Diesel scandal, China and US put the brakes on Volkswagen

BUYING a car is not what it used to be. There was a time when investment in a new motor or a used one without excessive mileage was one of the two big investment decisions in the life of most families, the other being buying a house.

A lot of hard work went into the task of securing the funds to get on the road as well as minimising the risk of landing oneself with a rustbucket.

That happily is all changed. Now the rust problem seems to have been solved and instead buyers’ priorities mainly focus on whether the car uses petrol, diesel or hybrid. It is a dilemma that has brought many manufacturers to the crossroads, particularly our company this week, the German motor car behemoth Volkswagen (VW).

VW is a cultural phenomenon as well as being an industrial giant. The history of its iconic foundation vehicle, the Beetle, is a legendary tale of wonderful engineering as well as missed opportunities. And that was before it captured the attention of the Disney Corporation.

Fast forward to 2019 and we find VW is a long way from the simple Beetle.

It is now the largest auto producer in the world and has become an indispensable part of the German economic powerhouse.

The figures for VW are staggering. It produced almost 11 million cars last year, had huge sales of €230bn, employs 630,000 people and is valued by the market at €74bn. It has operations in more than 150 countries with 100 production facilities in 27 countries. But VW has also had more than its share of ups and downs.

One of its downs was in 2015 when it admitted installing emission diesel cheating software in its VW, Porsche and Audi cars. So far this problem has cost the company €20bn in penalties and its legal woes could drag on for another decade.

While the bulk of the US cases have been settled, it is still facing problems in another 50 countries from Australia to Brazil.

Its shareholders got in on the act and are suing for €9bn in damages, reflecting losses they suffered when the share plunged following the announcement of emission cheating. The scandal has also forced chief executive Martin Winterkorn to resign. It is generally accepted that it will take some time before the group can put the scandal behind it.

Meanwhile, VW headwinds are formidable; new, tough EU diesel emission standards, tariff wars and the shift to electric and driverless vehicles are all shaping up as problems for the group.

There are also threats that large tech companies will enter the car market.

To meet these challenges, VW plans to spend a huge €44bn on technology for electric and hybrid vehicles. Its electric cars will offer a range of up to 500km and capable of fast refuelling.

However, some investors feel this is a risky strategy given other clean energy could be preferred to electric cars.

In spite of its problems last year the group had record revenues of €230bn and posted a net income of €12bn.

However, investors are worried not only with the cost of the diesel scandal but its difficulties in its largest market, China.

Its shares trade at €147, down 24pc on the year. Investors are also concerned with US President Donald Trump’s recent threat to impose import tariffs on the European Union.

This is an attempt by the US administration to whittle down a $30bn (German) car trade deficit. The imposition of such tariffs would be a body blow the VW.

To head off these problems, the company plans to set up an electric car plant in the US and is in discussions to have closer ties (possibly a merger) with Ford in the US.

While the group is at a crossroads with a low price earnings multiple of six, one is tempted to take a punt but to cautious investors it might be better to wait until some of the problems are solved. Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

VW produced 11 million cars last year with huge sales of €230bn