As Dieselgate scandal rolls on, VW emerges as the world No. 1 automaker

“Dieselgate” is back in the news thanks to a new Netflix documentary that among other things depicts how Volkswagen pumped diesel exhaust into small see-through chambers to test the effects of noxious diesel gases on monkeys. I am not making this up.

VW’s sprawling plant complex in Wolfsburg, Germany.

The horrific visuals of choking monkeys in Alex Gibney’s “Hard NOx” – part of a new documentary series entitled Dirty Money — are gut-wrenching. VW, we’re told, commissioned the tests in a bogus gambit designed to demonstrate that so-called “clean” diesels were a gift to humanity – affordable and “green.” Complete nonsense, of course. Humans were considered for the tests, by the way.

Moreover, Gibney ties the gassing of monkeys to Adolph Hitler, whose support of the People’s Car in the 1930s is well documented. In the film, attorney Michael Melkersen, who is acting for about 300 plaintiffs in civil suits against VW, says of the gassing: “Obviously one cannot help but think back throughout history to another series of events involving people being gassed.” Oh, my.

VW’s U.S. unit is arguing that the “inflammatory” comments by Melkersen will prejudice the jury in a trial set to start Feb. 26 and is seeking a six-month delay. We’ll see how this plays out. We know this: that trial is the first of about 2,000 suits representing those who opted out of a multibillion-dollar collective U.S. settlement in 2016 for reparation in the emissions scandal.

Ah, the scandal.

To review: for many years, the VW Group perpetrated a global fraud on some 11 million customers. VW had installed a so-called “defeat” device that allowed its diesels to cheat emissions tests so that it could claim vehicles like the Jetta with a small diesel were a fair and clean alternative to hybrids like Toyota’s Prius. That also was nonsense.

VW headquarters in Wolfsburg, Germany.

So far, just two minor VW executives in the U.S. have gone to jail for this fraud (one sentenced to seven years, the other 40 months). To date, VW has incurred upwards of $30 billion (US) in varies penalties and settlements in North American, Canada included.  Among the costs to VW in the U.S.: a $2.8 billion criminal penalty negotiated as part of a settlement with the U.S. Justice Department in January 2017.

In Canada, just last month VW came to an agreement to resolve Dieselgate. VW Canada will make cash payments and other benefits to eligible 3.0-litre diesel owners and lessees, for a total value of up to $290.5 million. VW also agreed to pay a $2.5 million civil penalty. That all comes on the heels of the larger settlement announced last year to compensate owners of 2.0-litre diesels (https://www.vwcanadasettlement.ca/en).

Nothing in the Canadians settlements addresses the millions of Canadians who inhaled excessive diesel fumes from vehicles equipped with the cheating device. And because the Canadian government has a cozy relationship with automakers in general, no further fines or charges are likely to emerge here.

Indeed, no VW Canada official has faced or is likely to face criminal charges for defrauding Canadians and excessively polluting our air. We have not been well served by government here.

But in South Korea, it’s a different story. There, VW has paid record fines and eight local VW and Audi officials have been charged criminally. One is now serving an 18-month prison term.

What’s missing from this picture is any sort of justice at all in Germany and Europe. VW has not offered nor given compensation to a single customer. No criminal or administrative fines or penalties have been imposed in Germany or Europe, either. None of the key decision-makers based in Germany have been charged by German or European authorities.

Perhaps there will be more to this story, yet. Perhaps German or European authorities will act to defend the rights of the public and consumers. Perhaps the many obstacles to successful civil suits in Germany will be overcome. Perhaps the Government of Lower Saxony will divest itself of its 20 per cent stake in VW and end what is clearly a conflict of interest – a government policing its own corporate interests. Perhaps.

What shocks me most of all about Dieselgate is not the lax global oversight of VW, nor the poisoned monkeys. What shocks me most is how little the general public seems to care about the damage done by a huge global automaker. Where is the outrage over European authorities who have failed to act to punish the company? Why do so few care that senior executives who almost certainly were aware of the ongoing fraud have not been charged?

As for the broader public, well, consider VW’s sales. Even as this scandal was unfolding in all its lurid detail last year, the VW Group and its 11 subsidiary brands – including Porsche and Audi — were posting record sales. In 2017, VW Group sold 10.7 million vehicles, a 4.3 percent increase on the previous year and enough to make VW the largest carmaker by sales in the world. Why are consumers around the world so forgiving?

Justice has yet to be fully served, and seen to be served, in the Dieselgate scandal and that is perhaps the biggest scandal of all.

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BMW has issues, but not a terminal illness

Folks often ask me what I would own if I could pick any “everyday” ride. Among cars, a BMW 5-Series. My SUV of choice would be the Porsche Cayenne.

