TheChek News Flow

09/25/2015 - 12:45

AUTO BILD Exclusive: New problems at VW - Automakers ignored serious security deficiency

The stainless gas tank of the VW Touran EcoFuel is a huge security risk. At least two cases are known in which the exploded tank. Further text by ots and www.presseportal.de/nr/53065 / The use of this picture is free of charge for editorial purposes. Please quote the source: "ops / AUTO BILD / Lena ...

 image info  Download

Hamburg (ots) - VW Touran EcoFuel tank has rust problems / In at least two cases, the tank / also owners of other natural gas models exploded complain about corrosion problems / Federal Motor Vehicle Office responded hesitantly

After the loss of confidence because of manipulated emission tests VW threatened further trouble. This time, stainless gas tanks the problem: In extreme cases, the vehicles can even explode. At least two serious accidents during fueling of the VW Touran EcoFuel are known: cars were destroyed and people injured, some seriously, when filled with 200 bar pressure gas bottles exploded. As AUTO BILD in its latest edition 39/2015 (EVT: 09/25/2015) reports exclusively knows the manufacturer of the problem: As early as 2012 there were more susceptible to corrosion due to tank the VW Touran (built from 2005 to 2009) a recall action. "Volkswagen claims that they have since improved the paint system" said AUTO BILD editor Matthias Mötsch. "In fact, owners also report much younger Tourans of Gammel-tanks. In addition, the problem occurs in other EcoFuel models of VW."

Unlike, for example in Sweden affected Volkswagen customers in Germany can not expect a free repair. On the contrary, customers have to ask for grace and partly with several 1,000 euros to participate in the repair costs. Also TÜV and DEKRA know the problems, as is apparent from internal documents, present the AUTO BILD.

Meanwhile, the Federal Motor Vehicle Office is in contact with VW. However, both sides want to not comment on the status of the talks. "Stainless natural gas tanks are lethal scrap. How VW withdraws his responsibility, is a scandal," said Matthias Mötsch. "Also, the Federal Motor Vehicle Office responds to passive. Consumer protection is different."

The article "Stainless Gas Tanks - Where is the call?" read in the latest issue 39/2015 of AUTO BILD, which appears on 25 September 2015th AUTO BILD on the Internet: www.autobild.de

To state the obvious, China is Top of Mind. Given recent rapid-fire developments in Chinese markets—and ensuing confusion about the country’s growth and policy trajectory—we attempt to gain a better understanding of what is really going on in China. We feature three interviews: Andrew Tilton, our chief Asia-Pacific economist, on the macro outlook (we expect further deceleration in growth in coming years, but fiscal support should stabilize growth in Q4); David Li, Tsinghua University professor and former PBOC advisor, on policy motivations (policymakers want a stable RMB more than they want currency reform); and Roderick MacFarquhar, Harvard professor, on the political context (bolstering Party legitimacy is the leadership’s absolute priority). We address what commodities tell us about China (a more sanguine message than one might expect) and scratch the surface of global implications (EMs will feel the negative impact most, and are the likely channel for any spillover to DMs).

Mega Merger Coming For China Telcos?

Bottom line: The MIIT is quite possibly weighing a merger between China Telecom (NYSE:CHA) and Unicom (NYSE:CHU), but any final decision might take at least a year due to the regulator's cautious and slow-moving nature.

A new research note is raising the intriguing possibility that a merger could be coming for the smaller of China's 3 big telcos, saying China Unicom and China Telecom may soon be forced into marriage. The reasons for such a marriage are certainly compelling, and a recent leadership shuffle among the nation's 3 big telcos could point to such a move.

Some might argue that such a marriage would be anti-competitive, reducing China's mobile space from 3 carriers to just 2. But the fact of the matter is that China's telecoms regulator has become quite frustrated with this trio, who constantly fight among each other for market share but do very little to innovate despite controlling the world's largest mobile market. Rather than focus its efforts on reforming this laggard bunch of state-run behemoths, the regulator has taken a number of other recent steps to bring more innovative, private investment into the sector.

