Is ‘Dieselgate’ nothing more than a small ripple in the German sea?

A lot is written about the emission-rigging software for diesel cars of German carmaker Volkswagen. This scandal is by many dubbed ‘dieselgate’. Some media and analysts claim that the aftermath of ‘dieselgate’ would have lasting effects. Not only Volkswagen would deeply suffer, but the whole image of manufacturing country and export champ Germany would take a heavy hit. ‘Made in Germany’ which stands for quality products could potentially no longer impress consumers. However, while the full effects have yet to become visible, recent business confidence shows little scratches for German businesses, on the contrary.

The leading business climate index presented by think tank Ifo declined just a notch to 108.2 in October from 108.5 in September. Analysts estimated a drop to 107.8. Although German business were slightly less satisfied with the current situation, their view on the future improved. What’s more astonishing, the Volkswagen scandal seems to have no impact on the automotive industry. The index for the sector continued to rise in October. Judgement of both the current business situation as well as expectations improved. The companies even plan to ramp up production.

But

there’s one shade: exports are not expected to provide an additional boost. This doesn’t necessarily mean that ‘dieselgate’ has a strong impact. Concerns about the growth potential in emerging markets, in particular Brazil and Russia, could have contributed to this assessment. Also the US economy dampened export expectations, which is somewhat odd given the weaker Euro compared to the US Dollar which should boost exports. After the last ECB monetary meeting, the EUR declined even further. Ifo economist Klaus Wohlrabe said in an interview to Reuters that the Ifo Index showed “no noticeable effects from the monetary policy pursued by the US Federal Reserve and ECB”. Probably an indication that financial watchers tend to exaggerate the importance of monetary policy making on every day business…

Another interesting point was that although business climate declined for the third month in succession, capacity utilization rose to 84.4%. Combined with Germany’s low unemployment, 6.2% in September, this in an encouraging sign. German manufacturers are not yet at full capacity, but increasing utilization could have a beneficial effect on capital investments. Many German employers, especially the small and medium enterprises, complain about a lack of skilled workers available. By investing in newer machines, this problem could be circumvented.

Back to Volkswagen: it is clear that the company’s sales will be impacted. However, while in the US dealerships are slashing prices, German buyers seem little impressed. According to a recent study (after the scandal hit the newswires), two-thirds of Germans still believe Volkswagen produces quality cars. 75% of them can imagine to buy a VW sooner or later. In addition, 63% believes within one year, ‘dieselgate’ will be forgotten. 60% thinks the brand name “Made in Germany” will not face a long-lasting damage. We can’t call Germans naïve, 91% of respondents believe other car makers are rigging as well. But we have to keep in mind that the German population is very proud of their cars.

Does this all make shares of Volkswagen a buy? Certainly not, the risk of larger than expected claims still exist. Currently the company took a provision of EUR 6.5 billion (USD 7.3 billion), but some market players expect claims of roughly USD 18 billion. The full scale of the scandal and forthcoming claims is not clear, which creates uncertainty. From a risk / reward-perspective, Volkswagen-shares are not attractive.