Frank Witter

VW’s CFO struggles to shake Dieselgate

main 124725129 Julian Stratenschulte DPA – VW Volkswagen board members shadows CEO Matthias Mueller points CFO Frank Witter second left March 14 2017 Wolfsburg headquarters
Old sins cast long shadows. Source: Julian Stratenschulte / DPA

VW’s finance chief doesn’t mince words: “I’m not at all relaxed about the diesel issue,” Frank Witter told reporters on Monday in Wolfsburg, where the carmaker has its headquarters. “We’re nowhere near done with it,” he said, citing the lawsuits and repairs the company will have to work through, while the German market for diesel vehicles remains shaky.

US regulators revealed the emissions scandal, which affects 11 million diesel cars globally, in September 2015, and it keeps haunting the world’s largest carmaker, which also sells Audi, Skoda, Porsche and Lamborghini cars. A Dutch foundation, named Volkswagen Car Claim, proved how true Mr. Witter’s fears are. The group will file suit against Volkswagen on behalf of 120,000 European customers, Handelsblatt has learned. Unlike in Germany where plaintiffs have to file suit individually, the Netherlands’ legal rules are similar to those governing class actions in the US. Separately, a court in Stuttgart allowed a case against VW and its controlling shareholder, Porsche Automobil Hoding SE, to continue.

Mr. Witter said he expected things would calm down on the diesel front in the short term, but he warned that the company still faces long-term risks that are far more difficult to predict. One example: The additional €2.6 billion ($3.06 billion) that VW had to set aside in October for unexpected expenses in the United States, like buying back and repairing diesel cars. The manipulated vehicles emit more nitrogen oxide, a toxic gas which can cause asthma, on the road than in the laboratory thanks to illegal software installed in the engines.

The CFO argued that VW would have to be extremely cost-conscious in the coming years.

To come clean with its almost decade-long conspiracy and fraud, executives in Wolfsburg have reserved more than €25 billion to cover car buybacks, repairs, litigation and fines. The bulk of this money is going to US and Canadian customers and US authorities; different legal standards in Europe have enabled VW to avoid costly settlements, at least for time being. Both consumers as well as shareholders have sued the carmaker, either seeking compensation for the lower value of their diesel cars or billions to cover investment losses, after the Dieselgate revelations sent shares plunging.

Considering all the problems that VW has yet to solve, the message from the carmaker’s CFO this week was one of caution. Volkswagen’s financial results – and its share price – may be improving, Mr. Witter said, but that doesn’t mean the company can afford to be complacent. The 58-year-old argued that VW would have to be extremely cost-conscious in the coming years, in part by bringing its development and investment expenses down to the level of many of its competitors. Those ratios should be at about six percent by 2020, almost one percent below current levels. Mr. Witter, who worked for VW in the US from 2002 to 2008, said the carmaker would stick to that strategy even as it sinks more money into electromobility and digitalization. “We’re moving in the opposite direction of many competitors,” said Mr Witter, who became VW CFO three weeks after Dieselgate became public.

main 81722589 Peter Steffen DPA – VW Volkswagen CFO Frank Witter left CEO Matthias Mueller non-executive chairman Hans Dieter Poetsch AGM May 2017 Hannover Hanover
The three men in charge: Frank Witter, left, CEO Matthis Müller, and non-executive chairman Hans Dieter Pötsch. Source: Peter Steffen / DPA

Analysts acknowledged that changes are taking hold in Wolfsburg but say more reforms are necessary. “Wages at VW have reached a new high in relation to revenue, at 17 percent,” said Arndt Ellinghorst of investment consulting firm Evercore ISI. That’s a good deal higher than most competitors, he said, and there’s been no increase in worker productivity at Volkswagen plants for more than six years.

For Volkswagen’s finance chief, CO2 emissions rules set to take effect in the coming years pose another challenge that Dieselgate has only made more difficult. As European customers turn away from diesel models, they’re latching onto gasoline-powered cars – including SUVs – which actually spew more carbon dioxide. Starting in 2021, carmakers will have to pay fines running in the hundreds million of euros per company if the new vehicles they sell exceed an average CO2 output of 95 grams per kilometer driven. Most manufacturers’ fleets currently come in at about 120 grams, but Mr. Witter expressed confidence that Volkswagen, which managed to sell a record number vehicles last month, would be able to adhere to the new standard, particularly as new electric cars hit the market in 2020.

While VW’s CFO acknowledged that used diesel models are taking longer to sell and that dealers are getting less money for them, VW sees those problems as manageable. “Resale values haven’t sunk like a stone, even though they may be under pressure,” he said. It would also help matters in Germany if politicians could find an agreeable solution regarding city driving bans on older diesel models: “Many customers will want to keep driving a car with a diesel engine,” Mr. Witter said.

Surprisingly, Mr. Witter’s boss, VW CEO Matthias Müller, scared the industry on Monday, saying tax breaks for diesel owners should be phased out. This idea, which would make it more expensive to drive a diesel car, could actually further dent demand for the vehicles and increase the financial uncertainties Mr. Witter is trying to manage.

Stefan Menzel reports on the auto industry, focusing on Volkswagen. Volker Votsmeier, an investigative reporter with Handelsblatt, contributed to this article. To contact the author: menzel@handelsblatt.com

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