Isabelle Chaboud, Professor in Finance, Accounting and Law at Grenoble Ecole de Management.
The Volkswagen group has been plunging towards an abyss ever since the discovery of its fraudulent circumventing of antipollution tests for diesel vehicles in the United States. The repercussions of the scandal have been quick and painful: the group lost approximately $25 billion in market capitalization over two days; its stock dropped by more than 20%; and the chairman of the board of directors, Martin Winterkorn, stepped down from his position on September 23rd. Mathias Müller, who previously worked for Porsche, was nominated to replace the ex-chairman. The events following this scandal could not only be fatal to the German group, but also have industry-wide repercussions.
In 2014, Volkswagen was neck and neck with Toyota. The group had sold more than 10 million vehicles around the world and had successfully overtaken GM. Mr. Winterkorn proudly announced the group’s financial results in its last annual report. Given the difficult economic period, the ex-chairman was happy to share positive results: sales of €202.5 billion (up 2.8% from 2013) and a net result of €10.1 billion ( up 21% from 2013).
Given these strong results, the now ex-chairman decided to increase shareholder dividends from €4 to €4.80 per share. In addition, his statement to the group’s shareholders declared: “We support (financial) soundness, reliability and long term success, even under these unfavorable conditions.” However, with the current scandal, such lofty goals appear to have gone up in smoke. The breadth of the scandal revealed on September 18th will likely mark the end of Volkswagen’s ambition to become the industry’s world leader by 2018.
A rapid succession of events
On September 18th, the American Environmental Protection Agency (EPA) announced that Volkswagen knowingly used software to help improve antipollution test results. On September 21st, the German group confessed and expressed its “sincere apology” following which an investigation was launched.
On September 22nd, the group declared that 11 million vehicles worldwide were equipped with this software and therefore called into question their test results. Volkswagen also indicated that in the third quarter of 2015, the group would set aside €6.5 billion to begin addressing this crisis.
A fatal blow to the “Made in Germany” brand
The group has been communicating for years with campaigns built around the German Das Auto slogan. Its slogans and ads, which were delivered in German even in France, helped develop the brand’s image of reliability, security and quality. This scandal however marks the implosion of years of efforts, research and development. By confessing to the use of a software that circumvents antipollution tests for 11 million of its cars, Volkswagen has opened the door to fears in other countries. As a result, Germany, South Korea and Italy have all launched investigations. On September 22nd, the French Minister of Sustainable Development, Ségolène Royal, requested a thorough investigation of the scandal.
To make matters worse for the group’s leaders, the American Department of Justice launched a criminal investigation. The risks are significant as those held responsible for fraudulent declarations and for cheating the Clean Air Act will face prison time.
At the same time, the EPA has launched an investigation and could fine the German automobile manufacturer up to $18 billion. To top off the crisis, thousands of automobile owners have joined together to launch a class action lawsuit in the United States.
Terrible risk management
This scandal is a perfect example of catastrophic risk management. Either the group’s management was unaware of major flaws in internal controls or they covered for their American teams. If the latter is true, how could the group’s management imagine that such a software would not be detected by a regulatory agency? With such a risk in mind, why did the group equip so many vehicles with this software?
It is possible that management estimated the risk of the software being detected to be minimal, but in any case, they greatly underestimated the magnitude of such a risk. If we take into consideration the fact that Volkswagen sold 10 million vehicles in 2014, then the 11 million vehicles equipped with this software translates to more than a year’s worth of sales!
A breakdown in governance
Given the consequences of such a decision, it is hard to imagine that top management, and therefore the board of directors led by Mr. Winterkorn, was not implicated in the decision-making process. A fact that brings into question the effectiveness of the German dual leadership governance model with its management and supervisory boards. This case would appear to be the epitome of an extreme breakdown in corporate governance. Either there was a massive cover-up from the management or we can point to a lack of independent non-executive directors who could have challenged management. Indeed, only very few directors were hired from countries other than Germany and Austria.
Not only does this scandal have a direct and immense financial impact on the group, it could also be a fatal blow to the brand if lawsuits are filed one after another and Volkswagen is forced to pay fines as well as punitive damages. On top of the impact suffered by the German group, the image of diesel fuel is also at risk. Finally, such a scandal has impacted other European manufacturers and their various stocks have dropped since September 23rd.
Michael Horn, President and CEO of the Volkswagen Group of America, appeared before members of Congress for more than two hours on October 8th. His declarations did not appear to convince the Energy and Commerce Committee. Much like Mr. Winterkorn, he stated that it was “not a corporate decision” and that “a couple of software engineers” were responsible for having installed the software in the vehicles. However, Congressman Chris Collins from New York’s 27th District categorically rejects such a view of the scandal. According to him, the manufacturer was either incompetent or responsible for a “massive cover-up.”
