German economy to overcome Volkswagen's emissions fraud
There is no doubt that the emissions cheating scandal, disclosed by the US Environmental Protection Agency (EPA) last month, is a huge blow to the reputation of the leading German car group and is also damaging to the 'Made in Germany' brand. However, short of fraud by the industry as a whole in Germany, it's unlikely to inflict long-term damage on the economy.
Volkswagen has admitted that 11m of its diesel engine vehicles worldwide, including almost 500,000 in the US, had software installed to fraudulently pass emissions tests while emitting nitrogen oxide at up to 40 times US federal standards.
Luckily now for VW in China, its biggest single market, it has few diesel cars there as the Chinese authorities have wanted to reserve diesel imports for commercial vehicles while consumers have not been keen on diesel.
The scandal coincides with challenging conditions in many overseas markets.
Volkswagen, which owns 12 brands including VW, Audi, Skoda, Seat and Porsche, reported a 12.4% rise in Chinese sales in 2014 to 3.67m cars — 34% of global sales.
However sales in the first half of 2015 were down 4% to 1.7m compared with the same period in 2014 while group sales plunged 39% in Russia and 26% in Brazil.
VW produced 25% of its global output in Germany in 2014 and had a market share of 40% of the 3m cars sold in the country; 46% of its average global payroll of 583,000 in 2014 worked in Germany and a further 28% in the rest of Europe.
The VW group generated cash flows of €21bn in 2014 and an operating profit of €13bn.
In 2014 the automotive sector was Germany's biggest goods export category with an 18% share, valued at €80bn. However, domestic production at 5.6m units (includes vans) in 2014 was up only 9% since 2000 while overseas production jumped by over 140% to 9.3m according to data from the German Association of the Automotive Industry (VDA).
There are about 780,000 employed in the automotive industry: 450,000 in car companies; 295,000 in suppliers and about 30,000 in trailer and body manufacturers. The industry employs about 1.9% of the German workforce.
The German car industry pay is the highest in the world — Page 15 here — and the industry accounts for almost one-third of R&D spending in the economy.
The car industry is important for several European countries and Italy, the one big country that has a poor level of FDI (foreign direct investment) and its own indigenous car industry, performed badly in 2014:
1. Spain was Europe's No. 2 manufacturer in 2014 with 1.9m units. VW bought Seat in 1986. Vehicle exports/ total goods ratio was at 18%;
2. In UK foreign-owned car firms produced 1.5m units; goods export ratio in 2014 was 13%;
3. France was just slightly behind the UK at 1.5m units and the total goods export ratio was 6%;
4. The Czech Republic had an output of 1.2m units with a total goods export ratio of 19%;
5. Slovakia produced 993,000 units and it had a total goods export ratio of 25%;
6. Poland produced 473,000 units and it had a total goods export ratio of 10%:
7. Italy produced 401,000 units and it had a total goods export ratio of 2%;
8. Romania produced 391,000 units and it had a total goods export ratio of 14%;
9. Hungary produced 225,000 units and it had a total goods export ratio of 14%;
10. Slovenia produced 198,000 units and it had a total goods export ratio of 15%;
11. Sweden produced 154,000 units and it had a total goods export ratio of 3%;
12. Portugal produced 118,000 units and it had a total goods export ratio of 13%.
Data from VDA, International Organization of Motor Vehicle Manufacturers (OICA), Coface, Observatory of Economic Complexity and national statistics offices.
Wolfgang Münchau, the Financial Times columnist in 'Dr Doom' mode, paints a bleak scenario of the future for the German car industry.
He says that VW "production could be shifted out of Germany only with the explicit consent of the trade unions. In other words, it cannot." We pointed out above that 75% of VW's production is outside Germany.
"Car engineers will not retrain to work in the biotech industry, or — heaven forbid — in the services sector," he says but the 93,000 R&D personnel in the industry are not all involved in metal-bashing research. Heard of digital?
There is no industry that does not face challenges and it's foolish to write-off companies with a global reach.
The UK revived its car industry through FDI and its financial services industry will adapt too. Just last week London was back on top as a global financial centre in a regular survey!
The size of the German car parts industry shows that it's a diversified sector and an industry accounting for 2% of the workforce may not be as dominant as Münchau believes from his cited 2008 research.
"Even a heavy drop in diesel car production and exports would probably not subtract more than 0.2% from German GDP," said Holger Schmieding, Berenberg Bank economist. "Demand for non-diesel cars may rise and partly offset the drop in demand for diesel-powered cars."
At a company meeting last week at the VW headquarters in Wolfsburg, Hans Dieter Poetsch, the incoming chairman, is reported to have described the situation as an "existence-threatening crisis for the company," the Welt am Sonntag newspaper reported on Sunday.
However, while there are squalls ahead including huge fines, this can be taken with a pinch of salt. The industry as a whole is facing big challenges and the European industry lobby group reported in 2013 that diesel engines powered 37% of the European car fleet in 2011.
The FT's Richard Milne visits Wolfsburg, home town to Volkswagen's headquarters, to gauge the mood among locals and customers: