· VW brand valued earlier this year at US$31 billion
· Estimated to have lost US$10 billion in brand value since emissions scandal emerged
· Further revelations threaten VW’s future existence
· German nation brand tarnished, set to lose position as world’s strongest
Recent revelations that, at the time of writing, as many as 11 million diesel vehicles may have been fitted with software designed to deceive emissions testers, have dealt a hammer blow not just to Volkswagen’s reputation but potentially to the entire German nation brand. David Haigh, CEO of brand valuation and strategy consultancy Brand Finance, gives his view on the scandal that has sent shockwaves around the world.
“At Brand Finance’s last calculation VW’s brand value stood at just over US$31 billion, making it the world’s 3rd most valuable auto brand. It appeared to be motoring ahead, brand value having increased from just over US$27 billion in 2014. The developments of the last few days will undoubtedly send this trend into reverse, resulting in $10 billion in lost brand value. The apparent ease with which the company’s activities were uncovered makes it all the more astonishing that VW was willing to endanger its most valuable asset. Rather than ‘Das Auto’, VW’s motto might be more appropriate if changed to ‘Crass Auto’.
The Scandal in Front is a Toyota
“Toyota, the world’s most valuable auto brand, suffered significant reputational and brand damage following a series of recalls over mechanical issues from 2009 to 2011. This was reflected in its brand value. After reaching a peak of US$27.3 billion in 2010, it dropped to US$26.2 in 2011 and further to $24.5 in 2012. It did not exceed the previous peak until 2014, when brand value was US$34.9 billion, increasing slightly to US$35 billion this year.
“On first assessment it appeared that Volkswagen might escape such severe brand damage. Toyota’s errors led directly and visibly to fatal accidents while Volkswagen’s alleged activity may also pose a threat to life, but in a less immediate way. However as the scale of the deception has emerged over the last few days it is beginning to look as though VW may face a crisis on an unprecedented scale.
“The cost of recalls and fines could be far more significant than those Toyota faced, whilst the apparently deliberate nature of VW’s actions compounds the impact on its credibility. Its sins of emission are sins of commission. This sits particularly badly with Volkswagen’s brand identity which is founded on reliability, honesty, efficiency (both efficiency of production and fuel economy) and more recently for environmental friendliness via models such as the Polo Bluemotion and XL1. Brand Finance therefore estimates that as much as $10 billion has already been wiped off the value of the brand.
VW Brand for the Scrapheap?
“The very future of the VW brand is in doubt. To have any chance of recovery, VW must investigate the source of the supposedly nefarious activity and if it is confined to a particular division or series of ‘bad apples’ then to clearly communicate that fact to avoid contagion. It must ensure that this type of activity cannot take place again and through multiple communication channels, from official statements to advertising campaigns, continue to emphasise the brand’s green credentials and commitment to mitigating the effect of the industry on the environment.
From People’s Car to People’s Shame
“It may already be too late to stop the corrosive effect VW is having on the reputation of its home country, in particular its business culture. German industry is lauded for its efficiency and reliability while Germans as a whole are seen as hard-working, honest and law abiding. This perception has only been intensified by the Merkel government’s firm, litigious approach to the Greek debt crisis.
“That such an iconic German brand, the ‘people’s car’, could behave in this way threatens to undo decades of accumulated goodwill and cast aspersions over the practices of German industry, making the Siemens bribery scandal appear less a one-off than evidence of a broader malaise. Despite the vast scale of the deception, other firms will need to be implicated before the damage to Germany’s nation brand become critical. Germany’s status as the world’s most powerful nation brand (revealed in the 2014 edition of the Brand Finance Nation Brands report) is under threat, and nation brand value could be set to fall when the results of our 2015 study are revealed next month.”
Brand Finance is the world’s leading brand valuation consultancy. Bridging the gap between marketing and finance, Brand Finance evaluates the strength of brands and quantifies their financial value to help organisations of all kinds make strategic decisions.
Headquartered in London, Brand Finance has offices in over 20 countries, offering services on all continents. Every year, Brand Finance conducts more than 5,000 brand valuations, supported by original market research, and publishes over 100 reports which rank brands across all sectors and countries.
Brand Finance is a regulated accountancy firm, leading the standardisation of the brand valuation industry. Brand Finance was the first to be certified by independent auditors as compliant with both ISO 10668 and ISO 20671, and has received the official endorsement of the Marketing Accountability Standards Board (MASB) in the United States.
Brand is defined as a marketing-related intangible asset including, but not limited to, names, terms, signs, symbols, logos, and designs, intended to identify goods, services, or entities, creating distinctive images and associations in the minds of stakeholders, thereby generating economic benefits.
Brand strength is the efficacy of a brand’s performance on intangible measures relative to its competitors. Brand Finance evaluates brand strength in a process compliant with ISO 20671, looking at Marketing Investment, Stakeholder Equity, and the impact of those on Business Performance. The data used is derived from Brand Finance’s proprietary market research programme and from publicly available sources.
Each brand is assigned a Brand Strength Index (BSI) score out of 100, which feeds into the brand value calculation. Based on the score, each brand is assigned a corresponding Brand Rating up to AAA+ in a format similar to a credit rating.
Brand Finance calculates the values of brands in its rankings using the Royalty Relief approach – a brand valuation method compliant with the industry standards set in ISO 10668. It involves estimating the likely future revenues that are attributable to a brand by calculating a royalty rate that would be charged for its use, to arrive at a ‘brand value’ understood as a net economic benefit that a brand owner would achieve by licensing the brand in the open market.
The steps in this process are as follows:
1 Calculate brand strength using a balanced scorecard of metrics assessing Marketing Investment, Stakeholder Equity, and Business Performance. Brand strength is expressed as a Brand Strength Index (BSI) score on a scale of 0 to 100.
2 Determine royalty range for each industry, reflecting the importance of brand to purchasing decisions. In luxury, the maximum percentage is high, while in extractive industry, where goods are often commoditised, it is lower. This is done by reviewing comparable licensing agreements sourced from Brand Finance’s extensive database.
3 Calculate royalty rate. The BSI score is applied to the royalty range to arrive at a royalty rate. For example, if the royalty range in a sector is 0-5% and a brand has a BSI score of 80 out of 100, then an appropriate royalty rate for the use of this brand in the given sector will be 4%.
4 Determine brand-specific revenues by estimating a proportion of parent company revenues attributable to a brand.
5 Determine forecast revenues using a function of historic revenues, equity analyst forecasts, and economic growth rates.
6 Apply the royalty rate to the forecast revenues to derive brand revenues.
7 Discount post-tax brand revenues to a net present value which equals the brand value.
Brand Finance has produced this study with an independent and unbiased analysis. The values derived and opinions presented in this study are based on publicly available information and certain assumptions that Brand Finance used where such data was deficient or unclear. Brand Finance accepts no responsibility and will not be liable in the event that the publicly available information relied upon is subsequently found to be inaccurate. The opinions and financial analysis expressed in the study are not to be construed as providing investment or business advice. Brand Finance does not intend the study to be relied upon for any reason and excludes all liability to any body, government, or organisation.
The data presented in this study form part of Brand Finance's proprietary database, are provided for the benefit of the media, and are not to be used in part or in full for any commercial or technical purpose without written permission from Brand Finance.