After the emissions scandal, what’s down the road for Volkswagen, the motor industry and the DAX?
If you had been asked to place bets a couple of weeks ago on which global giant was about to be hit by a multi-billion dollar scandal, who would your money have been on? Another major bank perhaps? A creative tax ruse on the part of a mega online retailer? Or how about oil?
Few, if any of us would have had Volkswagen in the running. Such is (or perhaps, was) the brand’s reputation for reliability, efficiency and no-nonsense quality, it just didn’t seem the type of company that would be exposed to self-inflicted damage on a big scale. If it proves anything, it’s that even if you are clued in to the fundamentals of any particular industry or market, you never know for sure what’s down the road.
So with a shake-up of the motor industry afoot, traders are faced with a fresh bundle of possibilities. How do I spot when the VW share price has bottomed out? Is now the time to get bearish on this manufacturer’s competitors? Should I rethink my whole attitude to the DAX? Here are some points to help you keep things in perspective.
What happened to Volkswagen: a recap…
Dubbed “diesel dupe”, the story emerged when the U.S. Environmental Protection Agency (EPA) declared that 482,000 cars in the U.S. had devices fitted that could detect when they were under test conditions and change their performance accordingly to alter emissions readings. Models covered by the findings included the VW Jetta, Beetle, Golf and Passat as well as the VW-manufactured Audi A3. It transpired that about 11 million cars worldwide are fitted with this software.
Between the story breaking on Friday 18th September and the following Tuesday, the Volkswagen AG stock price tumbled from €162 to €106. A brief rally was to follow, before further falls, with the stock currently languishing around the €100 mark.
Assessing the likely cost of all of this is still very much a work in progress. VW chiefs are currently preparing to testify before US politicians while the EPA and similar bodies on this side of the Atlantic work out their next steps. VW was quick to announce that it had earmarked €6.5bn to cover costs, although it soon became clear that the total bill is likely to be way higher. Taking the U.S. alone, the EPA has the power to levy a fine of up to $37,500 for each vehicle in breach of the standards, raising the potential for a maximum fine in the region of $18bn.
What will happen next?
The immediate reaction was inevitable; a dumping of shares on a huge scale. Partly there was a knee-jerk element here, but at the same time, traders were either consciously or unconsciously pricing in the broad possible ramifications of all of this for the company. Now that the dust has settled from the initial stampede, traders need to take a long hard look at precisely what VW is faced with and the extent to which further this is reflected in the current price.
Will VW survive?
First comes the big question. Is what has happened enough of a blow to topple the world’s biggest vehicle producer? At present, it’s too early to say. The cost of vehicle adjustments, repayment of emissions subsidies, civil and criminal penalties is yet to be assessed. So too is the wider impact on the company’s brand image.
Credit Suisse has produced three scenarios taking all of this into account. The baseline suggests likely costs of just over €40 billion. The best possible scenario suggests a bill of €23 billion and the worst case sees the German company faced with €87 billion. The same assessment also suggests that even if the best case scenario were to unfold, the company’s share price is currently still overvalued to the tune of about 20%.
But remember also that this is a company with a global workforce of approximately 600,000 people, not to mention its partners and affiliates. The EPA and similar bodies, while seeking their pound of flesh, are perhaps unlikely to go so far as to sanction VW into bankruptcy.
What about sales?
While regulators and courts may be talked into structuring fine and damages repayments in such a way as to allow ‘business as usual’, the public may take far more convincing.
Is this serious enough to turn people off VW in big numbers? The jury’s out. Optimists would say that at least VW hasn’t been caught tampering with what consumers really care about; i.e. safety and efficiency. As such (or so the argument runs), VW’s core value proposition hasn’t been completely scuppered by this. But then there’s the wider issue of consumer trust. Even though emissions may not be top of the list of consumers’ priorities, the air of toxicity that this saga leaves behind could quite possibly be enough to leave the company fatally wounded – have drivers just discovered a possible reason why they never seem to get the mileage quoted in their handbook? No consumer appreciates being lied to.
But VW isn’t the first car manufacturer to be faced with a calamity. Back in the 1980s, Audi was hit by a faulty brake scandal that threatened its existence. Between 2009 and 2011, Toyota had 9 million recalls on its plate. Both companies lived to tell the tale.
Right now, VW is only going to appeal to traders looking to take very short term positions. The profitable outcome of any such transaction will depend on reactions to company announcements, data releases and developments elsewhere. Before taking a position, look out for the following:
- Personnel changes. The company has already taken on Porsche boss, Mathias Muller. Are any other changes on the cards and will these inspire confidence?
- Regulator and legal announcements. What will law enforcers do next and are these steps more severe or lenient than the market anticipated?
- Sales figures. Are consumers surprisingly ambivalent to the whole episode – or are they turning away in droves?
Going forward, it’s a case of finding out what developments are in the pipeline and taking a view on how the markets are likely to react.
The motor industry
In terms of stock prices, by no means has it been a case of other manufacturers making automatic gains at the expense of VW. For instance Renault-Nissan, Ford and Rolls-Royce have all seen sharp falls in the last couple of weeks (Renault by approximately 19% and Ford and Rolls-Royce by 9%).
Increased unit sales across Europe and the U.S. meant that the industry as a whole received considerable investor backing over the last few years. A weakened Chinese market meant that the market dampened somewhat over the summer. The VW saga gave investors a reason to suddenly steer clear from the whole sector.
In the immediate future, the expectation is that those manufacturers with nothing to hide will do their utmost to reinforce their ‘clean’ credentials. As such, expect these companies to rally as it becomes clear that they’re not in the frame.
When looking at other manufacturers, traders will be keen to check there are no nasty surprises around the corner, including assurances that the manufacturer in question has abided by the testing rules.
The emissions scandal implications for the DAX
The swift selloff of VW shares dragged the DAX down by 4.9% to a year low of 9,427. The Wolfsburg company wasn’t the only one putting pressure on the DAX; BMW and Daimler (owner of Mercedes) both lost 13-15% of their value. Both have rallied somewhat since, and the DAX itself has edged up towards the 9,800 level.
Tread very carefully around shares in financial services companies that may be directly or indirectly exposed to the VW fallout. At the same time, bear in mind that the ‘Made in Germany’ tag could quite possibly be regarded as having lost some of its lustre for the time being.
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