10/6/2015

ForVolkswagen,costsofscandalwillbepilingupTheHindu

BUSINESSINDUSTRY

Published:October6,201510:29IST|Updated:October6,201510:29IST
FRANKFURT,October6,2015

ForVolkswagen,costsofscandalwillbepilingup
AP

Reuters
Volkswagenisexpectednextweektounveilawayforwardfromtheemissionsscandal.
Aswellasfinesfromgovernments,Volkswagenfacesthemassiveexpenseofrecallingupto11millioncarsglobally.
ForVolkswagen,thecostofitscheatingonemissionstestsintheU.S.islikelytorunintothetensofbillionsofdollarsandprematurelyend
itslongsoughtstatusastheworldsbiggestcarmaker.
Aswellasfinesfromgovernments,Volkswagenfacesthemassiveexpenseofrecallingupto11millioncarsglobally.
Alreadythecompanyhassetaside6.5billion($7.3billion)tocoverthefinesandrecallsbutitsafairbetthatsonlythestart.Someexperts
estimatethebillcouldultimatelybefivetimesaslarge.
Beyondinitialcharges,thecompanyisexpectedtosufferadropinsales.Andthedamagetothebrandsimagecouldtakeyearstoheal.
Thisisdamagingstuffthatgoeswaybeyondnegligenceandincompetence,saidJeremyRobinsonLeon,principalandchiefoperating
officeratNewYorkbasedPRfirmGroupGordon.Theissuehereisfraudandprettybrazenfraudatthat.
Financialcharges
Thecostsoffines,lawsuitsandrecallsarehardtoestimatebuthavethepotentialtosnowball.
MarcReneTonn,ananalystatWarburgResearch,saystheycouldultimatelyexceed35billion($39billion).
AchunkofthatwouldcomefromfinesfromtheU.S.EnvironmentalProtectionAgency,whichcouldamounttoasmuchas$18billion.In
theory,eachofthe482,000carsidentifiedashavingthedeceptivesoftwarecouldbeslappedwitha$37,500penalty.Theactualfinewill
likelybemuchlowerifthecompanycooperateswithauthorities.Mr.Tonnsaysitcouldreach12.5billion($14billion).
ThecarmakerfacesdozensoflawsuitsfromU.S.statesandcounties.OnecountyinTexasisseekingpenaltiesworth$100million,andthats
justonelawsuit.
Volkswagenmayalsofacefinesinothercountrieswhereitsoldsuchriggedcarsifthereisevidenceitcheatedonemissionsteststhere,too.It
isbeinginvestigatedinGermanyandotherEuropeancountries.

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10/6/2015

ForVolkswagen,costsofscandalwillbepilingupTheHindu

CustomerswhofeelcheatedaregoingafterVolkswagenaswell,withseveralclassactionlawsuitsalreadyfiledintheU.S.andEurope.That
couldamounttobillionsmoreindamages.
Andthecostofrecallingandfixingthecarscouldrun2billion($2.2billion)beyondwhatVolkswagensetaside,Mr.Tonnwroteina
researchnotetoinvestors.
Asaresult,analystsarepredictingaserioushittoVolkswagensprofits.
Mr.Tonnhalvedhisprofitforecastforthisyearto6.4billion.For2016,hereduceditto11billionfrom15.7billion.Volkswagenhas
strongfinances,startingwith20billioninnetindustrialcash.Itneedstokeepatleast10billionofthathowevertomaintainitscredit
rating.
Sales
Volkswagenisexpectedtoseeadropininterestinitscarsbecauseofthescandal,especiallyintheUnitedStates.AlreadyinSeptember,
VolkswagenssalesintheU.S.barelygrewdespitethewidermarketsdoubledigitgrowth,asithadtohaltsalesofmanydieselvehicles.
AutoanalystFerdinandDudenhoefferattheUniversityofDuisburgEssenestimatesthatVolkswagencouldseevehiclesalesfallbyupto10
percentgloballynextyear.Earningscouldtakeabiggerhit,asthecompanymayhavetoholddownpricesthroughpurchasingincentivesin
ordertomaintainsales.
Tomakemattersworse,thescandalcomesjustasdemandisslowinginChina,whereVolkswagensbrandsareheavilyexposed.Asforthe
companysstrategicgoalofmaintainingitsleadoverToyotaastheworldsbiggestautomaker,Mr.Dudenhoeffersays,Forgetaboutit.
Toyotas10.23millionvehiclesedgedVolkswagens10.14millionlastyear,thoughVolkswagenpulledaheadinthefirstsixmonthsofthis
year.
Mr.DudenhoeffersaiditwouldtakeVolkswagenatleastfiveyearstohaveanotherchanceatpassingToyota.
Shares
ThescandalhascausedVolkswagenssharestodropbyabout40percent,loppingoffabout30billion($33billion)fromthecompanys
marketvalue.
ThathithasbeentakenmostlybyitsbigshareholdersthePiechandPorschefamilies,whocontrolover50percentofthecompany,andthe
othermajorshareholdersthestateofLowerSaxonyandQatarHoldings.
Brandvalue
PerhapstheworstnewsforVolkswagenrelatestotheerosionofitsbrandtheintangiblevalueofbuiltupoverdecades.
Thescandalhaswiped$10billionoffthevalueofVolkswagens$31billionbrand,accordingtoBrandFinance,aLondonbasedfirmthat
valuescorporatenamesbyestimatingwhatacompanywouldhavehadtopaytolicenseitifitdidntalreadyownit.Thedamagecouldbe
worsethanthatsufferedbyToyotaoverunintendedvehicleacceleration.
Volkswagenscarefullytendedbrandmeansithasbeenabletochargemorefortheequivalentvehiclethancompetitorsakeydriverofprofit
inthehighlycompetitivemarketforbasictransportation.MorganStanleyestimatedthatweakerpricingcouldcostupto4billioninlost
earningsnextyear.
Rebuildingtrustwilltaketimeandmoney,includingadvertising.
IoannisIoannou,assistantprofessorofstrategyandentrepreneurshipatLondonBusinessSchool,saidonethingVolkswagencoulddoisto
investinemissionstestingincollaborationwiththeU.S.EnvironmentalProtectionAgency.
Recoverywillnotbequickandwilltaketime,hesaid.Volkswagenmustbepreparedtoheavilyinvestinthisrecoverytobringbackthe
trustandintegrityitneedstosurvive.
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