Thursday, September 24, 2015

We've All Been Duped. Again.

Regular readers of this blog will know that I am a passionate long-term investor in growing companies I believe to be smart, competitive, industry-dominant, strategic and possessed of management with integrity. I've discussed many of those companies here.

What few readers know, unless they've read my oldest, orphan posts from 2011, is that I'm also passionate about cars. Not that I can reassemble a '66 Pontiac carburetor blindfolded, or that I have a garage full of exotic Italian sports cars. But I'm the one who gets what-to-buy questions from the college parent looking for something safe, cheap, and Vermont-winter durable; the retiree who wants luxury, reliability and great mileage. I read a lot of car magazines and daydream about what I would own if I could. Maybe car geek is the best way to put it.

A few times, these two passions have aligned and I've purchased stock in an automotive manufacturer whose products, leadership and strategy resonated with me. Volkswagen is one of those manufacturers.

I bought my first VW product in 2003, a new Audi A4 Avant sports wagon. I loved that car. Not particularly quick, but with handling and comfort and safety unmatched in my experience. Where it really shined was on snow: Audi's proprietary all-wheel drive allowed me to motor up crazy-steep grades even on slick wet ice. A favorite apres-ski activity was hauling embarrassed Subaru and Volvo drivers out of snowy parking mishaps. I campaigned for the Audi brand, cajoling friends and family to consider what I felt were solid, reliable, exciting, practical and high-value vehicles. When some years ago, then-CEO Martin Winterkorn announced Volkswagen's intention to become the world's largest automaker, I evaluated the plan he laid out and bought the stock. I was not disappointed, as my investment rose substantially over the next couple of years. I sold out of that position in late 2013 when I reallocated that money into another company which I felt would appreciate faster. 

But I continued to be a fan of the products: my wife and I currently have both a newer and an older Audi, one gas-powered 4-cylinder and one diesel 6-cylinder. We agree, these are the best cars we've ever had. Not one complaint.

Until now. 

Golf Turbo-Diesel Injected
Last weekend, as you've undoubtedly learned, Volkswagen admitted it had been cheating the U.S. EPA-mandated emissions tests since at least 2009 on all its 4-cylinder diesel vehicles. That's 500,000 cars in the US, and another 10.5 million cars around the world. The cars contain smart software that will detect an emissions test underway and fake the results, while spewing the poisonous greenhouse gas nitrous oxide and other pollutants in regular driving. VW lied to its customers, to its shareholders, all the world governments which regulate those pollutants, and likely to most of its employees and its board of directors. This is the very definition corporate malfeasance: fraud on an absolutely massive scale. 

11 million people spent a combined $275 billion to buy these cars around the world thinking they were conserving a natural resource and protecting the environment at the same time. They were duped.

VW plant, Wolfsburg, Germany
How bad could it get? Volkswagen has already halted selling of the affected cars in the U.S. and probably will be forced to do the same worldwide. They face fines in the billions of dollars for the U.S. EPA infractions alone. The company will likely have to retrofit millions of cars with appropriate software and hardware to contain the unlawful emissions, which in turn will reduce both the cars' mileage and performance figures. Impacted customers will sue for the inevitable drops in resale value, and are unlikely ever to buy another VW branded vehicle-- which includes not only VW and Audi but Skoda and Seat (Europe only), Porsche, Bentley, Lamborghini and Ducati. What's bad for Volkswagen is bad for Germany: the German state of Lower Saxony owns 20% of the voting stock in the huge organization, which has fallen in value by over 25% in less than a week since the story broke. There are 300,000 Volkswagen employees in Germany, far and away the biggest employer in Europe's most financially stable and generous nation. Another 300,000 employees across the globe will also be forced to reckon with flat-lined sales and reduced company resources. The future of this massive institution may even be in jeopardy. And the governments who were tricked-- all of them of prosperous, educated nations whose leaders should know better-- come out looking foolish and irresponsible to have let this happen in the first place. 

"My [VW diesel] is no longer a car, it's a comeuppance. I now have a car that has been harming, not helping, the environment. It does not provide the benefits for which I paid a premium. It will have a lower resale value when I want to get rid of it." --Sam Grobart, Bloomberg

The mess is now causing regulators from around the globe to reassess other auto manufacturers' claims, starting with German competitors BMW and Mercedes-Benz (1 out of every 7 jobs in Germany is related to auto manufacturing). Now everything must be exhaustively inspected, tested, graded. There is talk of VW having actually turned the entire planet off of diesel as a realistic vehicular fuel, despite its excellent efficiency, strong performance, and low production cost relative to gasoline. It could swing the entire renewable energy debate. This thing is gargantuan.

"Clean Diesel" intro. Sales soared.
My wife and I got off easy, in the short term. Our Audis are not among the affected cars, which according to a quick Craigslist search now show resale values down about 20% from a week ago (though that could be a hiccup). My resales are probably down slightly due to damage to the VW and Audi brands, but those might rebound over time. But I cannot imagine the dismay of, for instance, a young outdoorsy couple who scratched and scrimped to purchase their first VW Golf turbo-diesel, paying up to feel they did right by the planet.

I've been shouting 'Audi' from the rooftops for more than a decade, and I've converted several former BMW and Lexus owners. I've made a profit as a Volkswagen shareholder. I've got a favorite performance fleece with the Audi logo, a gift from a friend who works at my nearby dealership. I even have an Audi watch. The geek as evangelist. 

On this, I am lost. It's a first-world problem, I realize, but I don't know what to do. My current car is leased, and comes due in a few months. I had planned to replace it with another Audi. Yet don't I now have a moral responsibility to boycott Volkswagen products? That's what a concerned citizen does to fight colossal corporate corruption: vote with my wallet. What if I get a used Audi next time, a transaction from which the company sees no financial gain? Is that also now morally off-limits? And what about the other German automakers? Surely they cannot all have been pulling the wool over our eyes? Unless they were actually in collusion with one another all along ...? 

And what of Volkswagen shares, which in 6 months or so will be cheap, and which still reside on my watch list? Is it karmically wrong to own part of a company which so ruthlessly ignores the health of the planet and circumvents the laws that govern its people, in the name of profitability? Come to think of it, I've long refused to own cigarette manufacturers-- and haven't they always played the same game of Obscuring the Obscene? 

In the end, we're all the losers on this. Consumers were duped and feel betrayed by Big Corporate, again. Germany itself, rising postwar to become Europe's only financial superpower, has stumbled. Elected leaders in the U.S., already disliked and mistrusted, look even more inept. Monumental international brand reputations have been trashed. Hard-asset resale values are slashed. China's pollution problem is worsened. Global temperatures probably notched up .001%. 

Maybe I'll get myself a nice bike. With an oxygen tank.

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