After Emissions Scandal, What’s Next for Volkswagen Stock?
Volkswagen AG (ADR) (OTC:VLKAY) former CEO, Martin Winterkorn, has been forced to resign. He may not be able to receive his 30 million euro severance agreement over the now infamous diesel engine emissions scandal, for which he has been held responsible.
Wolfgang Schaeuble, Germany’s finance minister, known especially to Greeks for his rigor, could not have said it more clearly: “Volkswagen will never be the same, will have to change structurally.” Reuters said that surely this will force a significant downsizing of its share price. He was commenting on the emissions scandal, known as “dieselgate,” that cracked the Volkswagen Group and Germany’s squeaky-clean image as a prosecutor investigates the group’s Audi luxury brand.
Volkswagen Stock Forecast for October 2015
Don’t let Tuesday’s slight rally for VW stock in Frankfurt distract you from the company’s continuing share price freefall on Wall Street. The Volkswagen stock forecast for October 2015 is bleak as the group may face criminal prosecution as other governments ponder similar legal sanctions.
Schaeuble’s words fall like the axe that will inevitably force the mighty Volkswagen Group (VAG) to give up being the world’s number one carmaker—a spot it took from Toyota earlier this year. Volkswagen may not even be the third-largest group by the time the Dieselgate mess takes its full toll with implications on the German economy. Indeed, should Volkswagen stock collapse (not likely), the U.S. economy would also be affected with risks of a global recession.
Indeed, in the end VW will never return to being the same company that it was in the past. Structural changes will take place even if it doesn’t threaten the resilience of the wider German economy, despite the Group’s significant contribution to it.
VW shares rallied in the past few days in Europe thanks to China’s decision to halve the purchase tax on cars under 1,600 cc, starting on October 1st. Yet this does not take away the fact that the Group will face significant financial stress to the tune of a $12.0 million vehicle recall and a mountain of legal battles. German prosecutors have been all over VW’s resigning CEO, Martin Winterkorn.
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Doubtless, VW will have to sell at least one, if not more, of its 12 brands. These include such names as Bugatti, Bentley, and Lamborghini; icons of the company’s growth over the past 15 years. Along with Martin Winterkorn, Volkswagen has already suspended some executives because of the scandal, including Audi’s head of research and development.
The Porsche-Piech family, which holds the majority of voting rights in VW, is pushing hard because the head of the group’s finances, Hans Dieter Poetsch, will become chairman of the supervisory board.
Meanwhile, Porsche has appointed Oliver Blume new CEO, replacing Matthias Mueller, who took over as CEO of the whole VAG Group. However, selling Porsches to an affluent and specialized customer is not the same job as selling mainstream vehicles. Mueller’s appointment itself is a hint of the Group’s leadership dilemma.
The government of the German province of Lower Saxony, a major shareholder, has already expressed its concern and anger over the “dieselgate” scandal’s fallout on the VW share price. The state, which has a seat on VW’s board, has accused the company’s management of having kept it and other members in the dark about the VAG Group’s clash with U.S. authorities for a year.
Like most investors, it discovered the emissions scandal just before it exploded in the media according to Olaf Lies, Minister of Economy of the German Laender, in a BBC interview. Lies said he felt “ashamed that Americans who bought those cars with confidence are so disappointed.” (Source: Volkswagen staff acted criminally, says board member, BBC, September 30, 2015.)
In the United States, where the emissions software swindle was uncovered, investigations continue. The Wall Street Journal warns that the U.S. Department of Justice is investigating the possibility that Volkswagen may be facing criminal charges. If the Department decides to pursue this path, it would be the first case against a car company over infringement of emission standards. (Source: Volkswagen may avoid environmental criminal charges, Wall Street Journal, September 29, 2015.)
Should VW avail itself of a provision contained in the 1970 Clean Air Act, avoiding the full brunt of the Law, says The Wall Street Journal, U.S. authorities may consider new legal approaches, focusing on perjury, accusing Volkswagen of deliberately deceiving regulators. This puts a dark shadow over VW’s stock forecast for October 2015 and beyond.
