The Volkswagen (VLKAY) cheating scandal is spreading like wildfire, sending shockwaves through European carmakers' stocks and prompting various authorities to ask for investigations. Jim Cramer says that after reports that the U.S. Department of Justice will start a criminal probe, the stock is "hard to buy, easy to sell, even down here."
With 11 million vehicles worldwide from the company that could be affected by the scandal, this story has definitely grown bigger than even Volkswagen, the German giant that not long ago briefly overtook Toyota (TM) as the world's biggest car firm by sales.
As with any big scandals, there are winners and losers. Let's look at the winners first.
- Shares of Toyota, the main rival of Volkswagen, were trading lower Tuesday morning, but the Japanese carmaker could definitely take advantage of the scandal. For a long time, Toyota has fostered the image of a company that cares deeply about the environment and it is pushing forward green technology, with its various versions of the well-known hybrid model Prius. South Korean carmaker Hyundai Motor could also be among the winners, because its models are well known in Europe.
- U.S. carmakers saw their shares fall sharply Tuesday morning, with Dividend Stock Advisor holding Ford (F) down more than 3% and General Motors (GM) down by more than 2%. But once the dust settles, these two could benefit from the fall in rival Volkswagen's credibility. GM's European subsidiary Opel-Vauxhall was well on its way to turning profitable again, and this could give it the impetus it needs, by stealing some of Volkswagen's buyers. Fiat Chrysler (FCAU) shares fell by more than 5% as the company is more exposed to Europe, but over the longer term it could emerge a winner, too.
- French carmakers have seen their stock prices tank. Renault was down more than 7% in Paris trading on Tuesday, while Peugeot-Citroen lost 7.7%, so for now they definitely look like losers. However, French Finance Minister Michel Sapin called for an inquiry into the issue at a European Union level, a move that will be seen as an implicit guarantee that the French car industry does not have such skeletons in its closet. This could turn the French carmakers into winners over the longer term, because they would eat into Volkswagen's market share.
- U.S. authorities emerge as clear winners. The Environmental Protection Agency will get kudos for discovering the software code, which detects when the car is undergoing official emissions testing and turns full emissions controls on only during the test. Volkswagen has said in a statement that it doesn't tolerate any kind of violation of the law, but the Department of Justice will reportedly launch a criminal investigation into the issue anyway. The EPA said the violations do not pose a health hazard and the cars are still safe to drive and resell, but the hit to Volkswagen's credibility is huge.
- Obviously, Volkswagen itself. The maximum fine the company could be made to pay is likely to be around $18 billion. Michael Horn, the head of Volkswagen's U.S. business, apologized, saying the company had "totally screwed up," and a German newspaper reported that the company's CEO, Martin Winterkorn, could resign. However, he has pledged to stay on, despite apologizing. Volkswagen shareholders lost as well, as the company's shares fell by 19% on Monday and were down 23% in European trading on Tuesday, before closing down by more than 16%.
- BMW (BAMXF) and Daimler (DDAIF). The shares of the German luxury carmakers fell, with Mercedes brand owner Daimler down by more than 7% and BMW falling by more than 5% in Frankfurt trading, as they have been tainted by association. A spokesperson for the German Environment Ministry said the ministry expected all carmakers to provide data so they could check whether "comparable manipulations in the emissions control system also happened in Germany or Europe," according to a report by Bloomberg.
- European Union regulators. Despite the EU's reputation as a staunch defender of the environment and its numerous regulations, it looks like it has screwed up royally on this issue. European citizens will wonder why the U.S. regulators were able to find discrepancies between tests and real-life driving conditions that meant some Volkswagen cars emit 40 times more nitrogen oxide particles than admissible, while European regulators did not find any problems.
- European savers. It is too early to tell for certain how this scandal will affect the wider European economy, but let's not forget that Volkswagen and the other carmakers are huge providers of jobs. In Germany, it is estimated that one in seven jobs is somehow connected to the car industry. German companies invest a lot in other EU countries where they have subsidiaries and contractors that make parts, especially in the emerging economies in Central and Eastern Europe. If the scandal leads to big cuts in production, this could in the end force the European Central Bank to print even more money to try to stop the eurozone from slipping into a recession.