Volkswagen continues to see fallout from the accusations raised by the California Air Resources Board and the U.S. Environmental Protection Agency that it used deceptive software in its cars which enabled the engines to pass emissions tests even if in reality they did not.
The German automaker said on Monday that 11 million cars produced from 2009 to 2015 and shipped all over the globe have the deceptive technology. This is much worse than the initial number of 482,000 vehicles the company said had the technology last Friday. Volkswagen has stopped selling new and used cars which contain the diesel engine in question.
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And now we have learned that Volkswagen isn’t the only automaker that allegedly tried to dodge emissions restrictions. The same group that raised the alarm about Volkswagen claims BMW has done the same.
Fallout for Volkswagen
Needless to say, shares of Volkswagen have plunged in the various stock markets where they’re listed as analysts and investors ponder just how bad the damage will be. The EPA has already opened a case on Volkswagen, and other regulatory bodies in multiple countries are expected to follow suit.
Bernstein analysts note that this case is much more serious because it goes far beyond a faulty part or recalls because they can be attributed to mistakes or shoddy workmanship. Volkswagen, however, is accused of purposely misleading regulators by including the deceptive software to enable its vehicles to pass emissions tests. The company has set aside €6.5 billion to deal with the issue, but it seems doubtful that amount will be enough to cover potential fines, legal costs, recalls and anything else related to the accusations.
How much of a fine might Volkswagen have to pay?
Analysts at Bernstein suggest that the best-case scenario for the German automaker is for it to face a fine of billions of dollars. Some estimate as much as $18 billion, although they think this could be a little excessive even though a large fine is expected. They say a $2 billion fine would cost the company E4 a share, while an $18 billion fine would cost E35 a share and weigh heavily on Volkswagen’s balance sheet. They add that an “Armageddon scenario” in which the company’s U.S. business is knocked out could result in more than 20% of earnings being wiped out.
UBS analysts believe Volkswagen could face a maximum fee of $21.8k per vehicle, which would be up to $10 billion. They estimate that the cost to fix each car could be greater than $400. They noted that the automaker’s CEO would likely step down, which he has since they wrote their research note.
Despite all the regulatory and legal risks, UBS still thinks Volkswagen is an attractive name because they see it as being one of just a few automakers with earnings that are “meaningfully below potential” and where they see plenty of room to improve operating performance. They trimmed their price target for Volkswagen from €300 to €290 per share.
It also hasn’t taken attorneys in the U.S. long to pounce on Volkswagen in light of the announcement. Court documents shared with ValueWalk indicate that Hagens Berman has filed lawsuits against the German automaker already. So far the firm has already filed three lawsuits, and it has notified ValueWalk that it plans to file a fourth before the week is finished. Consumers in all 50 states will be represented in the lawsuits.
It should be noted that Hagens Berman has a history of filing class action lawsuits for just about everything against a broad range of companies. In this case though, it seems like there could be major penalties involved.
Volkswagen downgraded by Deutsche Bank
In light of the allegations against Volkswagen, Deutsche Bank analysts downgraded the company from Buy to Hold and slashed their price target from €260 to €130 per share. They call the case “an investor’s nightmare” as there’s nothing but uncertainty right now. The company lost about €30 billion of its market value in only two days, so they say there could be a buying opportunity here but caution that there’s an immense amount of risk.
The Deutsche Bank team thinks the bigger concern for Volkswagen is the operational impacts rather than anything financial. They say volumes, residual values of the company’s used cars, pricing and costs are all at risk and note that there’s no way to make any kind of estimates on these now. They do, however, believe that increasing costs for diesel-powered cars will offset the majority of the negative impacts.
BMW may also have used deceptive technology
BMW now appears to be in the same boat as Volkswagen, which could have even broader-ranging implications for the auto industry. According to Bloomberg, the International Council on Clean Transportation claims that a four-wheel drive version of BMW’s SUV tested emissions at more than 11 times the limit set in Europe during a road test. That’s the same group which first raised the allegations against Volswagen. The initial report came from German magazine Autobild.
BMW denies the allegations and says it “does not manipulate or rig any emissions tests.” The automaker also said its not familiar with the test used by the group and that it doesn’t use any system that would respond differently to tests than it would on the road.
Volkswagen’s problems not expected to impact suppliers much
Analysts have also been weighing potential impacts from Volkswagen’s problems on auto suppliers, and most agree that there could be a near term impact but that it shouldn’t last long. However, because the allegations against BMW are newer than most of the analyst reports we have, they haven’t yet considered the impact on suppliers from a second major automaker also potentially doing the same thing as Volkswagen.
BAML analysts said that the spillover from Volkswagen into suppliers will probably be worse than they expected at first but that supplier valuations should recover quickly. They add that suppliers with a large exposure to Volkswagen could see big long-term impacts if the German automaker’s sales decline far. The two companies with the greatest exposure to Volkswagen in terms of percentage of revenue are ZF TRW Automotive and BorgWarner.