Speculation about a merger between China Telecom and Unicom came in a research note from Deutsche Bank (Chinese article), which cited the recent swapping of leaders between the 2 companies in August as a sign that a marriage might be coming. (previous post) The carriers saw a similar leadership swap about a decade ago, though nothing happened immediately after that. But a few years later, the regulator did end up merging the nation's 4 major telcos into the current field of 3.

The Deutsche Bank note cites a similar instance of leader swapping between 2 major shipping companies as a reason behind its thinking, but it doesn't appear to have any inside sources confirming such a move for the telecoms carriers. But as I've said above, such a move would certainly seem logical based on recent signals coming from the telecoms regulator, the Ministry of Industry and Information Technology (MIIT).

For starters, China Telecom and Unicom combined would only control a modest one-third of China's mobile market, a substantial but hardly monopolistic share. The MIIT had much bigger hopes when it conducted its last industry overhaul 6 years ago. At that time, it aimed to create a more competitive landscape and equal distribution of market share between the 2 smaller companies and dominant player China Mobile (NYSE:CHL), which controlled two-thirds of the market.

Lack of Progress

Fast forward to the present, when the 3 companies' market shares remain about the same as they did at the time of the reorganization, and none has done much to innovate. Instead, the most innovate players in China's telecoms space have been app developers like Tencent (OTCPK:TCEHY), whose WeChat sparked a high-profile spat after China Mobile complained the hugely popular mobile messaging service was stealing its traditional SMS business and thus was the equivalent of a stealth telco.

In the absence of innovation from the big 3 telcos, the MIIT has embarked on a number of programs to bring private money into the sector. The most advanced of those led to last year's creation of several dozen virtual network operators (VNOs), which sell mobile service under their own brands while leasing networking capacity from the big 3 telcos. More recently, the MIIT has also indicated it will let private companies build their own network infrastructure to directly offer broadband and other telecoms services.

All that brings us back to the original question of whether or not a merger of China Telecom and Unicom is in the offing. Shares of both companies have lost about a third of their value since recent peaks in late April, indicating investors aren't too excited about such a possibility or don't believe it's coming. The recent signals from the regulator, including the August leadership changes, lead me to believe that such a move could quite possibly be under consideration. But the MIIT never moves quickly on anything, and if such a move is indeed in the works, it could be another year or longer before the MIIT takes any definitive action.

■ Emission regulations to be rebuilt, OEMs could bear cost: VW's scandal

was a wake-up call for regulators and politicians, and is likely to be the

catalyst for sweeping changes to the EU regulatory framework. Arguably, the

entire framework has failed by allowing a company to manipulate its

emissions figures. In particular, the ineffectual testing for NOx emissions now

needs to be rectified to use real-world conditions. However, this could mean

the EC needs to rethink CO2 targets too, as real-world conditions

demonstrate that the NOx/CO2 trade-off appears unviable. While the ultimate

outcome is unclear, we expect the bulk of tightening to focus on NOx.

■ NOx/CO2 trade-off material negative for diesel: The argument that diesel

cars can be both efficient and clean appears to have suffered a significant

setback. While NOx can be reduced through increasing content of

aftertreatment components, this could reduce fuel efficiency by c.20% if Euro

6 limits were to be applied to real-world driving. The value of purchasing a

diesel vehicle becomes increasingly unattractive as fuel economy is thus

sacrificed. We estimate the total cost of ownership advantage of diesel cars

would be reduced from 4% to a 6% disadvantage due to lower fuel efficiency

and residual values.

■ Why the current rules will fail: Assuming no changes to CO2 targets, the

drop in fleet fuel economy due to tighter NOx limits would lead to a widening

gap to the 2020 CO2 target, and could result in penalties to OEMs. In

addition, the cost of increased emissions control content would add further

burden to companies' profits. In this scenario, we estimate that the impact on

earnings would be more than 30%, with potential to critically damage the

industry. Clearly this will be unpalatable for national governments.

