — is even harder to estimate and is the key concern here. A main element of our buy case had been significant cost cuts. We now believe that rising costs for diesel cars will offset most of the effects. Most importantly, we have taken a more cautious stance on the growth outlook for VW and Audi and believe pricing will come under pressure due to the reputational damage.
The scandal is just the latest headwind for the auto industry, particularly in Germany. Companies like VW found growth in China during the stagnant post-crisis years in the west, but frothy expectations for that expansion are rapidly cooling. Some economists think in the years ahead China will be unable to grow much faster than 3-4% per year, as little as a third of the rate it often recorded before the crisis.
Without Chinese consumers driving sales, and with a huge crackdown from regulators around the world, Europe’s car makers could be facing a brutal few years ahead.
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