Last September, Volkswagen admitted to fitting defeat devices that regulated emissions on as many as 11 million vehicles worldwide. The German auto giant set aside €16.2 billion ($17.8 billion) in charges related to the emissions scandal last year, and another €1.6 billion provision for the emissions issue through the first half of this year. The group incurred another €0.4 billion at a group level as special items, which can be mainly attributed to the Audi A3 liter engine issue. The total P&L impact of the dieselgate scandal has reached €18.2 billion since last year.
The nearly $15 billion deal with U.S. authorities, where around $10 billion has been set aside for customers, gives owners of the affected Volkswagen vehicles in the U.S. the option of buyback or a fix and cash compensation of $5,100-$10,000 per person, if and when a repair becomes available. Volkswagen will also pay $2.7 billion over three years to an environmental trust to remediate excess pollution in the U.S. and invest $2.0 billion over 10 years into zero emissions vehicles. The group will face penalties if it is unable to fix or buy back 85% of the affected vehicles by June 2019. This still does not include fixes for another 85,000 Volkswagen, Audi, and Porsche 3.0-liter engine cars, which means that Volkswagen is looking at costs of another few billion for the fixes and buybacks of those vehicles.
Volkswagen had also agreed late last month to pay $1.2 billion to 652 U.S. brand dealers to compensate them for the losses suffered due to the dieselgate scandal. Volkswagen will continue to make some incentive payments to dealers, initiate buybacks of the diesel vehicles, and suspend capital improvements it wanted dealers to make for two years, as part of this deal with the U.S. dealers.
Volkswagen is hoping to reverse its fortunes in the U.S., but not only is the company battling a tainted brand image in the country due to the dieselgate issue, but also a slowdown in demand in the overall market so far this year. The light-duty passenger vehicle market has grown only 0.5% year-over-year through September. This is affected by the cyclical nature of this industry. Following the recession, the U.S. automotive industry went through a boom period with refilling of fleet taking place in the last three years. However, the demand has slowed down this year, especially for passenger cars. S&P Global Ratings cut its estimate for automotive sales in the U.S. in 2016 to 17.5 million vehicles from 17.8 million. S&P cut its estimate for growth this year in the U.S. economy to 2% from the previously estimated growth of 2.3%. This puts doubt on whether automotive sales will surpass the record-breaking 17.5 million sales in 2015. Vehicle deliveries are down for both General Motors and Toyota - Volkswagen's biggest global competitors, in the U.S. this year.
The scandal has had a deep impact on Volkswagen's business and brand image, with the namesake passenger vehicle brand recording a 12.5% year-over-year decline through the first three quarters in the U.S., and continually low operating margin due to added costs of discounts and incentives to attract buyers. The Volkswagen Passenger Cars brand reported operating margin of only 1.6% through September, dragging down the group's overall margin. Volkswagen is looking to shake-off the impact of the scandal and is spending quite a few billions in this process, but it might be tough to derive growth in the U.S., where the group was struggling even before the news of the scandal broke out.
Have more questions on Volkswagen? See the links below.
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