If this scandal goes beyond VW, the wheels will come off an entire industry
Everyone does it. These are the words that have often sparked history’s great corporate scandals. Companies or industries become detached from reality, and illegal or improper practices become seen as normal. It eventually ends in disaster.
This was the case for traders and Libor, and now it could be the case for the automotive industry.
At present, only Volkswagen has admitted using a “defeat device” to rig emissions tests on diesel engines. Other leading carmakers, such as BMW and Daimler, the owner of Mercedes-Benz, have fiercely denied manipulating data. However, the slide in the shares of all carmakers last week suggests that many people aren’t so sure.
Whether other carmakers are dragged into the scandal or not, the events of the last week will have a profound impact on the automotive world.
First, VW – the world’s biggest vehicle manufacturer – is going to change dramatically. While the scandal may be rooted in an industry-wide disdain for emissions tests, it is no coincidence that VW has been caught first and on such a grand scale. The revelations have shone a light on how dysfunctional the carmaker has become and the lengths it went to in a bid to succeed in the US.
Based in Wolfsburg, 350 miles from Munich and 150 miles from Berlin, VW seems to have become ignorant of the world around it. The Porsche and Piech families own the majority of VW, with Lower Saxony and Qatar also holding substantial stakes. This small base of shareholders allowed VW to become increasingly insular and aloof.
It was also the personal fiefdom of Ferdinand Piech, who was in charge as chief executive and chairman for more than 20 years until April. Martin Winterkorn, the chief executive until Wednesday, was his ally and did little to prevent this.
If Winterkorn and Piech were to meet their goal of VW becoming the world’s biggest carmaker, they needed to crack the US. In order to crack the US, VW needed to persuade American drivers to buy its diesel cars, which the German company had promoted as its unique, environmentally friendly selling point.
Thus, VW was under pressure to increase sales in the US. It now appears that this pressure, mixed with a dysfunctional corporate culture, was a toxic mix.
The company will have to show the world it has changed and made a fresh start to recover from this scandal. That process will start with the construction of a new management team and corporate structure.
It should survive, even if it has to pay a potential $18bn in US fines, plus other penalties in Europe and consumer claims. But past corporate scandals show there are years of hard rebuilding work ahead. After Toyota’s own recall crisis in 2010, its share price did not bottom out for another two years – and the Japanese manufacturer was not deliberately rigging its cars.
VW has to recover from damaged customer perceptions, a sharp rise in the cost of financing its bonds, a possible big hit to sales, a probable loss of its valuable pricing power, and its share price falling by a third.
It may turn out that the lasting legacy of this crisis is not the damage done to VW, but the hit to diesel cars and the combustion engine. Amid the chaos of the last week, it was little noticed that shares at Tesla, the electric car manufacturer, rose more than 5%.
Sales of diesel cars have grown sharply in Europe as governments have backed them with tax breaks. Half of new car sales in the UK are now diesel. In the US, support has not been as forthcoming and diesel has just 3% of the market.
Any support for diesel cars is now going to be put into reverse, and sales will fall with it. If it subsequently emerges that tests on petrol engines and fuel mileage figures have also been fixed, then all bets – apart from those on Tesla’s share price – are off.
What price avoiding humiliation at Hinkley?
Why did chancellor George Osborne have to scuttle off to China last week to round up funding for Hinkley Point, the expensive nuclear power station he wants to build in Somerset? The short answer is that every sensible investor decided long ago to give this troubled project a wide berth.
Centrica, owner of British Gas, was the most high-profile refusenik. In 2013, it decided it could no longer throw good money after bad and took a £200m write-off rather than commit to a 20% stake. Former chief executive Sam Laidlaw’s investment record at Centrica was patchy but his judgment on that occasion was impeccable. “Since our initial investment, the anticipated project costs in new nuclear have increased and the construction timetable has extended by a number of years,” he said. Since then, Hinkley’s costs have ballooned to £24bn and the timetable been stretched ever further.
The last government’s response was to agree a absurdly generous “strike” price of £92.50 per megawatt hour for Hinkley’s output. Yet still it’s a struggle to get the investors to sign up. The European pressurised reactors (EPRs) that EDF, lead backer of Hinkley, is building in Finland and on home turf in Normandy are massively over budget and years behind schedule. “For third parties observing the announcements of delays and cost overruns for the EPRs under construction, it is difficult to commit,” Jean-Bernard Lévy, chief executive of EDF, told French newspaper Les Echos last week.
Don’t worry, continued Lévy, the Chinese “still have confidence in the EPR”. Up to a point. They, like everyone else, can see Osborne is desperate. They also require loan guarantees and a pledge that they can build their own nuclear plant (to a different design, naturally) in Essex.
In short, the Chinese have Osborne over a barrel. One wonders what other incentives have been offered to avoid a humiliating U-turn on Hinkley. The final deal, assuming it is agreed, should be published in full: and parliament should comb every line.
Women retailers left on the shelf
In respected retailer John Timpson’s new book High Street Heroes – The Story of British Retail in 50 People – only one woman earns her own chapter: Anita Roddick. Roddick built the Body Shop into an international business, demonstrating ethics and financial success could be combined.
She challenged the status quo – but so did Mary Perkins, who built the Specsavers empire, and Jacqueline Gold, who runs Ann Summers. They are bundled together in one chapter.
And Timpson has completely missed some other groundbreaking retailers, such as Natalie Massenet of online fashion retailer Net-a-Porter, or Jane Shepherdson, who did so much to build the Topshop brand and revive Whistles.
But perhaps Timpson can be excused. While the vast majority of money spent on the high street comes out of women’s purses and is handed over to women at the tills, nearly all the UK’s major retailers are controlled by men. The high street faces enormous challenges and needs fresh perspective more than ever. Women need a bigger part in the next chapter of retail.