Even if VWs aren’t as desirable as they once were, the image of the carmaker’s engineering excellence has remained largely intact since. But the revelation that the company had used so-called 'defeat devices' to game emissions tests on diesel cars could put an almighty reputational dent in the group that sees its cars lose their lustre, because environmental concerns, and the proportionate effect on running costs, are high on car buyers’ lists today. Shares in the group have unsurprisingly taken a battering – down nearly 40 per cent over two days - and knocked other carmakers' shares for fear that VW’s deceit is merely the tip of the iceberg and that other manufacturers have also been cheating emissions tests. Even before the latest probe, questions were being asked of the notable disparities between advertised fuel efficiency (measured in miles per gallon) and those drivers actually achieved in the real world.
The UK trade body representing carmakers and retailers, the Society of Motor Manufacturers and Traders, has dismissed suggestions of an industry wide conspiracy, instead pointing to outmoded test methodologies. But the wider repercussions to the diesel-fixated European car industry could still be huge, not least in an increasingly environmentally-conscious China which has to date proved a strong market for European cars. It is not an industry in which I would feel comfortable investing right now.
Among the wreckage of VW it is possible for investors to learn a few valuable lessons. Some of these should have been learnt already from the series of self-inflicted crises that have afflicted the banking sector in recent years – that it is not unusual for the profit motive to eclipse business ethics in large companies, with regulation seen as an obstacle to be circumvented and customers as cash machines undeserving of fair treatment. VW has set aside €6.5bn to cover potential liabilities that may arise – but the lesson to take from the banking industry, or even from BP’s travails in the Gulf of Mexico, is that redress for affected groups can grow substantially from first estimates. Given the health implications of diesel pollution, VW cannot expect to be let off easily.
We should also treat VW-gate as a reminder that enormous blue-chips are not immune to the kind of share price sell offs that in our minds are usually the preserve of dodgy Aim shares. "If only everything in life was as reliable as a Volkswagen" went an old advertising slogan – and indeed, reliability is a characteristic we often look for in the investment world. Yet, as VW demonstrates, it can be transient - instead we should take nothing for granted and diversify.
