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Volkswagen has admitted that a “defeat device” was used in for diesel vehicle emissions testing in the US. As a result the US authorities have ordered the recall of nearly half a million vehicles. The group has set aside €6.5bn to handle the repercussions and our rating is hold.
Corporate malfeasance is difficult to predict and can have significant implications. In the car industry it has typically been caused by the slowness of executives to come clean on safety issues.
Toyota was hit by a pedal entrapment issue and then also an unintended acceleration default. Around 21 deaths were alleged to be related to the pedal problem with the group forced to recall over 8 million hybrid cars.
General Motors recently paid US$900m to settle criminal charges for a flawed ignition switch tied to at least 124 deaths. GM took at least a decade to fix the vehicle defects.
The current issue with Volkswagen relates to the manipulation of diesel engine emission test results in the US. As such this is not a safety issue (and no one has died) but the US authorities have still ordered a recall of half a million vehicles.
A deliberate strategy to “game the system” has made Volkswagen vulnerable. A charge of €6.5bn will be made in Q3 to meet “necessary service measures and other efforts to win back trust.”
With a significant amount of uncertainty at this stage the shares have taken a meaningful hit. However, the company should have the financial firepower to withstand the headwinds.
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