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Another VW Recall Reminds Investors Of Scale Dangers

Grinding Down Costs With Increasing Volume Has A Darker Side.

Just when investors had convinced themselves that Volkswagen’s new MQB investment was set to pay off big, the news broke that VW was recalling at least 2.6 million vehicles to fix electronic and gearbox flaws.

The recall was for vehicles made before VW put into action its MQB system, shorthand for a massive investment by VW to standardize parts across a huge range of models to cut the amount of components used, slash costs and boost profits. But the size of the recall underlined a possible weakness for VW. MQB promises big savings by racheting up the scale of production, but the converse is true too; if anything goes wrong the scale of error becomes huge as well.

MQB usage is currently around one million cars a year, but this will rise to around three million in 2015. VW plans to build more than 40 new vehicles across its volume brands on the MQB platform. The first cars to use the platform – the VW Golf, Audi A3, Skoda Octavia and Seat Leon – are already on sale.

The current recall is for Tiguans with lighting defects, and a possible fuel leak on Amarok pickup trucks. 7-speed automatic gearbox owners were also advised to make sure they used mineral not synthetic oil. This gearbox has already cost VW €250 million to fix.

International Strategy and Investment (ISI) said the cost of this recall will be small to VW.

“Yet the size of the recall illustrates the risks associated with commonality if things start going wrong. Meanwhile, the larger the recall the greater the press coverage resulting in reputational risk, as Toyota experienced in the U.S. in 2010,” said ISI analyst George Galliers.

Small cost
Deutsche Bank also believed the cost of the recall to VW would be small, even though it involved a large number of vehicles. Deutsche Bank analyst Jochen Gehrke also worried that latest production systems could undermine large manufacturers.

“However, it clearly is a reminder that the risk of recalls is generally growing for VW and the industry as a whole as deeper modular usage is getting implemented which implies that the number of affected vehicles is equally increasing,” Gehrke said.

Meanwhile, before VW’s recall announcement, Berenberg Bank analyst Adam Hull said the company was getting more attention from would be investors as what he called “the almost obsessive fear” about MQB not delivering cost savings should be fading. Hull cut his estimates for VW’s earnings per share between 2013 to 2016 by between one and three per cent. He described 2014 as a transition year for VW with 2015 and 2016 strong. Key profit drivers for VW would be the new Porsche Macan, lower investment costs, greater MQB savings, new Audis like the A4, A5, and Q7s in early 2015, and better pricing in Europe.

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