Cash-rich Volkswagen braces for the impact of dieselgate

 

Lawsuits are flying after VW was found to have sold 11 million diesels secretly adapted to produce lower emissions during lab testing. The eight different litigation risks VW outlined on October 28 range from criminal prosecution in the United States to class action suits by customers and investors. Legal fees and fines are extra. VW reasonably points out that it’s too soon to guess at the total.

Dieselgate’s direct costs are becoming clearer, though. At 6.7 billion euros, the provision booked for recalls and other immediate charges is only 200 million euros higher than the group’s estimate four days after the scandal broke. Of that, 1.3 billion euros covers the potential loss of value in leased vehicles that sit on the books of VW’s sprawling financial services unit, a manageable sum.

One big question is whether VW’s reputation with customers is dented. It appears not. The group confirmed its pre-scandal sales and revenue guidance. While group sales in all-important China fell by 5.2 per cent over the first nine months, the earnings of VW’s Chinese joint ventures remained stable. Excluding the emissions-related provisions, the lacklustre profitability of the core VW passenger car brands increased slightly.

VW continues to generate strong cash flow. The sale of a 3 billion euro stake in Suzuki pushed the company’s measure of third-quarter free cash flow to 7 billion euros, almost three times the previous year’s level. At 27.8 billion euros, the automotive division’s net cash was 65 per cent higher than a year ago. And Volkswagen has ample room to cut investment spending more than the 1 billion euros it announced. 

The impact of dieselgate could still be severe, but VW’s seatbelts are fastened.