Volkswagen Emissions Investigation: When It Rains, It Pours

Volkswagen AG (OTCMKTS:VLKAY) has started damage control, after it was revealed in the middle of September that the German automaker falsified nitrogen oxide emission test results on as many as 11 million of its diesel vehicles worldwide. Just as the group was looking to get its act together, roping in the likes of accountancy firm Deloitte and law firm Jones Day to dig deeper into the dieselgate scandal, more bad news has emerged. Internal investigations have revealed that around 800,000 cars are affected with irregularities in CO2 levels.

See Our Complete Analysis For Volkswagen AG

This new discovery in a completely different part of the testing and approval process, which also follows a new set of allegations by the U.S. EPA, yet again put Volkswagen under the spotlight. There will be costs of recalls and refitting, fines and settlements, and more importantly, loss in customer trust, which means that the German group could be looking at a tougher time under the sun for the next few years.

Irregularities were found when determining type approval CO2 levels. Investigations have disclosed that CO2 and fuel consumption were set too low during the CO2 certification process in as many as 800,000 vehicles, some of which are petrol-driven, though most run on diesel. Economic risks related to the new discovery have been estimated at around 2 billion euros ($2.2 billion) tentatively, implying another set of expenses related to the emissions scandal. ^[1]

This adds to the €6.7 billion ($7.37 billion) that the group set aside in its Q3 financial statements released on October 28 — the main reason why Volkswagen recorded its first net loss in 15 years. The €6.7 billion only concerns the recall the automaker is facing in 2016, including costs of fixing the vehicles and necessary service measures, and doesn’t include expenses related to any legal measures, or potential penalties and fines. Combined, that’s over $9.5 billion that Volkswagen is already losing on account of its recall related to the emissions scandal.

And there could be more damage. The EPA recently said that it had discovered the defeat device on more Volkswagen group vehicles than was previously disclosed. The new allegations cover around 10,000 passenger vehicles already sold in the U.S. since model year 2014, including the diesel variants of the Volkswagen Touareg, Audi A6 Quattro, A7 Quattro, A8, A8L, and Q5, and interestingly, the high-end Porsche Cayenne. ^[2] Volkswagen has issued a statement denying that its 3-liter V6 diesel power units were fitted with the software that helped cheat on the emissions tests. However, this new development leaves Volkswagen’s customers, investors, regulators, and legislators more unsure about the German automaker’s discretions.

This is the first time that petrol-driven vehicles have been dragged into the emissions scandal, and so has the super-premium brand Porsche. While the namesake brand of passenger vehicles, which contributes approximately 60% of the net volume sales, has been dragging down the overall profitability of the group as its margins remain under 3%, premium brands such as Audi and Porsche lift the overall margins. These brands are doing well in terms of volume sales, and due to their higher price points, they are accretive to the group’s operating margins. Audi and Porsche reported operating margins of 9.2% and 15.5%, respectively, for the first three quarters of the year. With more diesel variants of Audi reported to have used the defeat device, and even Porsche now roped into the scandal, customer perception could be hurt, in turn, possibly hurting future sales for these brands.

Volkswagen faces tens of billions in government fines and settlements, private settlements, recall expense, and future loss of sales, and we estimate that these costs could run up to $35.67 billion (net present value). Of course, the cost could come down depending on how Volkswagen tackles the situation from here on.

See the links below for more information and analysis:

• Volkswagen’s Q3 results reflect weakness that goes beyond the emissions scandal
• Volkswagen emissions scandal: what we can learn from history
• Volkswagen: could the cost of the dieselgate scandal be lower than expected?
• 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

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Volkswagen press release [↩]
2. EPA finds more VW cheating software, including in a Porsche, nytimes.com [↩]