Volkswagen's emissions scandal can have big impact on fleet sector
The press loves a good scandal. And they don't come much bigger than Volkswagen’s spectacular, outrageous emissions fraud. The story broke in the US on Monday, but went global in no time.
Both the nature and the size of the scandal are shocking. Volkswagen was forced to admit that 11 million diesel vehicles around the world are fitted with software that enables them to 'cheat' on emissions tests. The company has set aside €6.5 billion to pay fines and claims. In a mere two days, Volkswagen has lost close to 40% of its value on the Frankfurt stock exchange, or 25 billion euro.
Those are truly enormous numbers. They will have a profound impact on Volkswagen, and possibly also on the fleet industry – both in the short and the long term.
The scandal will undoubtedly have a negative impact on Volkswagen sales. In the US, where the scandal broke, Volkswagen is compared to competitors GM, Ford and Toyota a small player. On the mid-term the impact may be bigger in Europe, where Volkswagen is a dominant player - and the number one brand for corporate fleet vehicles.
Another immediate consequence may be a steep decline in sales of diesel cars per se. Large fleet owners, especially those with HQs in the diesel-averse US, may start to wonder why they need diesels in their fleets, whether in Europe or elsewhere. With concerns over CSR, Health and Safety and the Environment becoming more embedded in corporate culture, the scandal may be the decisive element to no longer allow the choice for diesel cars.
The shockwaves of the scandal, which has confirmed dark and old suspicions that diesels are more polluting than shown by 'official' tests, will extend all the way to the remarketing end of the business, with a negative impact on the residual values (RVs) of contract diesel vehicles now very likely as diesel engines become less attractive. In the close-end lease environment that dominates in Europe, RV risks are for the account of the lease company. In open-end formulas of in case of outright purchasing, that risk is for the fleet client – who will get less for his end if contract diesel cars and so will pay more for using his fleet.
The Volkswagen emissions scandal feels like a kick to diesel when it is already down on the ground. Governments and environmental organisations across Europe have been arguing for stricter limits on diesel cars – in some cases even for outright bans from city centres. If further investigations show that fraudulent underreporting of diesel's polluting emissions extends beyond Volkswagen, the call for stricter anti-diesel regulations and less attractive taxation will become deafening. This will have a tremendous impact on the European fleet – in 2014 53% of all new sold cars in Europe were diesel and looking at corporate fleets this share rises to more than 70%. The popularity of diesel cars in Europe (in 2000 the share of diesel sales for new cars in Europe was just over 32%, source: ACEA) comes from a strong incentivisation since 20 years in order to reduce carbon emissions in line with the Kyoto protocol.
Of course, customer is king. And the ultimate impact of this scandal on Volkswagen in particular and on diesel powertrains in general depends on how fleet clients react to it. But nobody will dispute that this is bad news for a manufacturer otherwise known for the rigorous quality of its products. If Volkswagen doesn't rebound soon, the German word most associated with its products may no longer be Gründlichkeit, but Schadenfreude.
