Investors wiped about €25bn (£10.8bn) off the market value of Volkswagen (Ger: VOW3) in under three days after the German automotive giant was accused of cheating on US emission tests. The Environmental Protection Agency (EPA) claimed the group installed illegal software in diesel cars that allowed them to meet pollution standards under test conditions, despite producing up to 40 times the amount of noxious emissions during normal operation. The US government has demanded Volkswagen recall over 480,000 VW and Audi vehicles, and management has warned that up to 11m vehicles worldwide may be affected. The group could face up to $18bn (£11.8bn) in fines - more than half of its gross profit in 2014 - and Volkswagen's chief executive has stepped down. Michael Horn, the group's US chief, admitted the company had "totally screwed up".
Volkswagen has launched an external investigation and plans to cooperate fully with the relevant authorities. It has also earmarked €6.5bn to cover the costs of resolving the issue and regaining the trust of customers. If the allegations are true, the group may have sought to avoid the costs of building hardware to meet US emission standards whilst being able to advertise its vehicles as being more environmentally friendly.
The scandal has hit several UK-listed companies with exposure to the automotive sector. Shares in Carclo (CAR), GKN (GKN), IMI (IMI), Alent (ALNT), Trifast (TRI), Senior (SNR) and Johnson Matthey (JMAT) have all fallen this week. But unsurprisingly, Volkswagen felt the brunt of the fallout. Broker UBS predicted a penalty of up to $10bn, while analysts at Morgan Stanley thought in a "relatively optimistic" scenario, Volkswagen's EPS could be around €15 in 2016, compared to their previous forecast of €20.81.
Giles Worthington, a European equities fund manager at Smith & Williamson, said Volkswagen had done an "unbelievably stupid" thing but pointed out the company was "not going anywhere". He added the group's scale should mean it could stomach even the most punitive fine, and any comeuppance in Europe will have to go through the courts as there was no body that could fine it on the Continent like the EPA can in the US. The scandal could also lead to more rules and regulations for automakers, he said, who may also face higher development costs to ensure they meet emission standards.