BMW CEO Harald Krueger:

Yes, I admire German cars, despite the exorbitant pricing and the gouging of buyers who fail to tip-toe through the options list. German maintenance costs are also high.

On the whole, though, Volkswagen, Porsche, Audi, BMW and Mercedes collectively represent a fortress of automotive genius. The premium ones seem utterly impervious to the whims of wealthy buyers in particular and middle class societal trends in general. From a distance, it has long seemed that the Germans are unstoppable – even a billion-dollar global emissions scandal.

So, it was with great interest that I just read that “BMW Will Be the First to Go.” Oblivion? What?

Value Analyst, a respected Seeking Alpha contributor, is among the naysayers who believe BMW has a big problem with its branding, something being undermined further by a problematic balance sheet, legal troubles and low margins for a German premium automaker. Disruption in the auto industry – autonomous vehicles, car-sharing, electrification, and so on – will obliterate some car companies and BMW “will be the first to go.”

If you drive a BMW, keep it. If you own BMW shares, liquidate, argues Value Analyst.

Let’s dig into the case against BMW, starting with sales. BMW is a laggard in Canada, the U.S. and around the world. Canadian sales have inched up just 1.3 per cent to date, notes DesRosiers Automotive Consultants. That in a market up 5.0 per cent on the year. BMW of North America sales are down 3.2 per cent.

This makes little sense. Luxury car sales are exploding – up 7.4 to 18.0 per cent, depending on the segment in Canada. How bad are things for BMW versus its peers? Audi sales are up 18.7 per cent, Porsche is up 15.8 and Mercedes is up 12.2 per cent.

BMW has invested heavily in a long-range strategy to develop lightweight and electrified vehicles such as the i8 supercar.

Globally, BMW sales look rosier, until you dig. BMW is paying a price for sales that were up 3.7 per cent through the first three-quarters: third quarter pre-tax profit (EBT) was off 5.9 per cent and margin was down to 10.3 per cent. BMW, we can conclude, is buying sales. This is dinging profits and denting margin.

Moreover, the threats to BMW’s future health are many and varied. Tesla, while still incinerating billions, has a brand positioned to whack BMW the hardest among the Germans. If the Model 3 ever does come to market in significant numbers, it seems best positioned to T-bone BMW’s 3-Series more than any other single model.

Clearly, BMW has bungled the launch of its i-brand, which in a smart business plan would have positioned the Bavarian automaker to crush Tesla in an auto industry shifting to an electrified future. Worse, in the short term, BMW’s SUV offerings are not as varied as they should be in a market crazy for SUVs.

Which brings us to pickups. Sales are booming in North America, yet only Mercedes has moved into the pickup business with the X-Class. True, the X-Class is not for sale in North America – yet. Surely, a Merc pickup is coming to these shores. Nothing of the sort from BMW, Porsche, or Audi.

Perhaps BMW’s highly leveraged balance sheet explains why the Bavarian automaker isn’t pushing into pickups, and seems to lag rivals in other areas. Funding new products, technologies and services like Car2Go might become an even bigger problem to a BMW potentially facing liability costs associated with reports that the German car business colluded on technologies for decades.

Here’s something truly cringe-worthy: Dieselgate has cost Volkswagen tens of billions of dollars in fines and settlements with more costs coming, yet BMW has a third VW’s cash and equivalents on its balance sheet.

But in all this, let’s not forget that BMW is a resilient company that has been controlled by the Quandt family for decades. In past crises, BMW has proven resilient and inventive, and when pressed, family-controlled BMW can make quick decisions. Moreover, the BMW brand is powerful, owner loyalty is strong and the company is stuffed with innovative engineers and creative designers.

BMW has its problems and challenges, but only a fool would say the company is in peril. In the meantime, I will continue to love the 5-Series.

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The car you buy today should still be on the road in 2032

If you buy a new car or light truck today, you can reasonably expect it to last until 2032, perhaps longer.

Put another way, the car you drive off a dealer lot in 2017, will roll to something north of 350,000 kilometres on the clock before a final trip to the auto recycler.

We know this thanks to a mountain of data from DesRosiers Automotive Consultants.

Dennis DesRosiers, company president, says the average new car today lasts twice as long as anything built in the 1960s.  Back when the first Trudeau was prime minister, the “expected useful life of a vehicle,” says DesRosiers, was somewhere between 175,000 and 200,000 km. Today it’s 325,000-350,000 km.

Cars last longer than ever because the auto industry has invested hundreds of billions in a four-decade-long quality drive, notes DesRosiers. The results are real and quantifiable.

For instance, in 2000, only 26.1 per cent of vehicles survived 15 years of ownership. As of 2016, approximately 49.4 per cent of vehicles survived 15 years of ownership.

