Volkswagen Shareholders Demand More Scrutiny After Xinjiang Audit

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Volkswagen must regularly check its operations in China to ensure its supply chains are safe and comply with human rights laws, two of the carmaker’s investors said after an audit of its jointly owned Xinjiang site found no sign of forced labour.

The demands made by Union Investment and Deka Investment on Wednesday reflect ongoing concerns over Volkswagen’s engagement in the Xinjiang region, where rights groups have documented abuses including forced labour in detention camps.

Beijing denies any such abuses.

The result of the Volkswagen-commissioned audit comes as Germany is carefully recalibrating its relationship with China, its biggest trading partner, to reduce its exposure to a market that is also a systemic rival.

Volkswagen said on Tuesday that the much-anticipated audit, which was carried out by Germany’s Loening Human Rights & Responsible Business GmbH and two Chinese lawyers from a firm in Shenzhen, had found no evidence of forced labour.

Loening, however, noted that the audit had been limited to the site, a joint venture with SAIC Motor, adding that the situation in Xinjiang and the challenges in collecting data for audits were well known.

Germany’s Association of Critical Shareholders (DKA), which represents small investors on environmental, social and governance issues, said the audit raised more questions than it answered.

“If even a single audit … is so difficult, and can only happen without freedom of expression and labour union rights … further audits can hardly be considered an effective measure,” DKA co-managing director Tilman Massa said.

NO ‘ONE-OFF EXERCISE’

While calling the audit a step in the right direction, Henrik Pontzen, who heads sustainability and ESG at Union Investment, said Volkswagen had not yet reached its goal.

“There is still a lot to do: In China, audits must not remain a one-off exercise. A functioning complaints management system must also be established,” he said.

He also said that Volkswagen’s corporate governance, which has drawn criticism from some of its smaller shareholders, remains the Achilles heel of Europe’s top automaker.

Ingo Speich of Deka Investment, which according to LSEG data owns $99 million worth of Volkswagen’s preferred stock, welcomed the results of the audit but demanded more transparency in Volkswagen’s supply chain.

“Investor pressure has worked. VW has followed the example set by BASF, which already started audits in China at a very early stage,” he said.

Shares in Volkswagen were up 3.4% to 112.26 euros at 1144 GMT, lifting them to the top of the gainers on Germany’s blue-chip index, with traders pointing to relief after index provider MSCI gave it a ‘red flag’ in its social issue category in 2022, prompting some investors to drop the stock.

Volkswagen’s stock market value has halved to 57.6 billion euros in the past two years. Its shares are down 26% year-to-date, underperforming a 37% rise in the STOXX Europe 600 Auto index.

The automaker’s shares trade at just 3 times forward earnings over the next 12 months, down from 8.8 two years ago, which was the highest among its European competitors.

The price-to-earnings ratio, widely used in financial markets to gauge the relative value of stocks, is now below 5 for the European car sector.

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