EUR 850.00 For Business Accounts Only

Morningstar | EC Charges BMW, Daimler, and Volkswagen with Collusion on Emissions Technology; No FVE Changes

The European Commission has issued a "Statement of Objection" informing BMW, Daimler, and Volkswagen of its preliminary collusion findings. The EC said that, "…BMW, Daimler and VW participated in a collusive scheme, in breach of EU competition rules, to limit the development and roll-out of emission cleaning technology for new diesel and petrol passenger cars sold in the European Economic Area (EEA)" and that the, "three car manufacturers now have the opportunity to respond to our findings." We had expected this development but did not know the timing of an announcement.

So far, BMW has been the only company to respond, saying that it "will contest the EU Commission’s allegations with all legal means if necessary." The company also said that it believes that the EC will issue a significant fine. Because a fine is “more likely than not,” under International Financial Reporting Standards, the company is obligated to recognize a provision. BMW estimated the provision, which will be taken with the first-quarter results, to exceed EUR 1 billion.

We think the antitrust process will be lengthy but, we do not see our fair value estimates changing much, if it all. To give investors context, we provide a 1% fair value estimate sensitivity analysis of how much our enterprise value would have to change: narrow-moat-rated BMW−EUR 650 million; no-moat-rated Daimler EUR−885 million, and no-moat-rated Volkswagen−EUR 1.2 billion. Based on BMW's announcement, our fair value might be negatively impacted by 2%, resulting in retention of the stock's 4-star rating. In Volkswagen's case, because of the diesel emission scandal, we have already included a EUR 20 billion reduction in our enterprise value. While headline risk could result in additional stock price volatility until the EC antitrust issue is resolved, we think investors should consider share price weakness resulting from the news as an opportunity to own BMW, Daimler, or Volkswagen stock.

The EC basic fine for collusion includes a wide range of possibilities, but the calculation takes 0%-30% of the value of relevant sales times the number of periods (years or periods less than one year) plus another 15%-25% of the value of relevant sales. The basic amount could be increased or decreased based on what the EC calls aggravating or mitigating factors depending on each company’s role in the cartel, degree of co-operation, or repeat offense.

Leniency is granted up to 100% of fines if a company is the first to admit to collusion, up to 50% for the next to admit, 20%-30% for the third, and up to 20% for any others. An additional 10% is waived for all companies that work with the EC to reach a settlement. A collusion fine is limited to a maximum 10% of annual turnover (parent consolidated revenue, subsidiary annual revenue if no parent involvement) per infringement. Fine reductions are also granted where there is an “inability to pay.”

The record EC fine for collusion of EUR 2.93 billion, assessed in 2016, just happens to be against commercial truck manufacturers for diesel emissions, and it included DAF (Paccar), Daimler, Iveco (CNH Industrial), MAN (Volkswagen), and Volvo-Renault (Volvo Group). Each of the commercial truck makers settled with the EC in 2016, resulting in a 10% reduction in each of their respective fines. However, MAN was granted a 100% decrease under “leniency” for being the first to notify the EC. Volvo-Renault received a 40% reduction for being the second to cooperate. Daimler and Iveco received 30% and 10% reductions, respectively, while DAF did not receive any reduction for leniency.

Judging by the magnitude of the respective fines--MAN EUR 0, Volvo-Renault EUR 670.4 million, Daimler EUR 1.009 billion, Iveco EUR 494.6 million, and DAF EUR 752.7 million--it appears to us that the EC penalties were based on an amount allowable at the subsidiary level and not at the parent level. The EC can use the parent consolidated revenue level only if its investigation concludes that a subsidiary’s actions were driven by the parent.

In our opinion, the EC structure for calculating a fine puts firms in a prisoner’s dilemma, making confession the dominant strategy. Consequently, our estimated maximum impact to our fair value estimates is unlikely for each automaker. According to media reports, Volkswagen admitted to “possible” collusion in a letter sent to regulators in July 2017. Admitting that the respective company’s behaviors were possibly anti-competitive and actually pleading guilty are vastly different things.

In our opinion, Volkswagen made a preemptive decision to notify authorities of certain activities over concerns that, even though no collusion occurred, the outward appearance through the lens of the current political environment surrounding diesel emissions would automatically be construed by the EC as collusion. As a result, it looks to us like the company is jockeying for the 100% leniency position while not actually admitting guilt.

BMW published a statement that denies the EC's allegations. We think the company is confident that its behavior was not anticompetitive but, realizing it would probably not get the 100% leniency position, has cooperated with the investigation and if necessary, settle to avoid wasting resources on prolonged litigation. Daimler is in a particularly difficult spot, having an ongoing EC investigation into whether the company used a defeat device in its diesel engines and having already been a party to an EC fine for collusion on commercial trucks diesel emission equipment. Ultimately, if "pusch" comes to "schöve" in this hyper-scrutinizing political environment for diesel emissions, we think Daimler will also settle.