Investors Braced For Action If Volkswagen Contagion Spreads.
“Everyone knew what the tests involved and tried to optimize, and maybe VW tried a bit too hard”
Volkswagen’s revelations about its emissions cheating have paused for a moment, but investors’ biggest fear is being sideswiped by news the crisis was spreading to other big auto manufacturers which would decimate industry profitability, not to mention stock market values.
Volkswagen revealed this week that its upmarket and highly profitable Audi and Porsche subsidiaries were now implicated in the “dieselgate” scam, and that the contagion had spread from diesels to gasoline powered vehicles too.
Auto makers have to handle two types of emissions – ones related to clean air, and others which ratchet up fuel economy in the name of saving the planet from carbon dioxide (CO2). VW’s initial problems were linked to U.S. Nox emissions from its diesels. The latest news implicates VW gasoline engines’ fuel economy too.
VW’s problems have set environmental groups like Brussels-based Transport & Environment (T&E) into a frenzy of political activity and if their lobbying is successful, could force car makers into ever more expensive investment in technology to clean up emissions and curb fuel use even more.
Since the Volkswagen scandal news broke on September 18 it has lost around 30 per cent of its value on stock markets. Most other manufacturers initially dived too, but since then have mainly recovered Sept 18 values, and then some. If the crisis began to implicate other car makers, expect stock market mayhem.
“Everyone knows how the tests are done and everyone will use ways to meet them”
Investors are wondering if VW’s methods to avoid the U.S. Environmental Protection Agency’s noxious diesel emissions rules were unique to the industry.
“Everyone knew what the tests involved and tried to optimize, and maybe VW tried a bit too hard. VW came under scrutiny (in the U.S.) and I suspect that a lot of other manufacturers would have problems meeting the regulations on the road. Everyone knows how the tests are done and everyone will use ways to meet them,” said Christian Stadler, Professor of Strategic Management at Warwick Business School in Britain’s midlands.
“There is so much scrutiny now and that depends on whether anyone else is implicated,” Stadler said.
After VW’s latest CO2 revelations credit ratings agency Standard & Poors wondered if the rest of the industry could escape taint.
“This repeat incident could also be the sign of a wider industry problem if other manufacturers have followed similar practices; and it reinforces our view that the sector is likely to face tougher environmental regulations and requirements in coming years,” S&P said in a statement about VW’s prospects.
Commerzbank analyst Sascha Gommel also worries about a broadening of the scandal.
“We believe that a negative sector reaction is likely as a discussion will start if other (manufacturers) have also had irregularities in their CO2 classifications,” Gommel said in a report.
The political pressure on European car makers was given a boost by news, reported by the Financial Times, that the Institutional Investors Group on Climate Change (IIGCC), wants the E.U. to toughen up vehicle testing for CO2. IIGCC claims to manage €12 billion ($13 billion) of assets and includes BlackRock, a VW shareholder.
Trust needs to be restored
“Some investors have lost significant investment value. Trust in emissions date urgently needs to be restored so that investors can be sure that official data is reliable,” the FT quoted the IIGCC saying in an open letter to the E.U.
T&E has been running campaigns to force auto makers to clean up diesels, and another trying to shame them into admitting fuel economy claims are hugely exaggerated. A recent T&E report found in 2014 manufactures exaggerated laboratory-based fuel economy claims an average 40 per cent, up from eight per cent in 2001.
“This step will help to establish faith in the European automotive industry and regulations that have been totally undermined by the drip-drip of recent disclosures,” said T&E’s Greg Archer in a statement.
Warwick Business School’s Stadler isn’t sure whether those seeking tougher regulation will succeed.
“There are big implications in the U.S. and Europe because these are extremely important industries. It’s not in the interests of either to damage such an important industry. We will have to wait and see who is winning the day. But you can expect the regulators to favor their own. The U.S. has been giving VW a tough time, so expect the U.S. companies to get a tougher time in Europe,” Stadler said.
Diesel regulations are much tougher in the U.S. than in Europe, where CO2 rules are harsher. Europe demands average vehicle emissions of 130 grammes per kilometre of carbon dioxide (CO2) – that’s the equivalent of 43 miles per U.S. gallon – by this year. This will tighten to 95 g/km by 2021 or 57.4 miles per U.S. gallon. The U.S. requires a slightly less aggressive 54.5 mpg by 2025. The European industry reckons it already has the 2015 regulations beaten, but it faces a huge amount of spending to meet the 2021 target, even without tightening.