The Domino Effect Of Volkswagen’s Emissions Scandal

September 25th, 2015 by Trefis Team

Volkswagen AG‘s (OTCMKTS:VLKAY) recent emissions scandal is most likely to have far-reaching consequences. Rigging pollution results will not only cost the automaker dearly in terms of legal fines, investor and customer backlash, class action suits, possible criminal investigation, and loss of future sales, but the ill-effects of this scandal could spill over to other automakers, particularly Germans who make cars that run on diesel, and have a broader impact on the automotive industry. In fact, given how this scandal has everybody raising their eyebrows at the previously trusted and respected German engineering, the blow to the country’s largest automotive company could, in turn, hurt the country’s economic growth.

We have a $36 price estimate for Volkswagen, which is above the current market price.

See Our Complete Analysis For Volkswagen AG

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According to our estimates, the net present value of the cost of the entire dieselgate scandal for Volkswagen, including government fines and settlements, private settlements, recall expense, and future loss of sales, could be up to $34.5 billion. The interactive model for the same can be viewed on the Trefis Institutional site, and estimates can be altered to show customized scenarios and sensitivity analysis to forecast the total cost of the scandal.

Apart from the company, the recent revelations could also have negative implications on other companies, and, in general, on Germany’s automotive sector.

Daimler And BMW’s Integrity Also In Question?

The German magazine Autobild reported that the SUV BMW X3 emitted more than 11 times the European emissions limit when road-tested by the International Council on Clean Transportation, which uncovered that some of Volkswagen’s diesel models in the U.S. emitted 10 to 40 times the legal limit when tested during normal conditions. This led to a decline of almost 10% in BMW’s stock, before a rally of 5% on Thursday as BMW denied this report. Elsewhere, Daimler’s stock has declined by 13% this week, despite the automaker denying any manipulation of emissions data for diesel engines.

Volkswagen’s fraud has made the market wary of its compatriots too, which sell diesel vehicles in the U.S. and other markets. At first, it was only the 482,000 units in the U.S. that were reported to have been fitted with a defeat device, which would help in cutting emissions while being tested, as compared to normal road conditions. But since then, Volkswagen reported that 11 million cars worldwide used this software, a significant portion of which could be in Europe. The European Commission urged all member states to investigate the use of these defeat devices that help in falsifying emissions data and said how there would be no tolerance for any wrongdoing. The probe will spread to other automakers, particularly Daimler and BMW, the other German top automakers. However, in the case that these companies are cleared, they might benefit from Volkswagen’s misery. Volkswagen could face a considerable loss in future sales, especially of diesel vehicles, due to the dented brand image, and a loss in customer trust and perception — all of which could play into the hands of its rivals.

Volkswagen Is At The Heart Of Germany’s Auto Industry

Approximately 46% (~274,000 individuals) of Volkswagen’s near 600,000 workforce is employed in Germany. The country employs around 775,000 people in the automotive industry, which means that Volkswagen alone employs over 35% of Germany’s total automotive workforce, and this still doesn’t include employees of Volkswagen’s suppliers. In turn, the automotive industry forms around 2% of the net workforce in the country.

The hit to Volkswagen has also hurt the generally solid perception that Germany’s automotive industry and engineering held. German companies’ reputation for superior quality could be undermined following the Volkswagen row. A lot of jobs could be at risk at the company, not only related to the emissions scandal, but also if future sales take a considerable hit. The upheaval at the top management level has begun, with the resignation of Martin Winterkorn as CEO, and induction of Porsche boss Matthias Müller as the new CEO, and the anticipated removal of other senior executives, particularly those heading the U.S. operating unit.

The automotive sector is the largest industry sector in Germany. Last year, the auto industry reported a turnover of €384 billion ($428 billion), forming one-fifth the net German industry revenue. Considering how the customer perception of Volkswagen, and in general German cars, might be in jeopardy, exports could also suffer. In 2014, ~77% of the cars produced in Germany were exported to international markets. [1]

Germany has had to face the impact of the Chinese slowdown and the Greece debt crisis, and due to its dependence on the automotive industry, and the scale and enormity of Volkswagen as an integral part of this industry, the country might face headwinds to its economic growth if car sales are significantly affected going forward. Germany’s GDP is forecast to grow by 1.8% this year.  Considering that one in every five cars worldwide carries a German brand, and Volkswagen is the highest-selling automaker in the world volume-wise, this scandal could have far-reaching consequences.

See the links below for more information and analysis:

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Notes:
  1. Automotive industry–Germany [↩]