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Volkswagen Calm About To Be Upset By Important Decisions

Volkswagen Calm About To Be Upset By Important Decisions.

Diess Comes Under Pressure From Union, Politicians.

“it would appear Diess is increasingly ostracized, indeed last week Osterloh described him as someone who ‘lacks reliability’”

Volkswagen was rocked when the dieselgate scandal broke September 18 and investors are bracing for some key decisions later this month which will show whether the damage is survivable or deadly.

Meanwhile, reports in Germany suggest the ruling coalition of unions and local politicians which control the VW supervisory board are trying to undermine VW brand chief Herbert Diess. Diess is perhaps investors’ last great hope that one day VW will stop being a company that exists to protect jobs, boost worker welfare and keep inefficient plants open, and turn into one where, like most normal companies, the bottom line rules.

Important decisions coming later this month include a meeting of the Supervisory Board April 20, and an expected agreement between the company and the U.S. authorities on how to fix diesel engines fitted with software designed to cheat U.S. noxious emissions rules. VW is also expected to reveal the findings of its investigation into who was responsible for the scam, which resulted in 11 million diesel engines using software designed to fool regulators. And on April 28, VW is expected to finally announce its financial results for 2015.

With all this crucial information about to become available, the unions are worrying that Diess, hired from BMW, will use the moment to seize the initiative and push for cuts and savings to protect VW profitability. Last week engineering workers chief Bernd Osterloh was quoting as saying Diess “lacks reliability”.

“We have the impression that there is an attempt to slyly use the diesel scandal to carry out personnel cuts that until a few months ago were not an issue,” Osterloh said in a letter to VW employees last week.

The union controls half the votes on the ruling supervisory board and has a veto over plant closures. The German state of Lower Saxony has two seats on the board too.

Wolfgang Porsche, head of the family that controls 52% of VW voting shares, put out a statement Monday saying that Osterloh and VW Group CEO Matthias Mueller have VW’s best interests at heart.

“I am convinced they will succeed in finding good solutions for VW, its employees and shareholders,” Porsche said.

According to investment researcher Evercore ISI this doesn’t bode well for shareholders.

“With investors still waiting for VW to agree on a solution for its U.S. diesel problems as well as an insight into what the liabilities might be, it is concerning that the first priority of the company appears to be to protect its workforce. A strategy seemingly underway before VW itself knows what the diesel scandal might ultimately cost,” said Evercore ISI analyst Arndt Ellinghorst.

“Equally concerning is the limited role which VW brand CEO Diess appears to be playing in events, with Diess seen by many in the investment community as a savvy and effective manager well positioned to lead VW’s renaissance and improve margins at VW brand. From the outside, it would appear that Diess is increasingly ostracized, indeed last week Osterloh described Diess as someone who ‘lacks reliability’,” Ellinghorst said.

Wary of VW
Investment banks are wary of holding VW shares because of the huge uncertainties surrounding the possible scale of the cost to VW, which include the diesel settlement in the U.S., the scale of the U.S. justice department suit for violation of environment laws which could reach $46 billion, other actions from U.S. dealers for damage to their businesses, to perhaps deadliest of all, U.S. states alleging fraud.

VW shares plunged from 240 euros a year ago to a low of 101.15 October 2. Since then they have struggled up to around 122 euros. Many investment banks think it is impossible to buy VW shares until it becomes much clearer what the future holds.

Meanwhile Evercore ISI surveyed some investors and found that a solution to the U.S. diesel problem and a VW brand restructuring plan is required before they can own the shares again. They expect the diesel fix to cost 11.4 billion euros ($13 billion), the provision for dieselgate in the 4th quarter to be 5 billion euros, after the 3rd quarter’s actual 6.7 billion euros provision.

“81% of respondents do not believe that the VW brand is capable of earning its targeted 6% margin in 2018. In our view this reflects the opportunity for a VW brand turnaround post Diesel crisis. The market simply doesn’t believe VW management is capable or committed to deliver industry average levels of profitability at the core brand,” Evercore ISI said.

What is it for?
“It is currently not clear to us what VW really wants to be and what management stands for. Does profitability matter? To what extent does profitable growth drive decisions? Do the workers council union and Lower Saxony stand in the way of a more investor-focused business?” Evercore ISI said.

It is pretty clear to me that the answers to the questions are Not much. Not much. Yes.

Is there any chance of any of this changing? No.

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