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Why BMW Could Be the Winner in Volkswagen Diesel Scandal

This is one of the greatest ironic juxtapositions in recent corporate history. Just four days before Volkswagen was caught in a potential $18 billion scandal over cheating the Environmental Protection Agency on its emissions tests, with possible criminal charges, General Motors Co. (NYSE: GM) was fined $900 million with zero criminal charges for intentionally hiding an ignition defect that killed 147 people.

Either the lives of 147 people are only worth 5% of the air pollution spewed by Volkswagen, or the amount that this will end up costing the polluting German automaker is severely overblown, pun intended. As warped as it sounds, it is very possible that Volkswagen will have to pay much more for covering up nitrogen oxides than GM paid for covering up a fatal ignition problem that cost 147 lives, for two reasons. First, Volkswagen committed a direct crime against government regulators, which they take personally regardless of the fact that it is a minor issue compared to what GM did. In all likelihood, Volkswagen’s crime will not be linked to a single death. Second, GM is an infamous past $50 billion government bailout recipient. Volkswagen is not.

If you’ve loaned someone that much money in the past, you’re not likely to punish them too harshly when they do something wrong.

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The reason Volkswagen cheated is simple. Pollution controls lower fuel economy and performance, so they had the pollution controls automatically turn off on the highway through a software code. This, so they could claim their clean diesel cars were both clean and fuel efficient. They were caught when an independent team got suspicious and stuck a probe in the tailpipe of one of VW’s “clean diesel” cars while driving it on the highway.

But Volkswagen’s biggest problem may not even necessarily be the fine itself, which probably will be nothing near $18 billion. It will still be more than GM’s fine, but not 20 times more. The biggest problem won’t be China either, Volkswagen’s biggest single market. If we ranked governments by how much they cared about air pollution, China would be at the bottom, considering it is the world’s most polluted country as it is. Volkswagen’s biggest problem will be Europe where it has a 25% market share and they care about pollution.

Fewer Europeans will buy Volkswagen’s “clean diesel” cars even after the cheating software is removed. These include Audis, Porsches and Volkswagens proper. If Europeans are looking for a clean diesel German car, they will most likely move to BMW, which could gain the most from this debacle, assuming that BMW isn’t cheating just like Volkswagen. BMW has a 6.3% market share in Europe now. It may go up next quarter in taking some of Volkswagen’s share.

One other thing we can learn from Volkswagen’s 23% fall (so far) since the news broke is the fragile fundamentals of the entire global passenger car industry. Reaction to the news tends to be more telling than the news itself, and the fact that Volkswagen shares are still falling hard with no bounce yet belies more systemic problems in the passenger vehicle sector. European car sales are fueled by extremely low interest rates, just like in North America, rates that cannot last.

If industry fundamentals were stronger, Volkswagen shares would not have fallen so far so fast.

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By Rafi Farber