As the dust begins to settle on the Volkswagen scandal, what is the likely impact on the company and the wider industry? Seb Beloe considers the ramifications on the WHEB Group blog.
The numbers involved in the VW scandal are epic by pretty much any measure. Nearly 500,000 vehicles being recalled in the US alone, 11 million affected vehicles in total, potential fines of US$18bn, up to 241,000 extra tonnes of NOx emissions[i] and according to one expert at least US$10bn knocked off the company’s brand value.[ii]
Initially, several auto-analysts claimed that the scandal would only have a very temporary impact on the company’s business. They pointed to the long list of recent recalls that have affected the auto industry with little if any evidence of long-term damage to the companies in question. General Motors had to recall 13 million cars worldwide and paid compensation for 124 deaths associated with a faulty ignition switch through 2014-15. The result? GM is set to sell 10 million vehicles in 2015, a new record for the company.[iii]
But there are very good reasons to think that this time it really is different. Most scandals are due to negligence or a failure to come clean. VW’s case was deliberately fraudulent and may have involved criminal intent and will have resulted in emissions that have endangered the lives of millions and probably caused hundreds of excess deaths per year. Volkswagen may not be finished as a brand, but as one analyst claims “Like BP and Deepwater Horizon, this issue is going to last for longer, will get much worse and involve many more law suits than almost everyone expects.”[iv]
What are the lessons for investors?
The analogies with the Macondo Deepwater Horizon accident may go further. After the accident, analysts uncovered the ‘smoking gun’ of BP’s poor regulatory track record on health and safety in the US; a situation that was further compounded by poor regulatory oversight in the Gulf of Mexico.
Was the Volkswagen scandal similarly predictable? Certainly VW’s governance was widely regarded as poor. Institutional Shareholder Services (ISS) for example has been criticising the shareholder structure that is dominated by the Porsche/Piech family for a number of years and gave the company the worst governance score in its ranking system.[v] There has also been a track-record of issues with emission tests on Volkswagen vehicles and evidence that regulators – most obviously in the EU – had been ineffective in maintaining rigorous testing procedures for vehicles.
However, these patterns are much clearer with the benefit of hindsight. Most environmental, social and governance (ESG) analysis is focused on the policies and performance of the business’ operations rather than the performance of its products. One ESG research group conceded that while the episode marks “a substantial degradation in [VWs] customer and product responsibility and business ethics”, it said that these issues were outweighed in its scoring system by strong performance in other facets of the business, such as how it treats its staff.[vi]
This latest scandal, one hopes, will encourage the investment industry to pay much more attention to the environmental performance of products rather than corporate policies. This issue is particularly pressing in the automotive industry where 90% of the environmental impact is in the use of the car with only 10% due to the manufacturing process.
Whether or not the VW scandal was predictable, one thing that is abundantly clear is that the automotive industry – like the oil and gas industry before it – is subject to increasingly demanding performance standards. These are putting the industry’s technologies and products under huge pressure. Given the car companies’ history of aggressive lobbying,[vii] is it so surprising that they tried to cut a few corners? If investors must invest in the automotive OEMs[viii] (which WHEB does not), then the lesson is clearly to look very closely at environmental and regulatory track records.
Implications for the auto-industry
VW’s deliberate deceit is the critical issue in the damage to the company’s brand, but is the least important issue when considering the fall-out for the rest of the industry, in our view. Much more important, we believe, is that the deceit was considered necessary.
The fact is that Volkswagen, and possibly other diesel engine manufacturers, was struggling to achieve the US’s NOx emission standards at the same time as delivering good performance and meeting CO2 standards. One sell-side analyst believes, for example, that achieving the NOx standards will incur a 20% fuel efficiency penalty, in turn compromising CO2 emission targets.[ix] This is a problem that is only going to get worse as emission standards tighten – and possibly tighten precipitously if testing protocols are upgraded as they are now highly likely to be.[x]
As is often the case, the market has over-reacted in the short-term. We don’t believe that the diesel market will fall to zero as the share prices of companies like Johnson Matthey currently suggest. However, over the medium-term we do think the implications are significant. Achieving progressively higher emissions standards with diesel was already a challenge, but the poor performance that was masked by VW’s ‘cheat devices’ is clearly going to make this even more difficult. Higher standards in a more demanding test cycle is all but inevitable.