“This could only have happened if quality had increased substantially,” says DesRosiers in a note to clients, adding, “I would venture to guess that 60 to 70 per cent of vehicles bought today will still be on the road fifteen years from now.”

Averages can, however, be misleading. Not all car companies and car models are equal on the quality front. The latest reliability report from Consumer Reports shows a substantial gap between the most reliable brands and individual models and the least – the also rans.

Toyota, the No. 1 brand in the 2017 study, earned an average reliability score of 80 across 14 models; last-place Cadillac had an average score of 26 based on just five models.

Toyota’s least reliable model was the Tacoma pickup, while Cadillac’s was the Escalade sport-utility vehicle. Most reliable Toyota: the 86 sports car. Most reliable Cadillac: the CTS sedan.

As you ponder your next new ride, something that may be on the road for a decade and a half or more, here are the most and least reliable models from CR – and the top brands:

Top 15 brands: (1) Toyota, (2) Lexus, (3) Kia, (4) Audi, (5) BMW, (6) Subaru, (7) Infiniti, (8) Buick, (9) Honda, (10) Hyundai, (11) Nissan, (12) Mazda, (13) Porsche, (14) Mercedes-Benz, (15) Ford.

Most reliable vehicles: Kia Niro, Lexus ES, Lexus GS, Audi Q3, Toyota RAV4, Lexus IS, Toyota Prius V, Toyota Prius C, Infiniti Q70 and the Subaru BRZ/Toyota 86 combo.

Least reliable vehicles: Chevrolet Camaro, Mercedes-Benz GLC, Jaguar F-Pace, GMC Acadia, Fiat 500, Ford Focus, Ford Fiesta, Volvo XC90, Cadillac Escalade and Tesla Model X.

 

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And the (sales) winners are…

In a country that has gone crazy for big pickups and modest-size SUVs (sport-utility vehicles), two small-car stalwarts remain strong sellers in Canada.

Ah, the Honda Civic. Sales are up 13.5 per cent year-on-year. In real terms, the numbers remain strong. Through the end of July, Canadians had bought 43,759 Civics.

Honda Civic: best-selling car in Canada.

Then we have Toyota’s Corolla. Year-on-year sales are up 15.3 per cent, to a very respectable 32,527. And while Hyundai Elantra sales have dipped 9.1 per cent this year, the actual sales number is respectable – 28,298.

Overall, though, car sales are stalling, down 2.0 per cent on the year. Meantime, in a market where light vehicle sales overall are 5.0 per cent, sales of light trucks – pickups, SUVs and minivans — have jumped 8.7 per cent, notes DesRosiers Automotive Consultants.

Look, Ford sells twice as many F-Series pickups as Honda sells Civics. Four of the best-selling light trucks are pickups like the F-Series, Ram, GMC Sierra and Chevrolet Silverado. All are strong sellers overall, too. The Ram, Sierra and Silverado out-sell every passenger car model save the Civic.

Meantime, the compact SUV wave continues. Five of the top 10 best-selling light trucks are compact SUVs like the Toyota RAV4 and Honda CR-V. All the top-selling compact SUVs are enjoying double-digit sales gains, too, save the RAV4. But the RAV remains at the top of its class, nonetheless.

Canadians are growing increasingly interested in subcompact sport-utes like Toyota’s C-HR.

Now here’s something to watch:  subcompact SUV sales jumped 58.4 in July and are up 27.2 per cent on the year. Canadians are discovering the fuel economy and functional strengths of little rigs like the Honda HR-V, Mazda CX-3 and Toyota C-HR – all of which are about the same size as the first versions of the RAV4 and CR-V of nearly two decades ago.

Okay, enough of the commentary. Here’s a look at the top 10 best-selling cars and light truck in Canada through the end of July. The numbers come courtesy of DesRosiers Automotive Consultants:

Passenger Cars

2017        2016          % gain/loss

1 Honda Civic                43,759    38,558            13.5%

2 Toyota Corolla            32,527    28,216            15.3%

3 Hyundai Elantra         28,298    31,126            -9.1%

4 Chevrolet Cruz             17,712     13,805          28.3%

5 Mazda3                          16,941    16,512            -2.6%

6 Volkswagen Golf          12,533    11,115            12.8%

7 Volkswagen Jetta         10,556    13,036         -19.0%

8 Kia Forte                       10,083    7,419            35.9%

9 Nissan Sentra                9,212      9,989            -7.8%

10 Honda Accord             8,832      8,380            5.4%

Light Trucks\

1 Ford F-Series                92,651    85,818           8.0%

2 Ram pickup                   64,913   57,193           13.5%

3 GMC Sierra                    36,230   30,071          20.5%

4 Chevrolet Silverado      33,085   26,722          23.8%

5 Dodge Caravan              30,212    32,502          -7.0%

6 Toyota RAV4                  29,583   29,005            2.0%

7 Honda CR-V                   27,970    24,918           12.2%

8 Ford Escape                    27,699    25,130           10.2%

9 Nissan Rogue                 25,766    22,167             16.2%

10 Hyundai Tucson          18,292    15,917              14.9%

Source: DesRosiers Automotive Consultants

 

 

 

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This is why we all should worry about Tesla

I began my career as an automotive journalist when I was business writer for The Edmonton Journal. This is why I think in “buy the car, buy the stock terms.”

