January 11, 2017 / 10:52 AM / a year ago

VW saved by its own failures in the U.S

LONDON (Reuters Breakingviews) - Volkswagen has been saved by its U.S. failures. The German carmaker is close to a $4.3 billion (4.1 billion euro) settlement of criminal charges for manipulating emissions data of American diesel vehicles in the United States. It could have been a lot worse had VW’s American sales hit expectations.

A VW emblem is pictured on a Volkswagen car in a delivery tower at the plant of German carmaker in Wolfsburg, Germany, April 28, 2016. REUTERS/Fabrizio Bensch

The total price tag for VW’s emissions cheating is rising above 23 billion euros - against current provisions of 18.2 billion euros. The biggest single item was $10 billion (9.5 billion euros) for buying back 475,000 affected cars in the United States. Not all of the fines will trigger immediate cash outflows, though. Citigroup estimates the group’s provisions may have to increase by 3 billion euros.

While this does not include potential compensation for shareholders - claims made at German courts add up to 8 billion euros - the scandal’s financial fallout should be well below the 70 billion euros a Breakingviews analysis in October 2015 estimated VW could digest without having to sell brands or raise equity.

Ironically, the key reason VW can stomach the bill is its chronic operative underperformance in the United States, where emissions laws for diesel cars are much tighter than in Europe and penalties for cheating are harsher.

Less than 6 percent of the 11 million diesel vehicles affected by the manipulation were sold to American drivers, but the country accounts for more than 90 percent of the scandals’ costs. Sales growth between the Dieselgate years of 2009 and 2015 fell way short of the annual 11 percent needed to lift annual VW and Audi sales to the 1 million targeted by Chief Executive Martin Winterkorn.

Moreover, despite heavy marketing for supposedly “clean diesels”, only 20 percent of U.S. buyers chose the technology, compared to more than half in Europe. Had Volkswagen met its U.S. volume targets and lifted diesel penetration to European levels, it would have sold almost 2 million rather than 600,000 dirty diesels in the United States.

Assume constant recall costs and fines per vehicle, and the financial fallout in the United States alone would have swollen to 69 billion euros, Breakingviews estimates. Add recall costs in the rest of the world, fines in other countries and legal costs, and the bill would be well above the group’s comfort level. Volkswagen’s emissions scandal is a rare example where failure eventually results in success.


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