This will boost the catalyst manufacturers who provide technologies that improve emissions performance in both petrol and diesel engines. It will also accelerate the shift to plug-in hybrid and ultimately full electric cars as the cheapest route to delivering emission reductions. Tesla may be the only publicly listed auto company today that has no exposure to rising auto-emission standards, but Apple, Google and others might now be thinking about accelerating their own plans to enter this troubled market.
A Good Look At How Homes Will Become More Energy Efficient Soon
Everyone always talks about ways they can save energy at home, but the tactics are old school. They’re only tweaking the way they do things at the moment. Sealing holes in your home isn’t exactly the next scientific breakthrough we’ve been waiting for.
There is some good news because technology is progressing quickly. Some tactics might not be brand new, but they’re becoming more popular. Here are a few things you should expect to see in homes all around the country within a few years.
1. The Rise Of Smart Windows
When you look at a window right now it’s just a pane of glass. In the future they’ll be controlled by microprocessors and sensors. They’ll change depending on the specific weather conditions directly outside.
If the sun disappears the shade will automatically adjust to let in more light. The exact opposite will happen when it’s sunny. These energy efficient windows will save everyone a huge amount of money.
2. A Better Way To Cool Roofs
If you wanted to cool a roof down today you would coat it with a material full of specialized pigments. This would allow roofs to deflect the sun and they’d absorb less heat in the process too.
Soon we’ll see the same thing being done, but it will be four times more effective. Roofs will never get too hot again. Anyone with a large roof is going to see a sharp decrease in their energy bills.
3. Low-E Windows Taking Over
It’s a mystery why these aren’t already extremely popular, but things are starting to change. Read low-E window replacement reviews and you’ll see everyone loves them because they’re extremely effective.
They’ll keep heat outside in summer or inside in winter. People don’t even have to buy new windows to enjoy the technology. All they’ll need is a low-E film to place over their current ones.
4. Magnets Will Cool Fridges
Refrigerators haven’t changed much in a very long time. They’re still using a vapor compression process that wastes energy while harming the environment. It won’t be long until they’ll be cooled using magnets instead.
The magnetocaloric effect is going to revolutionize cold food storage. The fluid these fridges are going to use will be water-based, which means the environment can rest easy and energy bills will drop.
5. Improving Our Current LEDs
Everyone who spent a lot of money on energy must have been very happy when LEDs became mainstream. Incandescent light bulbs belong in museums today because the new tech cut costs by up to 85 percent.
That doesn’t mean someone isn’t always trying to improve on an already great invention. The amount of lumens LEDs produce per watt isn’t great, but we’ve already found a way to increase it by 25 percent.
Maybe Homes Will Look Different Too
Do you think we’ll come up with new styles of homes that will take off? Surely it’s not out of the question. Everything inside homes seems to be changing for the better with each passing year. It’s going to continue doing so thanks to amazing inventors.
ShutterStock – Stock photo ID: 613912244
IEMA Urge Government’s Industrial Strategy Skills Overhaul To Adopt A “Long View Approach”
IEMA, in response to the launch of the Government’s Industrial Strategy Green Paper, have welcomed the focus on technical skills and education to boost “competence and capability” of tomorrow’s workforce.
Policy experts at the world’s leading professional association of Environment and Sustainability professionals has today welcomed Prime Minister Teresa May’s confirmation that an overhaul of technical education and skills will form a central part of the Plan for Britain – but warns the strategy must be one for the long term.
Martin Baxter, Chief Policy Advisor at IEMA said this morning that the approach and predicted investment in building a stronger technical skills portfolio to boost the UK’s productivity and economic resilience is positive, and presents an opportunity to drive the UK’s skills profile and commitment to sustainability outside of the EU.
Commenting on the launch of the Government’s Industrial Strategy Green Paper, Baxter said today:
“Government must use the Industrial Strategy as an opportunity to accelerate the UK’s transition to a low-carbon, resource efficient economy – one that is flexible and agile and which gives a progressive outlook for the UK’s future outside the EU.
We welcome the focus on skills and education, as it is vital that tomorrow’s workforce has the competence and capability to innovate and compete globally in high-value manufacturing and leading technology.
There is a real opportunity with the Industrial Strategy, and forthcoming 25 year Environment Plan and Carbon Emissions Reduction Plan, to set long-term economic and environmental outcomes which set the conditions to unlock investment, enhance natural capital and provide employment and export opportunities for UK business.
We will ensure that the Environment and Sustainability profession makes a positive contribution in responding to the Green Paper.”