For Volkswagen, cost of scandal piling up
Its cheating could cost it more than $39 billion, one analyst says.
For Volkswagen, the cost of its cheating on emissions tests in the U.S. is likely to run into the tens of billions of dollars and end its long-sought status as the world’s biggest carmaker.
As well as fines from governments, Volkswagen faces the huge expense of recalling up to 11 million cars globally.
Already the company has set aside 6.5 billion euros ($7.3 billion) to cover the fines and recalls — but that’s only the start. Some experts estimate the bill could ultimately be five times as large.
Here’s a look at the financial reckoning the Germany-based automaker will face:
Financial charges
The costs of fines, lawsuits and recalls have the potential to snowball.
Marc-Rene Tonn, an analyst at Warburg Research, says they could ultimately exceed 35 billion euros ($39 billion).
A chunk of that would come from fines from the U.S. Environmental Protection Agency, which could amount to as much as $18 billion. In theory, each of the 482,000 cars identified as having the deceptive software could be slapped with a $37,500 penalty. The actual fine will likely be much lower if the company cooperates with authorities.
The carmaker faces dozens of lawsuits from U.S. states and counties. One county in Texas is seeking penalties worth $100 million, and that’s just one lawsuit.
Volkswagen may also face fines in other countries where it sold such rigged cars if there is evidence it cheated on emissions tests there, too. It is being investigated in Germany and other European countries.
Customers who feel cheated are going after Volkswagen as
well, with several class-action lawsuits already filed in the U.S. and Europe. That could amount to billions more in damages.
And the cost of recalling and fixing the cars could run 2 billion euros ($2.2 billion) beyond what Volkswagen set aside, Tonn wrote in a research note to investors.
As a result, analysts are predicting a serious hit to Volkswagen’s profits. Tonn halved his profit forecast for this year to 6.4 billion euros. For 2016, he reduced it to 11.0 billion euros from 15.7 billion euros.
Sales
Volkswagen is expected to see a drop in interest in its cars because of the scandal, especially in the United States.
Already in September, Volkswagen’s sales in the U.S. barely grew despite the wider market’s double-digit growth.
Auto analyst Ferdinand Dudenhoeffer at the University of Duisburg-Essen estimates that Volkswagen could see vehicle sales fall by up to 10 percent globally next year.
Earnings could take a bigger hit, as the company may have to hold down prices through purchasing incentives in order to maintain sales.
To make matters worse, the scandal comes just as demand is slowing in China, where Volkswagen’s brands are heavily exposed.
Brand value
Perhaps the worst news for Volkswagen relates to the erosion of its brand — the intangible value of built up over decades.
The scandal has wiped $10 billion off the value of Volkswagen’s $31 billion brand, according to Brand Finance, a London-based firm that values corporate names by estimating what a company would have had to pay to license it if it didn’t already own it. The damage could be worse than that suffered by Toyota over unintended vehicle acceleration.
Volkswagen’s carefully tended brand means it has been able to charge more for the equivalent vehicle than competitors — a key driver of profit in the highly competitive market for basic transportation. Morgan Stanley estimated that weaker pricing could cost up to 4 billion euros in lost earnings next year.