Why Volkswagen’s share price has fallen so far
An $18 billion fine is not the carmaker's only worry
By C.R./J.F.
VOLKSWAGEN (VW), the world's largest carmaker by vehicles sold, lost nearly a fifth of its value on September 21st as investors rushed to rid themselves of the firm's toxic shares. They suffered a further tumble the next day as more bad news about the firm emerged. VW's share price is down nearly a third since markets opened on Monday, a swoon that has wiped €23.5 billion ($26.2 billion) from its market capitalisation.
Over the weekend, the company was accused by America's Environmental Protection Agency (EPA) of cheating emissions tests. Half a million cars sold by VW in the United States—and 11m worldwide, the company said on September 22nd—are equipped with software that allows them to detect when they are undergoing emissions tests, whereupon they switch to clean-running mode. VW's chief executive, Martin Winterkorn, quickly apologised and resigned on September 23rd. That will not help much. The carmaker could still face a fine of up to $18 billion—more if regulators find that it committed similar acts in Europe and Asia.
Yet the fall in the firm's share price is not entirely caused by the threat of a big EPA fine. Indeed, the final figure may well be much lower, particularly if VW co-operates with regulators. And VW has tried to limit the damage to its balance-sheet by earmarking €6.5 billion to pay off fines and litigious customers. But that does not solve VW's other problems. The latest scandal has only made them worse.
VW has been aiming to build more than 10m cars a year, in order to take advantage of the big economies of scale that exist in the industry. But its efforts to grow have faltered. Its market share in America—which at 3.5% last year is smaller than Subaru's—is shrinking. So is its turnover in China. Even the sales it is making on its main Volkswagen brand are not particularly remunerative. Most of its profits now come from other brands it owns. Margins on Audis are six times higher per vehicle than those of VW-badged ones. Sales from Porsche-branded cars accounted for a larger share of overall profit than those from VW, which sold 25 times as many units.
This piece was last updated on September 23rd.