VW Investors Expecting Election Liberation Should Dream On.
“We believe it is hard to argue against the fact that professional, impartial and independent business people could serve the company more effectively,”
Elections in minor German states aren’t usually very interesting to the outside world. But Sunday’s election in Lower Saxony, the home of Volkswagen, is exciting investors.
Unfortunately, this is more of a rose tinted mirage than a possibility.
The Social Democrat government of Lower Saxony and trade unions, taking advantage of hangover laws from the 1960s, are able to veto VW governance and strategy. They have combined to stop plant closures and attempts to make it more efficient.
The election on October 15 conjures up the possibility that maybe, just maybe, a government will be returned that will finally over-turn this anomaly, and free VW to be a normal company, responsible to shareholders where the bottom line is the main determinant of policy, not entrenched sectional values which have held back the company from competing profitably on the world stage.
Other big changes are seen as possible if only the pesky unions and local politicians would get out of the way. This includes spinning off highly successful and profitable subsidiaries like Porsche, Audi and Lamborghini, and perhaps floating off the truck, component making and mass car maker brands VW, Skoda and SEAT. This is seen by some analysts as a great way of releasing value to long-suffering shareholders.
According to investment researcher Evercore ISI, in a report earlier this year, if VW was listed in six separate companies – Audi, Porsche, VW mass market brands, trucks, mobility services and financial services – the combined market value could reach 150 billion euros ($176 billion) compared with the then current 68 billion euros ($80 billion). This would also have raised the value of Lower Saxony’s stake by 6 billion euros ($7 billion) allowing it to pursue important social policies.
VW is chronically inefficient compared with its competitors. For instance, in 2015 General Motors, with 215,000 employees, produced almost as many cars as VW with 600,000. Toyota of Japan is roughly twice as profitable while being about the same size as VW.
But a new and intriguing possibility looms. Opinion polls are too close to call, but there is a possibility a Bernd Althusmann led conservative CDU coalition might beat the incumbent SPD’s (Social Democrats) Stefan Weil, current premier of Lower Saxony. If Althusmann wins he would be entitled to a seat on VW’s supervisory board and would have the right to appoint another. Althusmann has promised to give one of the two seats to an independent and qualified person as opposed to another politician. Althusmann has also said VW should perhaps look outside the company when it replaces the CEO.
Any large German company is governed by a Supervisory board with 10 seats for labour and 10 for capital. In Lower Saxony though the government is guaranteed two capital seats, so when socialists govern, they team up with the labour vote. When German industry was privatized in the 1960s, the so-called VW law gave the fledgling company special protection against hostile take-overs. This arrangement offends the European Union’s (E.U.) free movement of capital rules and the European Court of Justice challenged it in 2007, but the arrangement carries on.
Investment researcher Evercore ISI can’t wait for this arrangement to end and give minority shareholders, who own 35 billion euros ($45 billion) worth of company shares, a bigger say.
“We believe it is hard to argue against the fact that professional, impartial and independent business people could serve the company more effectively,” said Evercore ISI analyst Arndt Ellinghorst.
So what are the chances of a radical change of direction for VW?
There is a possibility of some change, according to Professor Ferdinand Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research (CAR) at the University of Duisburg-Essen.
“The result of the election is still unclear, but a coalition is likely. Let’s assume Christian Democrats, the liberal (liberal in free market, traditional sense) and greens will form a coalition. Then, we would have some chances to decrease the influence of policy to VW. Especially the liberal party could push to decrease political influence. I think for VW that could have a real chance to become an enterprise like others. However I don’t believe that they will spin off Porsche, Audi or SEAT. More important would be to separate the supplier (component) business in the VW group which in principle is not very cost competitive,” Dudenhoeffer said.
Most big car makers buy many components from outside to keep cost down, but VW doesn’t do this.
Matthias Holweg of the SAID Business School at Oxford University doesn’t expect any fireworks after election Sunday and the polls suggest a very close result which would likely end in protracted negotiations.
Karel Williams, professor of accounting and political economy at Manchester Business School doubts there will be much action on VW’s governance because reform on traditional lines assumes an industry and a company operating in a healthy industry. The automotive business is coming under threat from new entrants and expensive technology requirements.
And VW has been the centre of scandal because of its dieselgate shenanigans, and accusations of monopolistic collusion with other German auto makers.
“The new story is VW dieselgate and Vorsprung durch Kartell. How will the German political classes and public respond to the problem of loss of trust in an industry which has been politically sponsored and protected in Germany,” Williams said.
Evercore ISI’s Ellinghorst doesn’t expect any big changes after the elections but holds out hope that some progress might be made.
“”Unfortunately, it’s almost impossible to see any government in Lower Saxony selling the VW stake. However, more business friendly board representation would certainly make a big difference,” Ellinghorst said.