With such a major flaw in governance and risk management, who can this really be pinned on? Mathias Muller, the new chairman of the board of directors at Volkswagen, told the group’s 600,000 employees that “we can and we will overcome this crisis.” Nevertheless, he was unable to answer all of the questions brought up by this scandal and he has no real idea of how much it will really cost to fix everything from modifying the vehicles equipped with this software to recouping lost sales, making up for fines and rebuilding the brand’s image.
As a result, the bill is increasing daily. Volkswagen has already announced the recall of 8.5 million vehicles to begin fixing the issue. In addition, new class action lawsuits are being filed in the UK and the German carmaker will probably be forced to reimburse various government subsidies. The crisis could also lower the group’s credit rating which will increase the cost of financing. Analysts at Exane estimate that the cost will be at least €25 billion, whereas Credit Suisse predicts it to be more like €80 billion.
While we continue to await the verdict on who is to be held responsible, the group’s auditors have a real challenge to overcome as they try to calculate how much the group must set aside by the end of December 2015 in order to face this crisis.
Packaged food giants push direct online sales to gauge consumer tastes
By Siddharth Cavale and Nivedita Balu
(Reuters) – Packaged food giants including Kraft Heinz, General Mills and Kellogg are pushing sales of their products to consumers directly via their own online channels, in a quest to gather more data about shoppers’ purchasing habits.
Velveeta-cheese maker Kraft Heinz saw its e-commerce sales double in 2020, now representing more than 5% of its global sales, Chief Executive Miguel Patricio said at the virtual Consumer Analyst Group of New York (CAGNY) conference this week.
The company sells Heinz baked beans and tomato soup by subscription or in bundles directly to consumers on a “Heinz To Home” website in the United Kingdom, Australia and Europe.
Sales on the site are “giving us valuable insights into consumer behavior, enabling us to quickly test and learn from innovations,” Kraft’s head of international business, Rafael de Oliveira, said at the conference.
Kraft would continue to use the site as a channel to generate strong sales in developed markets, he said.
The company also counts sales of its products through marketplaces such as on Amazon.com and Walmart.com as part of its e-commerce sales.
U.S. shoppers spent on average $1,271 buying groceries online last year, 45% more than they did in 2019 as the pandemic spurred shopping online, according to market research firm Earnest Research. In contrast, the average dollars spent in stores rose only about 7% to $3,849.
PepsiCo sells products including Doritos, Quaker oats and Gatorade directly to consumers through two websites, pantryshop.com and snacks.com, both launched in 2020.
Chief Financial Officer Hugh Johnston said that more than 45% of the company’s capital investments over the next few years would be dedicated toward manufacturing capacity, automation, and a “ramping up of investments in our e-commerce channel.”
As major online retailers including Amazon.com and Walmart.com continue to gather valuable data on shoppers, many packaged food manufacturers are keen to gather their own data on shoppers, too.
“COVID (has) simply accelerated our digital growth and has provided us with yet another source of data and insight,” Monica McGurk, chief growth officer at breakfast cereal maker Kellogg Co., told the conference.
Kellogg, producer of Corn Flakes as well as Pringles chips, said on Wednesday it had launched a direct-to-consumer website focused on digestive wellness. The group plans to sell its new Mwell Microbiome Powder for gut health via the site to gather data on customer interest before it launches the product more widely.
E-commerce sales have doubled in the past year and now represent about 8.5% of the group’s $13.77 billion in annual sales, Kellogg said.
Pillsbury dough-maker General Mills also sees the benefits of tracking consumer habits more closely.
“We’re aggressively investing in data and analytics. We are gathering unparalleled insights from the first-party data we collect through our brand websites,” General Mills’ Chief Executive Jeffrey Harmening said at the conference.
On its Bettycrocker.com website, General Mills provides hundreds of recipes using Betty Crocker cake mixes and frosting. The site leads people to the closest store or an online retailer where they can purchase the products, thereby generating data for General Mills on what a particular customer from a certain zip code is buying. The company does not sell the food products directly on its website.
Consumers, however, may have to shell out more if they shop directly from brand websites.
Prices on the two PepsiCo sites, for example, were generally higher than those on Walmart.com or Amazon.com, Reuters checks show. On Walmart.com, for example, a 10 oz pack of Doritos Nacho Cheese was on sale for $2.50 compared to $4.29 on Pepsico’s website.
Kraft Heinz offers tins of soup, beans, pasta and baby food bundled into packs ranging from six to 25 items and costing between 10 and 20 pounds ($14.01-$28.03) on its UK website. It told Reuters the relatively higher prices of items and bundling of packs than on some other online marketplaces was to be able to eke out a margin after including delivery costs.
