VW Scandals Haunt EV Effort Investors Are Eager to Buy Into

(Bloomberg) -- Half a decade after Volkswagen AG's emissions malfeasance was exposed, scandals old and new are undermining the automaker's effort to make amends.

Investors are eager to get behind VW's effort to compete with Tesla Inc. for electric-vehicle supremacy. But they're putting tough questions to top executives whose predecessors are only now going on trial over the engineering and selling of polluting diesel cars.

“What will you do to make sure the stock market can honor the ambitious strategy of the VW group in the area of electric vehicles and isn't frequently scarred by reports about scandals?” Ingo Speich, a fund manager at Deka Investment GmbH, asked management in a statement issued before Wednesday's annual meeting.

For all VW's efforts to put its polluting past in the rear-view mirror, probes into its Audi and Porsche divisions' engines are ongoing. A racist marketing campaign also recently caused an uproar; an eavesdropping affair generated unflattering headlines; and outsiders within the insular company's upper ranks have resigned, been demoted or reassigned.

VW's chief executive officer is among those caught up in the tumult. Run-ins with powerful labor leaders and the carmaker's board cost him the role of directly controlling the company's main passenger-car operations.

“This year's infighting between CEO Herbert Diess, parts of the supervisory board and the workers council is a warning signal concerning the operational performance and the willingness and speed of change at VW,” Arndt Ellinghorst, a Bernstein analyst who initiated coverage of the carmaker this month with the equivalent a sell rating, wrote in a Sept. 18 report.

Electric Atonement

Diess, 61, came under fire over software problems that delayed the rollout of the ID.3 electric car and the flagship Golf hatchback earlier this year. The ID.3 and the upcoming ID.4 crossover are the first mass-market EVs VW is launching in the wake of the diesel saga that has cost the company about 32 billion euros ($37 billion) and is far from over.

About 600 kilometers (370 miles) south of VW's headquarters on Wednesday, prosecutors began presenting their cases against former Audi chief Rupert Stadler and other officials related to varying alleged roles in the company's emissions violations.

Legal arguments that are scheduled take place through the end of 2022 will start Wednesday from Stadelheim prison in Munich, one of Germany's most famous jails. The hearing presided over by judge Stefan Weickert was moved there because of the site's large courtroom that allows for greater social distancing.

Direct implications for the company will probably be limited because the trial focuses on individual suspects including Stadler and Wolfgang Hatz, Audi's former engine-development chief. VW and Audi agreed to pay fines totaling 1.8 billion euros in 2018 to settle German prosecutors' claims.

The hearings could still cause unease for VW if comments by witnesses or suspects contradict its defense that top brass were unaware of the engine manipulation. Evidence that conflicts with those claims would provide fresh ammunition to investors suing VW for allegedly being too slow to inform markets about the massive scope of the scandal.

Governance Misgivings

U.S. monitor Larry Thompson completed a three-year run of oversight this month and certified that the company had improved compliance and risk-management systems. But corporate governance is still a concern.

“Significant conflicts of interest at the board remain that may hinder proper oversight and execution of the company's strategic vision,” Simone Andrews, an ESG analyst at Bloomberg Intelligence, wrote in a report Tuesday. The company lacks an independent chair and lead director, which runs counter to best practices for overseeing management.

Diess has budgeted 33 billion euros over five years to build the world's biggest electric-car fleet, leading some analysts to predict that VW will overtake Tesla as the EV-market leader by 2022. On Wednesday, he said efforts to transform the German manufacturer into a technology giant with software chops will be “much more challenging” than the shift toward electric cars. VW will take further steps toward his goal in the course of this year, he said.

Bernstein is skeptical that the company can smoothly transition from internal combustion engines and turn its vast industrial scale into a competitive advantage.

“We would warn investors not to solely look at VW from an EV perspective,” Ellinghorst wrote earlier this month. “Without a bold and focused restructuring of VW's overly complex and inefficient traditional ICE business, the move into the BEV world bears many risks.”

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