CHANGES ARE LIKELY TO ADD COSTS TO OTHER FIRMS, WRITES ALAN TOVEY
Volkswagen will take a NZ$54 billion to $60 billion hit from the scandal over rigged emissions tests, according to motor industry analysts.
UBS’s experts are predicting the bill for legal costs, settlements with regulators, recalls to modify engines and vehicle buybacks will hit $60 billion, while Societe Generale (SG) puts the cost at $54 billion over two years.
Last year the auto giant posted a pre-tax profit of $25 million on global sales of $343 million, meaning that the cost of cleaning up after the scandal could push VW into the red for its next two sets of results.
This is before the damage done to VW’s sales caused by the company’s admission it installed software in up to 11 million diesel vehicles which allowed them to trick pollution tests.
The company has already set aside $11 billion to deal with the costs, but SG’s estimate suggests further huge provisions will have to be made.
In a note describing the company as going “from too big to succeed to too big to fail”, UBS analysts said they “appreciated the uncertainty” around the company but questioned the downside the market is pricing in.
“VW’s corporate behaviour is inexcusable, but it has helped trigger an industry and political crisis by putting what we consider an overdue spotlight on the growing gap between test and real emissions in the EU,” they added.
SG also examined how contagion from the scandal could impact other parts of Germany’s economy.
According to their analysis, the car sector represents 5.6 per cent of Germany’s annual GDP.
“Beyond VW, other carmakers have not acknowledged any wrongdoing,” the analysts said.
“Our baseline scenario assumes that the scandal will not spread beyond VW, but changes in regulations are likely to add costs also to other diesel car manufacturers.” SG said it expected VW’s diesel sales to suffer a “significant short-term dip”, but added this was unlikely to do too much harm to other European car manufacturers. “While VW is clearly facing a major challenge, the macroeconomic effects on Germany and the euro area are less clear-cut and depend very much on how consumers react by switching into other fuel types or into non-German and non-euro area brands.
“We assume that for now, until the regulatory framework becomes clearer, the main impact will be a severe blow to the VW diesel brand, due to the admitted cheating, with consumers mostly switching over to other German-made and European cars, as well as petrol cars.”
They added that only a relatively small number of motorists would shy away from European marques and pick foreign manufacturers as a result of the scandal. On a wider economic basis, the scandal could deliver a short term boost to the economy.
“History suggests that economic activity is boosted in the near-term after a disaster or an accident,” the analysts said.
“In the case of the car sector, international experiences of similar episodes point to higher activity such as when Toyota had to recall nine million vehicles between 2009 and 2011, or when GM recalled 27 million vehicles in 2014.
“Indeed, the recall or the change of vehicles itself will generate more economic activity [service production] in the coming months.”
However, this could be offset by lower production rates as demand for new cars drops in the wake of the crisis at VW.
This could have a greater impact on the wider Germany economy as sectors such as metal production, textiles, and legal, accounting and marketing, which feed into car makers, take the country’s dependence on the auto industry up to about 8pc of German GDP.
In the long-term, a bigger threat to the growth of German car makers is likely to be the slowdown in China “irrespective of the VW scandal”, according to SG.