The Volkswagen disaster will have aftermaths not only on the Wolfsburg company, but also on the German economy. According to an analysis by Intesa Sanpaolo, the recent events could cost the automaker tens of billions between fines, class actions and the recall of 11 million vehicles, as well as a predictable drop in sales of at least 5%. And even the German GDP, albeit to a much lesser extent, will remain penalized: up to 0,3%, with inevitable repercussions on investments in the auto market, which employs 0,7% of the entire German workforce.
Here is the Intesa Sanpaolo study.
Undoubtedly, the cost to the group of the recent events is potentially high: beyond the reputational damage, there is the cost of the fines that the US Environmental Protection Agency could impose (up to a maximum of 18 billion 37,5 thousand dollars dollars for each car. There are 482 thousand 2.0 Tdi diesel vehicles sold in America), to this must be added the cost of federal fines, potential sanctions in Europe, class actions, and the cost of the recall of the 11 million cars indicted which, according to the group's estimates, could be around 6,5 billion euros. The impact on the financing arm Volkswagen Financial services5 should also be considered, which has already announced that it intends to freeze hiring, expecting a decline in car purchase financing volumes.
IMPACT ON THE AUTO MARKET
But it is not our business to forecast direct costs to the business. Instead, we tried to look at the weight of the group in German manufacturing and in total car sales to understand what can be the order of magnitude of the macroeconomic impact of a potential slowdown in production and sales, which however is not guaranteed to be long-lasting.
The Volkswagen group, with a turnover of 202 billion euros in 2014, accounts for over 70% of the turnover in the auto sector (and 10% of the manufacturing turnover) and about 40% of the industrial production of cars (the auto sector accounts for 11% of output in manufacturing). If distribution services and part of the components are also considered, the contribution of the automotive sector in a broad sense to the formation of total added value rises to 10%. In Germany, the group employs around 321 people out of a total of 775 employed in the automotive sector (approximately 0,7% of the German workforce).
The group is the leader in the automotive market in Germany (40% of total sales) and in Europe (24,6%). Last year it sold 2,2 million cars in the European Union. Overall, the VWG group accounts for approximately 2,3% of the added value if we look at the turnover. Estimating the impact of the scandal on production activity is not trivial, because it depends on a plurality of factors: industrial choices of the group, actions of the authorities, impact of reputational damage on the choice of brand and type of food by buyers and on theintention to buy a car in general.
The effect on components and other sectors linked to the sector should also be considered, as well as on the demand for intermediate imports (if they drop, GDP rises) and ancillary services to car production. The figures on the weight of the industrial group in Germany (4,6% of manufacturing output) suggest that a hypothetical 5% drop in VW car production could subtract 0,1% from value added dynamics. If we consider the weight of the automotive industry (5,5% of the added value for the distribution part only), the effect would rise to 0,2%.
The scandal could have a limited impact on the sales of the offending diesel cars both in the short term, as a result of the decisions of individual countries (Switzerland has suspended sales of the 1.2 TDI and 1.6 TDI and 2.0 TDI diesel vehicles affected by the scandal), and of the decisions of the group companies abroad (the CEO of VW Italia has blocked the sales of Euro 5 vehicles), but also in the medium term due to potential regulatory changes in Europe for NOX emissions (but these should also impact other manufacturers).
A hypothetical 5% drop in VW diesel car sales (48% of total sales in Germany) would translate into a 1,0% drop in overall car sales (VW share is 41%) and lower fuel consumption. goods for 0,1-0,2%, since cars account for 6% of the consumption of goods. This assessment does not consider that those who have decided to buy a car simply turn to other brands or end up opting for other types of power supply, perhaps still from VW. Thus, the impact on total demand may ultimately be negligible.
The negative impact on growth would occur to the extent that the market share lost by VW was acquired by producers not located in Germany. The drop in output could come more from the decline in exports than domestic sales. In 2014, the German auto sector exported around 76% of the cars produced, and over 60% of auto exports went to Europe (EU 27). OECD data indicate that in 2011 the contribution of imported value added to German auto exports was over 31% (up from 27,3% in 2000). A decline in German machinery exports would therefore weigh on the rest of the euro area since Germany imports around 65% of the total from the euro area.
IMPACT ON INVESTMENT
As regards the potential impact on sector investments and the dynamics of total investments, the auto industry accounted for 6% of fixed investments in 2014. The Volkswagen group spends 13 billion a year on research and development, an amount between highest in the world. The effects of the scandal on such spending, however, are ambiguous: on the one hand, the reduction in the flow of profits should lead to a decline in investment. On the other hand, the need to defend market shares could force the group to make new investments and focus on other measures to improve cash flow.
IMPACT ON GERMANY'S GROWTH
The considerations made suggest that the impact of a permanent drop in production and sales of Volkswagen cars of around 5% should weigh no more than 0,2/0,3% on the growth of German value added, also assuming a negative effect on investments. To hypothesize greater impacts, we have to believe that the VW scandal triggers a process of moving away from made in Germany and also negatively affects the sales of other German products.
