Settlements In The U.S. Continue To Drain Volkswagen’s Bank Accounts

by Trefis Team
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Volkswagen AG (OTCMKTS:VLKAY) had a tough run in the U.S. through late-2015, as it wasn’t able to sell a large number of its vehicles in a market dominated by the domestic bigwigs GM and Ford, and the Japanese automaker Toyota. Things took a turn for the worse when it was announced that Volkswagen was guilty of deliberately installing software that would assist in cheating on emission tests in over 11 million of its diesel vehicles. The company has since faced a lot of backlash all over the world, especially in the U.S.

Early in the year, Volkswagen agreed to a nearly $15 billion deal with U.S. authorities, where around $10 billion has been set aside for customers, giving owners of the affected Volkswagen vehicles in the U.S. the option of a 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 did not include fixes for another 83,000 Volkswagen, Audi, and Porsche 3.0-liter engine cars.

This month, Volkswagen reached a $1 billion agreement with the U.S regulators to get the 83,000 3.0-liter engine cars off the road. The deal includes buybacks from 20,000 owners of the older 2009-2012 Volkswagen Touareg and 2009-2012 Audi Q7, as well as a free fix and payouts for 63,000 owners of the newer 2013-2016 3-liter diesel models. [1] Volkswagen will also pay $225 million into an environmental trust fund to mitigate the environmental damage caused by their vehicles, and $25 million to California to support the use of zero-emission models. More recently, Volkswagen also agreed to pay “substantial compensation” to the owners of these 83,000 3.0-liter engine cars, which is not included in the aforementioned $1 billion settlement. This comes after Volkswagen reached a $2.1 billion settlement in Canada to provide cash payments to owners of around 105,000 2.0-liter Volkswagen and Audi diesel vehicles that were fitted with the defeat devices that helped cheat on emissions testing.

Volkswagen had also agreed previously 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. [2]

What this means is that Volkswagen would spend as much as $17.5 billion in the U.S. alone in relation to the emissions scandal to resolve claims from the federal and state regulators and owners of the affected vehicles, in addition to recently announced compensation for the owners of the impacted 3.0-liter engine cars. ((Volkswagen reaches deal with 80,000 U.S. 3.0-liter vehicle owners, reuters.com)) 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 over €18 billion since last year, and is bound to increase much more with announcements of compensations and vehicle fixes in relation to the scandal.

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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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Notes:
  1. Judge warns VW owners not to strip diesel cars for buybacks, usatoday.com []
  2. Volkswagen will pay $1.21 billion to settle U.S. dealer claims, yahoo.co.in []
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