Volkswagen’s Net Dieselgate Spending In The U.S. Rises Above $20 Billion


2016 was a tumultuous year for Volkswagen AG (OTCMKTS:VLKAY), which faced the dieselgate backlash in most of its crucial markets around the world. Especially in the U.S., where the automaker had been struggling to compete with local best-sellers GM and Ford and even the Japanese automaker Toyota, Volkswagen faced hefty expenditure in fines, settlements, recall expenses, and future losses in sales. In September 2015, news that Volkswagen had fitted around 11 million vehicles worldwide with software that allowed cheating on emission tests broke out. Since, the company’s stock took a sharp plunge, a halt on diesel-car sales and tarnished customer perception dampened vehicle sales, and the company has also faced several allegations and fines in different markets.

Recently, Volkswagen agreed to pay fines and penalties in the U.S., agreeing to resolve criminal and federal environmental and other civil claims against the automaker in relation to the dieselgate scandal. Volkswagen has agreed to plead guilty on as many as three felony counts. The plea agreement includes a criminal fine of $2.8 billion, penalty of $1.45 billion to resolve civil claims by the Customs and Border Protection agency under U.S. customs and environmental laws, and a civil penalty of $50 million to the Department of Justice to settle potential claims asserted under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). [1] [2] The combined value of these fines and penalties stands at $4.3 billion, which means that Volkswagen would now end up spending over $20 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, and for recalls and fixes. Let’s break down how Volkswagen reached this mammoth amount through various agreements with the U.S. government throughout last year:

  1. 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 475,000 eligible Volkswagen and Audi 2.0L 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.

  2. Volkswagen also agreed 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.
  3. In December last year, 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. 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. Following that, Volkswagen also agreed to pay “substantial compensation” to the owners of these 83,000 3.0-liter engine cars, which was not included in the aforementioned $1 billion settlement.

This massive dent in Volkswagen’s kitty in the U.S., coupled with the company’s continual poor performance in the country, reflects how it has not been a good 2016 for Volkswagen in the U.S.  Vehicle deliveries for the automaker fell 2.6% year-over-year in a market which remained relatively flat last year, battling lower demand after re-fueling of fleet took place aggressively in the country in the years following the recession.

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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. VW settles diesel cheating cases: felony pleas, $4.3 billion fines []
  2. Volkswagen press release []