Framing the issues: VW admission moves 'clean diesel' to top of mind
VW emissions episode shocked investors
Volkswagen’s admission that it installed defeat devices in 11 mn engines worldwide corresponded with the loss of €25 bn of market capitalization and triggered CEO Dr. Winterkorn’s resignation. More broadly, the SXAP is down 10% over the past three days destroying a total €31 bn of market capitalization as the market is pricing uncertainty over the future of ‘clean diesel’.
Numerous risks and uncertainties
We see numerous risks occupying investors’ attention and preventing an efficient assessment of the fundamental value of Volkswagen.
Future of ‘clean diesel’ top of mind
Regulation has pushed companies to focus on CO2 targets possibly at the expense of NOx emissions. Euro 6 requires a NOx reduction to 80 mg/km from 180 mg/km. An ICCT study revealed significant discrepancies between real-world emissions of engines and current Euro 6 requirements (“NEDC” test).
Collateral damage – autos industry
We see three risks put into the spotlight by the VW emissions episode: (1) comprehensive scrutiny of the world diesel fleet especially in regard to defeat devices and emissions performance; (2) regulatory risk in relation to tighter NOx rules and controls; and (3) risk of diesel stigmatism from consumers.
Collateral damage – “Made in Germany”
The VW episode also impacted the DAX (-3.1% this week). VW is a bellwether industrial company and as such we believe had a negative impact on the brand “Made in Germany”. Industrial manufacturing is 16% of German GDP and exports are 48%.
Stock implications
European OEMs are likely to continue to be marked down for their diesel exposure given the investigations, scrutiny, regulatory and political debates. We see selective opportunities within suppliers as beneficiaries from increased focus on emissions. In this regard, we highlight Buy-rated Conti and Valeo.