■ Politicians to decide fate of industry: Given the magnitude of knock-on

effects on the entire automotive industry, it will be in the hands of politicians

to weigh the impact on public health with the future of the industry. While the

worst-case outcome looks unlikely, we expect the pressure to increase on

the whole industry. VW's infringements put the entire industry in a weak

bargaining position. While we don't expect governments to enforce a 30%

earnings cut, profits will likely still be materially impacted.

* Japan: reduce the size of our overweight, owing to GEM economic exposure and Abe's loss of popularity, but we stay overweight because Japan scores very well on our quant scorecard, is likely to have the most immediate policy response (we expect QQE to accelerate by ¥15trn in late October), the best earnings revisions (driven by underlying change, not just yen weakness), the best funds flow story (domestic investors, public and private, could buy c.11% of market cap), clear signs of corporate change (that may have been underestimated) and it is the cheapest region on EV/EBITDA. The problem is Japan's very high operational leverage, but if anything, we believe investors are now too pessimistic on global growth.

* Continental Europe: reduce the size of our overweight as 18% of sales come from GEM, it has the fewest signs of investor capitulation relative to other regions, and we fear that consensus is too bearish on the euro. However, we still believe investors should be overweight euro area equities as: (i) European equities are discounting just c.0.5% GDP growth and a sharp fall in macro surprises (with September's flash PMIs showing resilience) – we believe there is a genuine domestic demand story; (ii) to return to an average valuation on normalised earnings against the US, euro area equities have 10% upside potential; (iii) the very large output gap

means that, after Japan, there is the greatest scope for policy proactivity. We reduce German equities to benchmark (having reduced most of our overweight in March and having taken German autos to underweight in July). We stay underweight France but increase Spain to overweight and continue to like Italy.

* UK: remain benchmark: UK equities score second bottom on our quant scorecard, with valuations ex resources extended. UK equities correlate closely with GEM equities, where we are now benchmark. We take domestic cyclicals to underweight as UK growth is slowing, but wages are accelerating. We take the non-food retail sector to underweight.

* US: reduce the size of our underweight: The US has the lowest corporate sales and economic exposure to GEM, (relatively) improving earnings revisions and sentiment is depressed. The problem is that if global growth

accelerates or US rates rise, then the US underperforms and relative valuations (on P/B, Credit Suisse HOLT® and P/E) are now at the top end of their range.

* QE hopes spring eternal: inflows to both Europe & Japan equity funds; this week’s equity redemptions concentrated in US funds (in particular SPY)

- Equities: $3.3bn outflows ($2.9bn ETF outflows and $0.4bn mutual fund outflows)

- Bonds: $0.4bn inflows, ends 6 straight weeks of outflows

- Money-markets: $17bn inflows (largest in 4 weeks)

- Precious Metals: $0.1bn outflows (4 straight weeks of modest outflows)

- EM: tiny $95mn outflows = smallest outflows in 11 weeks

- Europe: $2.9bn inflows (inflows in 18 out of past 19 weeks)

- Japan: $0.9bn inflows (inflows in 29 out of past 31 weeks)

- US: $7.3bn outflows (note: SPY alone accounts for $7.4bn outflows)

- REITs the winning sector this week ($0.6bn inflows); Healthcare one of the only sectors to record outflows ($0.3bn)

- $1.3bn outflows from IG bond funds (largest in 4 weeks)

- $0.2bn outflows from HY bond funds (outflows in 8 out of past 9 weeks)

- Govt/tsy funds see 12th straight week of inflows ($0.9bn)

- Small $0.1bn outflows from EM debt funds (9 straight weeks)

- Largest weekly inflows to muni funds since Jan’15 ($1.1bn)