Many politicians and environmentalists are hoping that the Volkswagen case results in a change of the rules, including the introduction of criminal sanctions for violations of emission standards. It is hard to fathom the VW Group’s fall from grace: from number one carmaker in the world to lending its name to an emission law, shaming the company for decades.
And that’s just in the U.S.; several EU governments are already on the move. Not surprisingly, the Italian government sees an opportunity for Fiat Chrysler Automobiles N.V. (NYSE:FCAU) to benefit from the scandal, given that its diesel engine cars—too popular in Europe to simply fade away—have not been implicated in “Dieselgate.”
The Italian government may launch a class-action suit against VW. Presumably, Greece, which has suffered the full weight of Germany’s punctilious enforcement of rules in the handling of its debt crisis, will not be kind. Any German government attempt to ease VW’s consequences may well face opposition in Brussels from Greece and other southern European economies. That said, the Italian consumer association, Codacons, has already sued VW. The company will have to appear before the judges on February 11, 2016 to respond to consumers’ claims. VW sold over 116,000 cars in Italy in 2014.
To grasp the impact that the “Dieselgate” may have on the Volkswagen Group, the German economy, and prospects of a global recession; consider the cases of Enron or Lehman Brothers. Its fraudulent emission control unit was tampered deliberately in at least 11 million vehicles; it is by any standard a major international scandal. Its industrial and financial implications can be understood in the context of other events already that have set business history.
Enron failed in 2001 after its revenue and profit-inflating scheme was uncovered. Enron, like VW, had until the weeks before its ultimate demise, become a model of social and corporate responsibility, setting standards that its competitors tried to emulate all over the United States and beyond.
While the German automotive group is accused of perpetrating lesser crimes than Enron, its image of corporate responsibility and sustainability has been eviscerated, which could have consequences for how the entirety of the German industry will be perceived. The Volkswagen emissions scandal will also make consumers less trusting of socially responsible management and marketing claims, feeling deceived.
The case will also inevitably draw parallels to the Lehman Brothers scandal. The once mighty investment bank failed, or was led to fall, in September 2008, triggering a global crisis of trust in the markets. Global credit was frozen, leading to the collapse of the financial house of cards based on subprime mortgages and their related toxic securities.
Lehman’s contribution to the subprime mess was not much worse than that of other large international banks and the system in general, considering it had functioned for years before its defect emerged. Let’s not forget to mention the complicity of self-righteous rating agencies responsible for evaluating the claims of those financial products. The analogy, then, is with the entire system of checking car engines for consumption and pollution.
In the case of Lehman which was the first to be caught, its collapse set off a domino effect that spread to Wall Street and beyond within weeks. The VW emission scandal has not prompted a Lehman Brothers-like contagion to spread to other car companies. Indeed, many analysts urge investors to shift their focus from VW to Fiat-Chrysler or Ford and General Motors.
The emissions scandal will have a major impact on the company and on the European industry itself. Europe’s overall recovery, which started a few months ago, relied largely on a recovery of the automobile sector as a whole. “Dieselgate” will prevent VW from taking full part in that trend, even if it was poised to be its biggest beneficiary. An interruption now is the last thing the company needs.
Moreover, the “Dieselgate” scandal comes just as the United States and Europe are negotiating the Transatlantic Trade and Investment Partnership (TTIP) over the rules of global trade. The U.S. economy is also reluctant to see higher interest rates, strengthening the euro versus the dollar, weakening demand from VW’s biggest export market. In this sense, Volkswagen will require significant political support, given that it has links and employees all over Europe.
This means that, while Greece and the Mediterranean countries will try to squeeze as much as possible from the “dieselgate” scandal, EU authorities will not allow VW or the German economy to share the same fate as Enron or Lehman Brothers, averting global recession.
Here’s the Bottom Line on Volkswagen Stock
Volkswagen’s collapse may not even be in the interest of its competitors, let alone of the U.S. economy, as classical capitalist theory suggests. Still, there’s no escaping that Volkswagen stock will not come out of the emissions scandal unscathed. Its share price will face a tumultuous period, settling at a price that is not more than half of its 2015 high of $52.87. It is now trading at about $23.00 in a rally, but before considering VW a bargain, there are many events to consider. The stock has more room to fall before a true recovery can begin.