Can VW ride out the Dieselgate storm?

US and French prosecutors escalate over the emissions scandal, and VW's deep pockets may not be enough to save it.

by Adam Gale
Last Updated: 30 Mar 2016

Even the most optimistic or blinkered VW executive realises that things are going to get worse before they get better. In the US alone, it faces up to $46bn (£32.4bn) in fines under the US Clean Air Act, possible criminal action, hundreds of private civil cases and now another government suit under the Financial Institutions Reform, Recovery and Enforcement Act, a civil fraud law.

It’s not that much better in Europe, which was far more exposed to the use of defeat devices, but which has less stringent laws and regulations on the matter. Alongside the €6.7bn (£5.2bn) the Volkswagen Group set aside to pay for product recalls, it’s now being formally investigated for ‘aggravated fraud’ over the emissions scandal in France. Widening German and British investigations also loom.

VW’s response has seemed underwhelming. Most of its utterances on the ‘diesel issue’ (we prefer ‘disaster’) have emphasised how it’s cooperating with the authorities and how it wants to discover the truth of what happened just as much as everyone else.

Its labour chief Bernd Osterloh meanwhile took to warning the US not to be too trigger happy with the fines in case it forces VW to lay off workers (VW employs several thousand in the US and over 600,000 worldwide). ‘We very much hope that the US authorities also have an eye for this social and employment-political dimension,’ he said.

Not exactly a model of corporate contrition so far. On a more practical level, VW’s recent ‘New Perspectives’ strategy document does talk about cost cutting, ‘re-evaluating’ its strategy, decentralising the group and ‘profoundly changing the way we do things’. That’s all well and good, but it doesn’t address the business life-altering effects of having to cough up what could easily be £40bn or £50bn in fines and litigation costs.

Just look at BP, which was forced to sell tens of billions of dollars worth of assets to pay for the Deepwater Horizon fiasco –it’s still there, but it’s smaller as a result. VW’s fines could leave BP’s in the dust.

With over €30bn in cash and equivalents on its balance sheet, the group isn’t totally unable to handle the odd asymmetric shock. But in a highly competitive market where research into new technologies like electric and driverless cars is critical to a company’s future, having one’s coffers drained is somewhat more serious that a slap on the wrist. It will be interesting to see whether VW boss Matthias Mueller adopts a more drastic response than the firm has given so far, when he finally unveils its delayed 2015 results.

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