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Volkswagen has been fitting devices to diesel cars to enable them to pass emissions tests. The view of automotive engineers — a group to which I most certainly do not belong — is that when the problem is “fixed” the vehicles will run terribly.

But if owners attempt to ignore the issue, their cars will instead be pollution factories. As a result of this brazen deception of its customers, VW’s reputation has taken a potentially catastrophic hit.

Now the question to consider is how all of this will affect the secondary market for VWs?

In terms of the 482,000 diesel vehicles in the U.S. that are directly affected by the issue, market value is likely to suffer tremendously.

The ultimate value of these vehicles will depend on the level of utility that can be derived from their ownership after appropriate corrections have been applied. If the cars remain functional, they will presumably find a market.

If a “fixed” VW diesel offers a poorer driving experience than any other car on the road, however, the value of the sum of the parts will exceed the whole and the vehicle will likely be scrapped. Only time will tell the extent of the problem for the directly affected vehicles and their owners.

Of arguably greater material concern for auto financiers around the country is what happens to the valuations of the greater than 10 million gas-powered VWs on the roads of the U.S.

Our analysis here assumes that there is nothing functionally wrong with the vehicles in question. In other words, we assume that all scandals related to VW have already been made public and that similar deceptive devices were not fitted to gas-powered cars. 

One way to assess the potential impact of the VW scandal is to consider similar reputational shocks that have occurred in recent history. The most obvious example of such an event was the spate of vehicle recalls that affected Toyota during the winter of 2009-2010.

What was initially reported as a trivial problem with floor mats jamming accelerator pedals in late 2009 became a major news story in February 2010. Vehicles with floor mats safely stowed in the trunk were involved in fatal crashes that were blamed on the occurrence of sticking pedals. The problem was clearly more pernicious than it was initially reported to be.

The chart below shows the interest in the Toyota recall event as measured by Google Trends. The initial flurry of interest occurred in September 2009 when the floor mat issue was first reported. The flood of interest came in February 2010 following the second recall.

 

It is a matter of debate whether the Toyota issues were more problematic than VW’s current woes, as we are assuming that there is nothing functionally wrong with gas-powered VWs. This was technically not true for Toyotas back in 2010. Several deaths were directly linked by authorities to the problems that triggered the Toyota recalls. 

It has been argued that the VW scandal is actually more deadly in the sense that heightened pollution indirectly affected more people. Nevertheless, the Toyota scandal provides the most obvious benchmark to use in assessing the potential impact of an event that is unprecedented in nature and scale.

The following chart shows the observed secondary wholesale auction market prices of 2007 Toyota Priuses, sourced from NADA data.  Bear in mind that the 2007 model Prius was only marginally impacted by the recalls — it was listed in the floor mat recall but was, apparently, unaffected by the later, more problematic recall activity.

We have detrended the data on observed prices relative to the initial MSRP or sticker price.  The auction valuations tend to spike in the spring as dealers stock up each year for the summer selling period. However, the Toyota recall occurred in the aftermath of the Great Recession.  Due to low anticipated demand during the summer of 2009, the spring spike for Prius was relatively muted though a small price bump was recorded. 

With an improving economy in early 2010, coupled with rapidly rising overall used car prices, one might have expected dealers to bid up the price of Priuses. Instead, we observe absolutely no spring price spike.

 

By the start of the following selling season, we observe more “normal” behavior from the popular hybrid vehicle. It seems that by spring of 2011 the public’s interest in Toyota’s problems had faded. The cars remained popular and their prices quickly recovered their full value.

For gas-powered VWs, this analysis suggests that there will be little impact on secondary market value.  Fortunately for Volkswagen, the scandal erupted in late summer and early fall.

By way of contrast, the timing for Toyota, strictly in terms of its impact on secondary values, could not have been worse. Public consciousness was at its highest point just as the new selling season was kicking off. Occurring in late September, it is conceivable that public interest in VW will fade to the point where March/April auction sales will be barely impacted. For those with a material interest in used VWs next spring, we advise close monitoring of Google Trends data. If scandals keep coming, if memories do not fade, VWs will sell at winter prices even though the snow is melting outside the auction house. 

A further issue concerns the prices of other, unaffected vehicles. Will the VW shock have macroeconomic or industry wide reverberations? Let’s imagine for a moment that all major car manufacturers hold a joint press conference tomorrow where they all confess to the same sins as those committed by VW.

Following this imaginary event, would Americans then choose to drive less? We are not sure what is more fanciful – the notion of an industry-wide mea culpa or the concept of Americans opting en masse to utilize public transportation!

Because the total number of miles driven will be unaffected by the scandal, it should have no impact on overall used car values. If VW has a bad spring in secondary markets, therefore, we would expect valuations of other competitor brands to be marginally higher than they were otherwise likely to be.

For owners of cars directly affected by the recall, one hopes that they will be compensated for the loss in utility and value that their cars have clearly suffered. An event like this, while clearly not a good thing for other VW owners and their financiers, will likely have a much more muted impact.

Performance in next year’s spring market will help tell the complete tale.

Editor's Note: Additional developments in the VW emissions situation can be in this Auto Remarketing story, which was posted Wednesday.

Tony Hughes is managing director of credit analytics at Moody's Analytics. As with any contributed content, the opinions expressed in this and other editorial columns are solely that of the author's and do not necessarily reflect those of Auto Remarketing or its parent company.