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Has Volkswagen caused a pile-up in the auto industry?

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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.

Economy

New Zealand to Switch to Fully Renewable Energy by 2035

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renewable energy policy
Shutterstock Licensed Photo - By Eviart / https://www.shutterstock.com/g/adrian825

New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.

New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.

Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.

Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”

The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.

Zero net emissions by 2050

Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.

Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.

She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.

Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”

A worldwide shift to renewable energy

Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.

Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.

Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.

Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.

Sources: https://www.bloomberg.com/news/articles/2017-11-06/green-dream-risks-energy-security-as-kiwis-aim-for-zero-carbon

https://www.reuters.com/article/us-france-hydrocarbons/france-plans-to-end-oil-and-gas-production-by-2040-idUSKCN1BH1AQ

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Economy

How Going Green Can Save A Company Money

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going green can save company money
Shutterstock Licensed Photot - By GOLFX

What is going green?

Going green means to live life in a way that is environmentally friendly for an entire population. It is the conservation of energy, water, and air. Going green means using products and resources that will not contaminate or pollute the air. It means being educated and well informed about the surroundings, and how to best protect them. It means recycling products that may not be biodegradable. Companies, as well as people, that adhere to going green can help to ensure a safer life for humanity.

The first step in going green

There are actually no step by step instructions for going green. The only requirement needed is making the decision to become environmentally conscious. It takes a caring attitude, and a willingness to make the change. It has been found that companies have improved their profit margins by going green. They have saved money on many of the frivolous things they they thought were a necessity. Besides saving money, companies are operating more efficiently than before going green. Companies have become aware of their ecological responsibility by pursuing the knowledge needed to make decisions that would change lifestyles and help sustain the earth’s natural resources for present and future generations.

Making needed changes within the company

After making the decision to go green, there are several things that can be changed in the workplace. A good place to start would be conserving energy used by electrical appliances. First, turning off the computer will save over the long run. Just letting it sleep still uses energy overnight. Turn off all other appliances like coffee maker, or anything that plugs in. Pull the socket from the outlet to stop unnecessary energy loss. Appliances continue to use electricity although they are switched off, and not unplugged. Get in the habit of turning off the lights whenever you leave a room. Change to fluorescent light bulbs, and lighting throughout the building. Have any leaks sealed on the premises to avoid the escape of heat or air.

Reducing the common paper waste

paper waste

Shutterstock Licensed Photo – By Yury Zap

Modern technologies and state of the art equipment, and tools have almost eliminated the use of paper in the office. Instead of sending out newsletters, brochures, written memos and reminders, you can now do all of these and more by technology while saving on the use of paper. Send out digital documents and emails to communicate with staff and other employees. By using this virtual bookkeeping technique, you will save a bundle on paper. When it is necessary to use paper for printing purposes or other services, choose the already recycled paper. It is smartly labeled and easy to find in any office supply store. It is called the Post Consumer Waste paper, or PCW paper. This will show that your company is dedicated to the preservation of natural resources. By using PCW paper, everyone helps to save the trees which provides and emits many important nutrients into the atmosphere.

Make money by spreading the word

Companies realize that consumers like to buy, or invest in whatever the latest trend may be. They also cater to companies that are doing great things for the quality of life of all people. People want to know that the companies that they cater to are doing their part for the environment and ecology. By going green, you can tell consumers of your experiences with helping them and communities be eco-friendly. This is a sound public relations technique to bring revenue to your brand. Boost the impact that your company makes on the environment. Go green, save and make money while essentially preserving what is normally taken for granted. The benefits of having a green company are enormous for consumers as well as the companies that engage in the process.

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