Which brings me to Tesla Inc.

As I write this, shares of Tesla are trading at $365.20, giving the company a market valuation of $58.63 billion (all figures in U.S. dollars).

Some perspective: General Motors Co. is trading at less than one-tenth of that, at $35.67, for a market cap of $51.4 billion. BMW AG is worth $52.80 billion ($80.14/share).

Tesla Model 3 prototype.

Not to belabor the point, but GM and BMW earn billions in profits each year. Never-profitable Tesla is trading at an astounding price based on pure speculation about future potential.

Some prominent analysts believe Tesla will soon be worth even more. Robert W. Baird & Co. a private equity firm, has an analyst on board who has set a Tesla price target at $411.

“In our opinion, TSLA isn’t a good short headed into the Model 3 ramp as we continue to believe upcoming catalysts will drive shares higher,” advises analyst Ben Kallo. The EV automaker is a top pick for 2017 at the firm.

Baird also owns shares in Tesla. A surging Tesla is good for Baird. But not as good as it is for the top 15 Tesla shareholders. And this is where things get very interesting.

There were 166.89 million Tesla shares outstanding as of July 31. About 71 million of those shares, or 42.5%, are held by 15 huge institutional investors, according to the latest Form 13F’s for 2Q17. (Within 45 days after the end of each calendar quarter, institutional investors with at least $100 million in assets under management are required to file a Form 13F with the U.S. Securities Exchange Commission.)

Let’s drill deeper. According to the latest from NASDAQ, 777 institutional investors hold 57.04% of all outstanding Tesla shares.

Tesla CEO Elon Musk (right) and actress Amber Heard.

The point is, about $35 billion of Tesla’s $58.63 billion market cap is owned by a very small group of big institutions who are making big bets on Tesla. These institutions are run by like-minded people who travel in the same circles, go to the same clubs, send their kids to the same schools, live in similar mansions and penthouses, sail about on similar yachts… These people think alike and are in constant communication, professionally and socially.

Take Fidelity (FMR LLC), which is a very secretive entity run by Boston’s Johnson family. I am sure you’ve heard of Fidelity; it runs ads everywhere for its wealth management services.

Fidelity owns 21.3 million shares of Tesla, or 12.8% of the company. Baillie Gifford & Co., owns 13.4 million shares of Tesla, or 8.0%. Yes, two big and powerful investment institutions own one-fifth of Tesla.

Vanguard Group owns about 4.0%, T. Rowe Price has 3.3%, and so on. Morgan Stanley, whose analyst Adam Jonas is the most bullish of the Tesla bulls, holds nearly 1.0% of Tesla. Even Canada’s own Bank of Montreal has a 2.0% stake in Tesla.

This small group of huge investors decides whether Tesla shares go up or down by their trading behavior. Trading is influenced by the pronouncements of analysts like Kallo and Jonas.

On top of that, many of these firms earn a tidy profit from servicing Tesla short-sellers. But again, they control what’s available to those who want to short Tesla.

In one sense, this is all a casino game being played for huge stakes by rich members of a very small club. That said, plenty of everyday investors hold mutual funds and other investments tied to the fortunes of Fidelity, Vanguard, BMO and the like. In that sense, it’s a game being played with other peoples’ money.

At the present time, there is no evidence of any collusion or coordination amongst these like-minded investors. There is no evidence to suggest they are coordinating their trades or anything like that. Personally, I doubt there is any such thing happening – not in a formal sense.

But I cannot emphasize enough the fact that a small group of investors who control the fate of Tesla’s share price think alike, run in the same circles, associate with the same people and share the same legal advice. Right now it’s in their interest to see Tesla’s shares remain strong and grow, despite the fact Tesla is unprofitable and has always been so.

Tesla may very well turn out to be what CEO Elon Musk has promised – an energy company with a market cap to rival Apple. But what if that doesn’t happen?

A Tesla failure, or even underperformance that disappoints the market, could result in a small group of big investors losing fortunes – along with the small investors who themselves either hold stakes in Fidelity, Vanguard and the rest or let these firms manage their investments, or both.

This is what worries me most about Tesla. And this is why I believe CEO Elon Musk’s outsized pronouncements and promises are dangerous. If Tesla does not live up to its promise, big institutions and investors of all sizes will be badly hurt.

 

 

 

 

 

 

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