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Volkswagen Gets A Nod By US Authorities For Its Settlement Plan

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.

  • Volkswagen Is Losing Share In Europe Thick And Fast
  • Volkswagen's Navistar Partnership Will Open Gates To North America
  • The U.S. Automotive Slowdown Is Here And Now
  • Where Will Volkswagen's Revenue And EBITDA Growth Come From Over The Next Three Years?
  • By What Percentage Have Volkswagen's Revenues And EBITDA Grown Over The Last Five Years?
  • What Is Volkswagen's Fundamental Value Based On Expected 2016 Results?
  • How Much Have Big Auto Companies Been Investing In Growth Opportunities?
  • Rundown Of How Volkswagen's 2015 Results Were Impacted By The Dieselgate Issue
  • How Significant Will China Be For Volkswagen By 2020?
  • Where Volkswagen Stands Relative To Its Competitors In Crucial Markets
  • How Is Audi Holding Up Compared To Its Compatriots In Crucial Markets?
  • How Has Volkswagen's Revenue And EBITDA Composition Changed Over 2012-2016E?
  • What Is Volkswagen's Revenue And EBITDA Breakdown?
  • Why Premium Brands Are 3x As Valuable As Non-Premium Brands For Volkswagen
  • How Much Will Premium Brands Contribute To Volkswagen's Top Line By 2018?
  • How Does Volkswagen's China Market Share Compare With Other Foreign Automakers'?
  • How Much Does Volkswagen Make On The Sale Of One Porsche, Audi, Skoda And Volkswagen Vehicle?

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Volkswagen

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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