Volkswagen: Could The Cost Of The Dieselgate Scandal Be Lower Than Expected?

Will the slump continue for Volkswagen AG (OTCMKTS:VLKAY), or has the market overreacted?

The dieselgate scandal has seen one-third the net valuation (~$32 billion) of Volkswagen get wiped out in a matter of 10 days. Sure, the crime is serious, affecting 11 million cars worldwide — that’s roughly 20% of all cars that Volkswagen has sold since 2008. Falsifying emissions data has gotten the German group under the scrutiny of the U.S. Environmental Protection Agency (EPA) and prosecutors from other countries as well, and has hurt the perception of customers, who thought they were driving a cleaner car up till now. This scandal could cost Volkswagen dearly in the near term due to fines and lawsuits, and in the longer term due to the loss of sales. However, there is a flip side to this. Depending on how the German group goes about controlling the damage, the total cost of the dieselgate scandal, might come down considerably.

We have a $36 price estimate for Volkswagen, which is above the current market price.

See Our Complete Analysis For Volkswagen AG

Volkswagen now faces government fines and settlements, private settlements, recall expense, and future loss of sales, related to the dieselgate scandal, which could be up to $34.5 billion, according to our estimates. The interactive model for the same can be viewed on the Trefis Institutional site, and estimates can be altered to show customized scenarios and sensitivity analysis to forecast the total cost of the scandal.

But the cost could possibly come down, and here’s how:

• If VW’s Future Compliance Helps Curb Losses

Government Fines and Settlements:

Volkswagen has sold 482,000 cars in the U.S. since 2008, which were fitted with the defeat device that helped in cheating the emissions test. According to the EPA, the fine for each vehicle that did not comply with federal clean air rules could be up to $37,500 (£24,000), which means that Volkswagen could be facing fines of up to $18 billion, for this US piece alone. ^[1] This is, of course, the worst case scenario. Volkswagen might be able to settle the fines for much less depending on how the group goes about the process of damage control from here on in.

The group has accepted all responsibility for falsifying emission results and has vowed to try and win back customer trust. Previously, GM reached a $900-million settlement with the U.S. government to avoid criminal charges over the faulty ignition switch that would inadvertently turn off while driving, and disable safety features, such as power steering and airbags. This ignition switch is blamed to have caused at least 124 deaths and 275 injuries. Volkswagen’s software did pollute the environment 10 to 40 times more than the legal limit (in the U.S.), but it didn’t lead to any loss of life, the company could argue. The $18 billion fine might be a bit steep, and given how the German group might look to comply with future terms and conditions, this figure could come down considerably. The estimates for this scenario can be viewed on the Trefis website.

Loss of Future Sales:

Considering the broad impact of the emissions scandal, Volkswagen is in grave danger of losing future sales, especially of its diesel variants. However, the impact of this scandal on future sales could also be milder than expected. Customers typically care about the working performance and economics of buying a vehicle. Volkswagen has set aside €6.5 billion ($7.25 billion) to cover costs of the scandal, and will make a provision for the scandal in the upcoming Q3 income statement. After the cars are refitted, and assuming that Volkswagen might provide easier financing and other incentives for its vehicles in the future, the discontentment in the minds of the customers could start to fade in due time.

Toyota, too, reached a $1.2 billion settlement with the U.S. DoJ, after it was found guilty of concealing the problem with its sticky gas pedals that resulted in the recall of 10 million vehicles. Though vehicle deliveries and reputation took a considerable hit through 2009-2011, Toyota was back as the world’s highest-selling automaker in 2012. History could repeat, and Volkswagen might gain from the market’s short-term memory. In this case, assuming the impact of the dieselgate scandal on the group’s future sales only lasts till the end of this decade, and becomes milder through 2019-2020, the net present value of the future loss in sales comes down to $17.5 billion from the previously estimated $27.5 billion.

With these two possibilities in mind, the net present value of the total cost of the dieselgate scandal to Volkswagen goes down to $25.8 billion, roughly $8 billion less than the previously estimated total cost of $34.5 billion. Whether $26 billion or $35 billion, this scandal is bound to hit Volkswagen hard. But the $26 billion figure suggests that the market might be assuming an exaggerated effect of the emissions scandal on the German group, considering that $32 billion of the company’s value has already been wiped out since the news of the scandal broke.

See the links below for more information and analysis:

• Volkswagen has started damage control
• The domino effect of Volkswagen’s emissions scandal
• What could the dieselgate scandal cost Volkswagen?
• Oh Volkswagen, what have you done!
• Volkswagen’s troubles run deep
• How premium automakers are faring in a slower Chinese market
• Volkswagen’s split could be good news
• Trefis analysis: Volkswagen China and Affiliates Vehicles Sold
• Trefis analysis: Volkswagen Passenger Cars, SEAT, LCVs Revenues
• Trefis analysis: Volkswagen Audi Revenues

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1. VW emissions scandal hits 11m vehicles, bbc.com [↩]