Another open question in the Volkswagen Dieselgate emissions cheating scandal is the total cost for penalties, damages payments, etc? Will Volkswagen survive this mess? Will Volkswagen be able to fulfill the promising line of electric vehicles planned for 2017-2018 debut?
Recently VW’s new CEO has reportedly said Volkswagen might not survive. Germany’s Finance Minister, Wolfgang Schäuble, is quoted in Bild saying “VW will no longer be what it was.”
At the surface it looks bleak for Volkswagen. Six years of outright fraudulent cheating on emissions tests means we have zero sympathy for VW’s corporate plight. The company created this mess for itself, it should suffer the consequences. Right? I’m looking at government regulators who might be inclined to give VW a slap on the wrist, as happens in so many other cases of corporate wrongdoing.
Also consider that the government of Lower Saxony owns 20% of Volkswagen AG’s stock, and the Prime Minister of Lower Saxony sits on VW’s Board. Might the government have an incentive to take it easy on VW?
In any case, there are government investigations, class action lawsuits, and shareholder lawsuits, against VW around the world. In the U.S. press I’ve seen mention of nearly 200 class action lawsuits filed against Volkswagen.
Clearly, there is obvious grounds for shareholder lawsuits. Volkswagen management clearly lied to investors (along with everyone else) for years about these engines, and Volkswagen’s stock gained value because of increased sales because of those lies.
But let’s not wave our hands in the air – let’s look at some numbers. The German newspaper Bild published a couple estimates over the last couple days.
Estimating Volkswagen’s potential monetary damage
On Sept 30, Bild presented an estimate of $65 billion in damages in the emissions cheating scandal. That’s about 10x the amount Volkswagen’s management recently set aside to cover damages. In an Oct 2 report, Bild went over the full extent of impacts on Volkswagen.
Car owners loss of value: The resale value of the affected cars is clearly going to be impacted, depending on the engineering fix that VW concocts. In part resale value comes from our collective opinion about the manufacturer and these cars – and VW’s reputation has been damaged greatly.
But there may be a practical problem. Given what we know now, these cars should never have been sold in the first place. They don’t meet emissions standards, and the EPA and other regulators should never have awarded the certificate of conformity required for the cars to be sold. It’s possible that the existing cars could be declared illegal, and have to be turned in. That’s why the fix VW’s engineers are developing is so important.
In any case, this “loss of value” will be a key point in upcoming class action lawsuits. Volkswagen pretended these cars were one thing, telling that fiction to customers, who bought in the belief that Volkswagen was telling the truth.
Shareholders loss of value: We already mentioned this (and Bild’s report failed to mention it), but there is obvious grounds for a shareholders lawsuit. An example of the value loss is that on the day before the Dieselgate news broke, VW’s stock price stood at 167/share, and today (about 2 weeks later) it is at 101/share.
Spain (and others) may reclaim subsidies: One effect of VW’s fraudulent actions is that many governments granted subsidies to these cars because they were supposedly so clean. We now know that to be false, and these cars should never have received any subsidy. The Spanish government has suggested it will demand Volkswagen repay the subsidies paid out in Spain.
Declining sales: Consumer confidence in Volkswagen is eroding, and therefore it’s likely Volkswagen’s sales will drop off a cliff.
Penalties: It’s suggested that U.S. fines alone might add up to $18 billion. Other regulatory agencies around the world might also levy fines. There might be a requirement to repurchase old cars, at another cost.
How can Volkswagen survive?
Since the penalties and other costs will easily surpass the reserve fund VW AG management has set aside, the company will face an enormous challenge.
According to Volkswagen AG’s financial disclosure filings, the company has $27 billion in cash and short term investments. That gives a deeper cushion than the amount management has already set aside.
On the other hand, the costs will blow a hole in the middle of management’s financial plans. They will have earmarked those funds for some other use like factory investments, R&D investments, and so on.
Volkswagen AG can issue more shares to raise capital. Bild quotes a financial analyst saying this could raise 8 billion euro’s this way.
The company can slow down its expansion plans. Bild says the current five year plan envisions 100 billion euro’s in new factories, and R&D. It’s estimated this could net 2 billion euros a year. Apparently Volkswagen is already doing this, there’s a report that expansion at VW’s factory at Puebla Mexico has been suspended. And, there are reported hiring freeze’s at Volkswagen facilities all around Germany.
Volkswagen AG owns several automobile and truck manufacturing brands. Some of those entities could be sold off to raise capital. The estimates for this range from 30 billion euro’s to 60 billion euro’s, depending on how many brands are sold off.
In other words, even with stiff penalties Volkswagen AG could well survive. But it’s likely to be a smaller company, and R&D will have slowed down considerably. That last bit will impact their electric vehicle plans, which is ultimately what I’m concerned about.
Volkswagen has promised for years that by 2018 they’ll have a strong leadership position in electrified vehicles. Well, that promise was always mingled with beaming proclamations about Clean Diesel, as if that would be another solution to the emissions control goal. Just a couple weeks ago the company unveiled plans for 200+ mile range electric cars in 2018. Will they be able to accomplish that goal while still paying off these damage claims?
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