“Longer term, we see real value in this channel to be an insight and data channel for us,” Jean-Philippe Nier, head of e-commerce for Kraft Heinz’s business in the UK and Ireland, told Reuters. People are more prepared to order directly from manufacturers than they were before. The time is now.”
Graphic: Direct online sales to cross $20 billion in 2021 – https://graphics.reuters.com/PACKAGEDFOODS-ECOMMERCE/rlgpdexngvo/chart.png
($1 = 0.7137 pounds)
(Reporting by Siddharth Cavale and Nivedita Balu in Bengaluru; Editing by Vanessa O’Connell and Susan Fenton)
Siemens Healthineers gains EU nod for $16.4 billion Varian buy
BRUSSELS (Reuters) – EU antitrust regulators on Friday cleared with conditions Siemens Healthineers’ $16.4 billion acquisition of U.S. peer Varian, paving the way for the German health group to become a world leader in cancer care therapy.
The European Commission said Siemens Healthineers pledged to ensure that its medical imaging and radiotherapy equipment will work with rivals in return for its approval, confirming a Reuters story. The pledge is valid for 10 years.
“High quality medical imaging and radiotherapy solutions are crucial to diagnose and treat cancer. The efficiency and safety of treatment relies on the ability of these products to work together,” European Competition Commissioner Margrethe Vestager said in a statement.
Varian is the leader in radiation therapy with a market share of more than 50%. The deal received the U.S. antitrust green light in October last year.
(Reporting by Foo Yun Chee)
Battling Covid collateral damage, Renault says 2021 will be volatile
By Gilles Guillaume
PARIS (Reuters) – Renault said on Friday it is still fighting the lingering effects of the COVID-19 pandemic, including a shortage of semiconductor chips, that could make for another rough year for the French carmaker.
Renault reported an 8 billion euro ($9.7 billion) loss for 2020 which, combined with gloomy take on the market, sent its shares down more than 5% in late morning trading.
“We are in the midst of a battle to try to manage a difficult year in terms of supply chains, of components,” Chief Executive Luca de Meo told reporters. “This is all the collateral damage of the Covid pandemic… we will have a fairly volatile year.”
De Meo, who took over last July, is looking at ways to boost profitability and sales at Renault while pushing ahead with cost cuts. There were early signs of improving momentum as margins inched up in the second half of 2020.
The group gave no financial guidance for this year, although it said it might reach a target of achieving 2 billion euros in costs cuts by 2023 ahead of time, possibly by December.
Executives said they were confident the carmaker could be profitable in the second half of 2021, but that they lacked sufficient market visibility to provide a forecast.
Renault struck a cautious note, saying it was focused on its recovery but warned orders had faltered in early 2021 as pandemic restrictions continued in some countries.
The group is facing new challenges as the European Union tightens emissions regulations and after rivals PSA and Fiat Chrysler joined forces to create Stellantis, the world’s fourth-biggest automaker.
The auto industry endured a tough 2020 but a swift rebound in premium car sales in China helped companies such as Volkswagen and Daimler to weather the storm.
Auto companies globally have since been hit by a shortage of semiconductors that has forced production cuts worldwide.
“The beginning of the year has shown some signs of weakness,” De Meo told analysts, but added the chip shortage should be resolved by the second half of 2021. “We have taken the necessary measures to anticipate and overcome challenges.”
Renault estimated the chip shortage could reduce its production by about 100,000 vehicles this year.
The group was already loss-making in 2019, but took a sharp hit in 2020 during lockdowns to fight the pandemic, which also hurt its Japanese partner Nissan.
Analysts polled by Refinitiv had expected a 7.4 billion euro loss for 2020. The group posted negative free cash flow for 2020.
The 2018 arrest of Carlos Ghosn, who formerly lead the alliance between Renault and Nissan, plunged the automakers into turmoil.
In a further sign that the companies have been working to repair the alliance, De Meo told journalists that Renault and Nissan will announce new joint products together in the coming weeks or months.
Renault has begun to raise prices on some car models, and group operating profit, which was negative for 2020 as a whole, improved in the last six months of the year, reaching 866 million euros or 3.5% of revenue.
Analysts at Jefferies said the operating performance was better than expected. Sales were still falling in the second half, but less sharply.
Renault is slashing jobs and trimming its range of cars, allowing it to slice spending in areas like research and development as it focuses on redressing its finances. It is also pivoting more towards electric cars as part of its revamp.
It was already struggling more than some rivals with sliding sales before the pandemic, after years of a vast expansion drive it is now trying to rein in, focusing on profitable markets.
De Meo told journalists on Friday that the French carmaker will make three new higher-margin models at its Palencia plant in Spain, where manufacturing costs are lower, between 2022 and 2024.
($1 = 0.8269 euros)
(Reporting by Gilles Guillaume and Sarah White in Paris, Nick Carey in London; Editing by Christopher Cushing, David Evans and Jan Harvey)
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