The Volkswagen scandal

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The Volkswagen scandal.

We were dealt a blow in our International portfolios when Volkswagen admitted to cheating on US air pollution tests. Senior Portfolio Manager Roger Garrett talks about our strategy in response to the news.

The Company
The Volkswagen Group is the world's largest carmaker with a 12 brand product range extending from low consumption small cars to prestigious luxury brands such as Porsche, Bentley and Lamborghini. We invested in Volkswagen (VW) in 2012, originally attracted to its global market leadership and aim to create shareholder value through more efficient production methods for its lower value products and premium pricing in its luxury brands.

The Crime
VW installed so-called 'defeat devices' or sophisticated software to five of its main US 'clean diesel' cars including the VW Golf, Passat, Jetta, Beetle and the Audi A3. This software essentially recognises when a car is being tested for emissions and automatically cuts emissions to an acceptable level. VW installed these devices because it allowed them to appear to pass emission standards while achieving competitive fuel efficiency in a much contested segment of the market. In the US, devices were fitted to 482,000 cars; although VW have admitted over 11 million cars globally have these devices.

The Punishment
Severe, widespread and likely to be prolonged. Their share price has been smashed, down over 40% wiping nearly €37b off their market capitalisation. The CEO has resigned and faces possible criminal charges and other heads are likely to roll. There is also the cost of recalling up to 11 million cars to remedy the issue. Additionally, there are potential class action lawsuits and possible fines, with the US Environmental Protection Agency (EPA) able to fine up to $37,500 per car (up to $18 billion) with unquantifiable fines in Europe if VW is found to have deliberately misled regulators there. However, apart from the fines and lawsuits there is also the potential damage to the VW brand and loss of customers' trust that could result in lower demand and pressure on pricing.

Our Take
VW had performed well for our international portfolio and in light of this we had marginally reduced our holding in the company prior to this event. However, the deceptive and fraudulent business practices and long-term threat to their brand and reputation left us with little choice but to sell our holding in VW completely. We no longer have confidence in management, cannot quantify all the costs of this deception and as Warren Buffet once said: "There is never just one cockroach."


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