Volkswagen: A Development Opportunity


Volkswagen (VW) is a German carmaker founded in 1946 renowned for its engineering quality and passion for automobiles: “Aus Liebe zum Automobil”(for the love of the automobile) was their slogan until 2007. Unfortunately, their reputation of being a competent and reliable car manufacturer with an all-time high stock price of €253.20 has been recently tarnished.


After the emissions scandal in September, stock price plummeted to €115.90 (-74%) as of the 24th of November, a sign of the market’s disillusion with the brand. The German carmaker, which accounts for about one in four cars sold in the EU, did not only make shareholders skeptical about future performance, but also harmed other business sectors and industries.


Even though “90% of European vehicles” were hit by the nitrogen oxide scandal, share price did not drop despite the potential to generate huge repayment costs for the company due to the robustness of its financial position. The company’s share price rose by nearly 5 per cent on Tuesday after the CEO Matthias Müller said that the cost to repair diesel engines equipped with misleading emission indicators would be lower than expected. Despite this, the road ahead remains bumpy as the company finds itself embroiled in other emission scandals.


VW now faces three separate emissions scandals. The initial inquiry by U.S regulators into excess nitrogen oxide emissions which affected 11m diesel cars and a wider scandal involving 85,000 Audi, VW and Porsche models with larger engines. The last scandal involving carbon dioxide emissions is potentially the most economically damaging because experts believe this would be a significant factor in consumers’ purchase decisions. This has repercussion effects on the luxury brands of VW as they use a similar engine software as present in the Audi and Porsche brands (recently discovered to be manipulated too).


An excuse for using these reducing software was the end consumer, as they would face “mid-double-digit” sums to afford such a car. The somewhat liquid position of VW allows them to make such statements: “The company has already set aside €6.7bn to deal with fixing NOx emissions but analysts have forecasted the scandal would cost up to €30bn in total due to fines and lawsuits “, reducing the uncertainty investors have about the company’s future.


As the saying goes, throw enough dirt on a clean wall and eventually something will stick. German authorities have launched an investigation into suspected tax evasion by VW which is linked to the emissions scandal.


Further upstream, VW’s legal troubles are affecting the commodities and precious metals industry which already faces problems of oversupply and weak demand. Metals such as platinum and palladium, which are widely used in the manufacture of catalytic converters, has seen price drops of 29% and 31% respectively and are at their lowest levels since 2009.


The on-going slump in China’s economy has affected the demand for commodities including precious metals and there is little evidence to suggest a reverse in trend. Analysts have estimated that demand for jewelry in China could decline by 9% this year, putting further pressure on the commodities and precious metals industry. It is estimated that there will be surplus of precious metals in the market over the next three years. For palladium manufacturers, this is only the beginning of their problems. Following tighter EU regulation that would require catalytic converters in cars to have a higher content of platinum, there is speculation that demand of palladium will drastically fall.


German automobile manufacturers are widely believed to be trend setters for the industry’s profitability but recent events has allowed other manufacturers such as Fiat, Chrysler, BMW and Daimler to muscle into what was formerly VW’s territory.


Despite the ‘diesel-gate’ scandal, there is a silver lining for potential investors. With ongoing investigations, VW’s share price is among the lowest in years at around €120 (27 November 2015) and this presents an incredible opportunity to invest into a company at a discount relative to stock fundamentals.

 

WRITTEN BY PHILIPP MARTYS & FELIX LIM FOR BESA

PLEASE DIRECT ANY INQUIRY TO AS.BESA@UNIBOCCONI.IT

#Volkswagen #Germany

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