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How will the VW crisis affect the ‘car state’ of Saxony?

The Chemnitz Automotive Institute (CATI) comments on the impact of the Volkswagen diesel disaster on the region – scaremongering is misplaced

Volkswagen’s reputation has been adversely affected in recent days by its deception of its customers and the public. Volkswagen’s brand image as a guarantee of high-quality products has been damaged, something which the Chemnitz Automotive Institute (CATI) considers to be a dramatic turn of events – also affecting employees of the automobile group and numerous suppliers. Prof. Werner Olle, a member of the Chemnitz Automotive Institute (CATI) board, comments on the impact of the Volkswagen diesel disaster on the region.

What specific impact does CATI expect to see?

Initially, this will essentially be an impact on sales and profit. As regards sales, it is already apparent that VW has done itself no favours on the strategically important US market. A drop in sales can be expected here. We know from other incomparable occurrences involving other manufacturers on the US market that the loss of image has a lingering effect. This has already been ensured by a flood of lawsuits, the legal evaluations and decisions for which will drag on for years. The second risk is that sales of diesel vehicles as a whole will be adversely affected and will (at least temporarily) suffer a decline. This applies not only to the US market with its diesel market share of less than 5%, but also to markets such as Germany and Europe with market shares of 50% among new registrations. The first signs of this have already been emerging in recent days on online platforms for new car purchases in Germany. Finally, we have the great unknown – loss of image. Will VW diesel customers switch to petrol models, or will some VW customers also switch brand? The bottom line is that we expect VW brand sales figures to be under pressure for at least the next few months.

And how would you rate the impact on profit?

The prevailing topic in recent days has been VW’s financial burdens. Eight-figure sums for corrective actions, fines and customer receivables hang in the air. These and the expected sales pressure will place strain on VW’s profits not only during the next few months, but also in an ongoing fashion for the next two or three years.

What does this mean for VW’s three Saxony sites?

No region will be spared the impact of the pressures approaching VW as a whole. This includes the ‘car state’ of Saxony, which is of immense importance for Volkswagen with its 10,000 employees across three sites. At the Chemnitz engine plant, which manufactures solely petrol engines with various injection technologies in the lower litre capacity range plus components for diesel engines, the impact will remain very limited. As a start-up location for product innovations, this site is also one of national significance for the VW brand. At the vehicle production plant in Zwickau, vehicles with both petrol and diesel engines are produced for the Golf and Passat ranges according to the VW brand’s plant allocation. We fear that the impact of the emissions scandal on sales will make it impossible to meet this year’s ambitious targets for vehicle volumes. It is not currently possible to reliably make any more detailed forecasts. The impact of VW’s cost burdens and consequently reduced profit should not be underestimated for any sites or regions, and we expect this to result in new investment projects which have not yet been begun or commissioned being subject to renewed scrutiny. This could also prompt painful adjustments to new projects in the region.

What should VW suppliers in the region expect?

Today, the supplier industry is responsible for 70-75% of a car’s value. This holds true for Volkswagen. Suppliers will therefore inevitably feel the effects, specifically in two respects. The first is turnover. If VW experiences the sales pressures I previously mentioned, and we assume that this will be the case for the coming months, then suppliers will also be subject to reduced demand figures and their production volumes will therefore also be diminished. The second is profit. The huge cost burdens in store for VW will without a doubt not alleviate the cost pressures on the supplier industry in existing or new optimisation programmes. Engineering and planning service providers involved in new projects may feel the effects. This is also hugely important for Saxony, where around 20,000 to 25,000 people are employed by suppliers working for Volkswagen.

Is there a danger of the VW crisis triggering an automotive crisis in Saxony?

On the one hand, we must be realistic about the fact that the market – including VW customers – and politics will not easily return to business-as-usual with everything soon back exactly as before. This will not happen. On the other hand, however, scaremongering is entirely misplaced. In our view, very much will depend on how quickly and relentlessly Volkswagen makes disclosures and sustainably ensures that fraud and manipulation are systematically eliminated in the future. For a start, this is extremely important on an internal level, as employees are also awaiting clarity and sustainability. If this is achieved, then Volkswagen will always have the potential to regain its former strength. The market will also react positively to this after a certain amount of time has passed. The WV crisis will not escalate into an automotive crisis in Saxony: we at the CATI Institute are convinced that this is the case. However, the region will be faced with two or three years of serious challenges.

What other topics can we expect in the wake of the VW emissions scandal?

If VW fulfils its disclosure obligations in the next few days and all those affected begin to emerge from their state of shock, a whole range of familiar economic and social policy topics will again be debated and pushed to the fore: changes to test methods for consumption and emission data, the technical prospects of diesel technology combined with the subsidisation of the price of diesel, and the acceleration of alternative drive technologies. We expect a change to test methods in the interests of credibility among consumers, but no short-term accelerating rise in volume, for example in electromobility.

(For the purposes of this press release, an interview was held on 25/09/2015 with Prof. Werner Olle, member of the Chemnitz Automotive Institute board, extracts of which were broadcast on the ‘Sachsenspiegel’ programme on MDR regional TV on 25/09.)