The Strategist

Volkswagen struggles with financial consequences of Dieselgate

11/18/2016 - 14:38

Last year, Volkswagen found itself in the center of a scandal. The US authorities found out that the carmaker forged results of tests one emissions of harmful gases into the atmosphere. The investigation is gradually resulting in withdrawal of thousands of cars made by the German company, huge fines and a series of lawsuits from consumers. Now, the scandal has slightly faded, but still did not lose its relevance.

The company is now struggling with financial consequences of the Dieselgate. Under an agreement with the trade unions, the German automaker is going to cut tens of thousands of jobs and save billions of dollars. The company needs this money to restore profitability, eliminate consequences of the scandal, and finance transition from diesel to electric and unmanned vehicles.

German newspaper the Handelsblatt was the first to write about dismissal of 30 thousand employees working for Volkswagen worldwide. Reuters’ sources specified that 23 thousand of them fall on Germany. According to Bloomberg, the company is planning to cut 23 thousand jobs in total; nobody will be forced to leave until 2025. 

Almost all publications, however, agree about amount of money to be saved. This is €3.7 billion euros, or $ 3.9 billion, annually. 

On Tuesday, US District Court in San Francisco confirmed total fine of $ 14.7 billion to be imposed on Volkswagen in the United States in connection with the Dieselgate, writes The Wall Street Journal. This is the largest amount of compensation to be paid by an automaker in United States’ history.

The fine includes a multi-billion dollar payment within settlement agreement with the US car owners. According to the document, Volkswagen will allocate about $ 10 billion to repurchase 475 thousand vehicles with 2-litre diesel engines. Consumers may return their cars and get their money back, or repair them at the manufacturer’s expense in accordance with the US environmental standards.

Whichever option is selected, each of the owners will receive additional compensation of $ 5.1 thousand to $ 10 thousand. In case of car leasing, they will be paid $ 3.5 thousand additionally. Besides, VW will contribute $ 4.7 billion in environmental funds.

Withdrawal of cars in the US starts in mid-November 2016. The final decision may be taken up to September 2018. If Volkswagen fails to recondition or dispose 85% of all faulty cars by June '19, it may face further penalties.

Head of VW American division Hinrich J. Woebcken called the agreement "a milestone on the way to normalization of the situation in the United States," reports Deutsche Welle. At the same time, Volkswagen Group has yet to conclude a similar agreement for Audi vehicles with 3-litre diesel engines, of which there are about 85 thousand units. 

Meanwhile, the scandal had a little impact on the company's financial results. In the third quarter of 2016, Volkswagen reported a net profit of € 2.34 billion, compared to a loss of € 1.67 billion for the same period of the previous year.

According to the company, its operating profit decreased by 4.9% in the third quarter - up to € 3.31 billion. Revenues from sales increased by 1% - up to € 52 billion. At the same time, net profit of the group grew in the first nine months of 2016 by 48.2% - up to € 5.91 billion. Operating profit rose by 2.6 times up to € 8.65 billion, but revenue from sales decreased by 0.2% to € 159.93 bln.