Back in September 2015 US authorities discovered deception of Volkswagen regarding the emission footprint of their cars. It was only a tip of an iceberg. Namely, investigations have disclosed the nature of competition among the respectful German automotive players. It was not only Volkswagen that installed software that adjusted the exhaust reading when a car was on the testing, but also Daimler, BMW, and VW’s subsidiaries Audi and Porsche.

It all started with coordinated action regarding the size of a tank of AdBlue, urea mixture used to split nitric oxide into its harmless components of water and nitrogen. Large tanks would have been expensive and would use a lot of space, so Daimler, BMW, Audi and Volkswagen agreed within the working group meeting to use small tanks. However, at some point the amount of AdBlue the tanks contained was no longer sufficient to adequately clean exhaust gases. The introduction of Euro6 norm led to an increase in AdBlue consumption of up to 50 percent. This meant that the tanks were much too small. Customers would thus have to be reminded to refill the urea mixture every 2,000 to 3,000 kilometers. None of the players hit upon the obvious idea of installing larger tanks, thereby attaining the competitive advantage of being able to market cleaner cars. German newspaper Der Spiegel reports that in an email dated May 2014, Audi urgently warned against any company deciding alone. The need to inject larger and larger amounts of AdBlue into the exhaust gas system, Audi wrote, could “expand into an arms race with regard to tank sizes, which we should continue to avoid at all costs.” As AdBlue tanks were no longer sufficient to adequately clean exhaust gases, automotive companies begun to deceive licensing authorities and consumers about the true exhaust emissions coming from their diesel cars. They designed software that detected when a car was put on a testing facility, so that sufficient amount of AdBlue was injected for a short period of time. It was an agreement that suspended both competition and the market economy. Besides AdBlue working group, there were many, many other working groups involving the five German automakers, including working groups for braking control systems, seating systems, air suspensions, clutches, gasoline engines and diesel engines, determination of speed at which a driver could open or close the convertible top. Major issues were discussed and arranged in these groups.

Such secret agreements not only fly directly into the face of principles of market economy and its competition rules, they are also detrimental to customers who buy German vehicles because, among other things, they expect to be getting the best possible products from a technical standpoint. Further, they face the prospect of no longer being allowed to drive their cars in cities, and ultimately of suffering significant losses when selling the vehicles after their prices plunge.

Further, shareholders can lose significant value of their holdings. Direct effect will be caused by anticipation of the market participants that authorities would impose fines that can run in tens of billions, which can even exceed a third of market capitalization of each of the three corporations (each has between 55 and 70 billion market cap), significantly reducing the share prices and credit ratings. European Commission has imposed fines in similar large cases recently, i.e. against cathode ray tubes in 2012 and against commercial truck manufacturers in 2015. For fines, vehicle improvements and compensation for customers in the United States only, Volkswagen created reserves as high as 20 billion EUR. Even more important will be the indirect effects, which will reflect on reputation and subsequently on future car purchase decisions. German premium brands might not be seen as mighty as before. And that comes in times when all endeavors of the German carmakers should be directed to transition to electric cars, autonomous driving and their transformation into mobility service providers. In this front they are being challenged by new competitors from Silicon Valley and China.

In addition, some large asset managers following sustainability principles have banned investments in the German carmakers after an investigation on the alleged industry collusion was announced. Given market capitalizations of the three companies, such institutional investors can significantly reduce relative demand for the carmakers’ stocks and thus reducing their prices and together with them – again – their credit ratings.

And last but not least, as in almost any cartel agreements, suppliers are adversely affected. And this can have unanticipated impact on the supply chain. As investigation will gain pace that will change the colluding practices, and electric and self-driving trends will evolve, supply-chain landscape will change as well. For some to the better, and for some for the worse. Not only some of the OEM (original equipment manufacturers) suppliers will be affected, but all cooperating suppliers in the supply chain. Everyone should be aware of deterioration of the credit risks within a buyer portfolio that are at the first glance not obvious.