Dieselgate Drama

VW’s Legal Tsunami

ILLUSTRATION - Ein Schlüsselanhänger, der eine US-amerikanische Flagge zeigt, ist am 14.03.2016 in Kaufbeuren (Bayern) am Schlüssel eines Volkswagens befestigt. Foto: Karl-Josef Hildenbrand/dpa [ Rechtehinweis: (c) dpa ]
VW has settled in the US over Dieselgate. What's next?
  • Why it matters

    Why it matters

    The money VW set aside to cover financial risks related to the emissions-rigging scandal – €16.2 billion ($17.9 billion) – could be completely consumed by U.S. liabilities alone.

  • Facts

    Facts

    • VW this week agreed to pay approximately $15.3 billion in a settlement with the U.S. Environmental Protection Agency and nearly half a million VW diesel car buyers in the United States.
    • The carmaker remains exposed to financial risks associated with more than 10 million affected diesel vehicles sold in the rest of the world, including around 8 million in Europe.
    • VW’s legal troubles are only beginning to unfold in Europe. A group of 278 large investors, for instance, is seeking nearly €3.3 billion in damages in a district court in Germany.
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    Audio

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Legal certainty can be an expensive commodity. Just ask embattled German automaker Volkswagen, which this week agreed to pay up to $15.3 billion (€13.8 billion) in a settlement with the U.S. Environmental Protection Agency and nearly half a million VW diesel car buyers in the United States.

Amid the ongoing fallout of the global Dieselgate emissions-rigging scandal – involving the manipulation of emissions control software in around 11 million diesel vehicles worldwide – the total cost of Volkswagen’s transgressions continues to unfold.

One name that will not appear among the long list of agencies, customers and investors queued up with legal claims against Europe’s largest carmaker: Porsche SE.

Volkswagen’s largest shareholder, controlling 50.76 percent of VW’s common shares, Porsche will not join the legal fray, Manfred Döss, the luxury car company’s legal affairs executive, predictably clarified on Wednesday at its annual general meeting in Stuttgart. Mr. Döss also leads VW’s legal team.

“We believe in the strength of our most important shareholding.”

Hans Dieter Pötsch, Executive Board Chair, Porsche SE

Given the iconic German automakers’ close relationship, it comes as no surprise that Porsche will not join the legal tsunami bearing down on its most important asset. Nearly nine months after its diesel-emissions deception first made headlines, Volkswagen remains in treacherous territory – despite the settlement in the United States and the calming words of company executives.

“We believe in the strength of our most important shareholding as well as a positive share-price development,” Hans Dieter Pötsch, chairman of the executive board at Porsche Automobil Holding, said at the annual shareholder meeting.

Mr. Pötsch – Porsche’s chief financial officer who formerly occupied the same post at VW – is also chairman of Volkswagen’s supervisory board.

But many colleagues and investors question such optimism, believing the €16.2 billion ($17.9 billion) Volkswagen set aside in 2015 to cover its financial risks related to the scandal will not suffice.

Such concerns appear well founded.

The disclosed price tag of the U.S. settlement announced Tuesday, for instance, still could rise substantially given certain conditions attached to the deal. Additional costs accumulate if VW fails to repair or repurchase and scrap at least 85 percent of affected automobiles in the United States. The automaker must pay $85 million for each percentage point under that threshold.

Moreover, the settlement involves only 2.0-liter VW or Audi diesel cars, meaning the carmaker remains exposed to financial risk from 3.0-liter vehicles in the United States – with billions of dollars on the line.

The settlement also does not cover potential criminal penalties stemming from the U.S. Justice Department’s ongoing investigation or other criminal prosecution.

Europe, which accounts for more than eight million of those remaining uncompensated vehicle owners, is the biggest question mark.

In other words, VW’s set aside could be completely consumed to cover legal costs associated with vehicles sold into the United States alone, while it remains exposed to the risks associated with more than 10 million affected diesel vehicles sold in the rest of the world.

Europe, which accounts for more than eight million of those remaining uncompensated vehicle owners, is the biggest question mark. And Volkswagen can hardly afford to stay silent on the matter on its home turf, especially after compensating U.S. customers so handsomely.

Under the terms of the settlement, VW has agreed to buy back affected vehicles at their September 2015 value, before the scandal became public. A compensation payment comes on top of that. The buyer of a 2011 VW Golf would receive $18,000 to $20,000, for instance, while the buyer of a 2015 Audi A3 would receive up to $44,000.

VW dealers in the United States hope such lavish rewards will convince customers to stick with the brand when they buy replacement vehicles.

To date, Volkswagen has said and done little to financially compensate customers in Germany or the rest of Europe.

“I would have wished for a symbolic compensation already, also in Europe,” said Stefan Bratzel, director of the Center of Automotive Management in Bergisch Gladbach, near Cologne. “Even if the company is not legally obligated.”

Europe’s Industry Commissioner Elzbieta Bienkowska has also called on Volkswagen to compensate European drivers after the company’s U.S. payout. “European consumers have been cheated in the same way as US customers, so it is only fair to offer comparable compensation without hiding behind legal arguments,” Bienkowska said in an emailed statement, Reuters reported.

For U.S. star attorney Michael Hausfeld, symbolism is not enough. Mr. Hausfeld is preparing a sweeping class-action lawsuit involving thousands of VW customers that could keep the carmaker’s legal affairs team busy for years.

Customers and agencies in other countries, such as Turkey and South Korea, also plan to hold Volkswagen responsible in the form of fines, restitution of damages, repairs or buybacks – to the tune of billions.

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Unlike strategic shareholders, such as the state of Lower Saxony, where Volkswagen is headquartered, or the Porsche-Piëch families, some other investors appear willing to take VW to court. A group of 278 large investors, for instance, is seeking nearly €3.3 billion in damages in a district court in Braunschweig, Lower Saxony.

The litigious investors – including insurance giant Allianz, investment fund firm Deka and the California Public Employees’ Retirement System – are seeking damages for their losses related to the Volkswagen scandal.

Recent actions of federal prosecutors in Braunschweig can only be encouraging: In mid-June, they opened a probe into former Volkswagen chief Martin Winterkorn and another VW executive.

Martin Murphy is an editor with Handelsblatt and specializes in the automotive, defense and steel industries. Markus Fasse covers the aviation and automobile industry. Stefan Menzel is the managing editor of Handelsblatt’s website and closely follows the car industry. Astrid Dörner is part of Handelsblatt’s team of correspondents covering finance and U.S. corporations in New York.

To contact the authors:murphy@handelsblatt.comfasse@handelsblatt.commenzel@handelsblatt.comadoerner@handelsblatt.com

 

 

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