How Badly Has the VW Diesel Scandal Hurt VW?

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It has been more than a year since the automotive world was rocked by the Volkswagen diesel scandal. In September 2015, the company was caught cheating with diesel cars (also called TDI cars by VW) producing many times the amount of emissions allowed by law. Vehicles sold under the Volkswagen, Audi, and Porsche brands in the U.S., plus other brands in international markets, were included in the deception.

On October 25, an agreement with California and U.S. regulators is set to be approved by a federal court in San Francisco. The agreement will cost the company nearly $15 billion, including up to $10 billion for buybacks or modifications, plus $4.7 billion for environmental mitigation and zero-emission research and development.

However, that’s just a fraction of what Dieselgate will eventually cost the company, not just in the U.S., but around the world.

Volkswagen still faces enforcement actions and lawsuits from governments and investors from around the world, plus additional suits from U.S. states and customers who have opted out of the current settlement. The proposed settlement only applies to Volkswagens equipped with 2.0-liter diesel engines. Customers owning Volkswagens, Audis, and Porsches with 3.0-liter engines have yet to see an approved fix or settlement.

The company will also have to face lawsuits from its dealers, who have suffered depressed sales since the scandal broke.

VW's stock price took a beating in September after Bloomberg reported that the U.S. Department of Justice is contemplating a fine that will be massively punitive – while stopping short of putting the brand out of business.

However, Volkswagen has returned to profitability for the year, based on strong sales in China. For the first six months of the year, it was the world’s largest automaker, taking the crown from Toyota.

Dieselgate Background

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The vehicles involved in the diesel emissions scandal contain a “defeat device” in their software that allows emissions control systems to be deactivated, or their functions reduced, when the vehicle is driven on the road. In laboratory testing, all of the emission control systems were operated at their full capabilities, allowing the cars to pass certification tests. The use of such devices is expressly forbidden by regulations.

Around 475,000 vehicles in the U.S. are implicated in the scandal, but about 11 million Volkswagen Group diesels around the world allegedly included the illegal defeat device software.

Sales in the U.S. initially plummeted, as did the value of Volkswagens with diesel (TDI) engines. The number of people considering purchasing a VW, new or used, dropped precipitously. According to Kelley Blue Book data, the resale value of Volkswagen diesels declined more than three times as fast as those of nondiesel VWs between June 2015 and March 2016.

According to lease marketplace company Swapalease, prior to the scandal, 0.88 percent of searches on their site were for Volkswagens. However, the number dropped when the news broke, and in August 2016, only 0.56 percent of searches were for VW products.

On the bright side, sales did not fall as far as they could have. While diesels accounted for around 25 percent of VW’s sales before the scandal, sales for 2016 are only off 12.5 percent through September, according to VW.

So what does it mean for the future of Volkswagen?

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First, new Volkswagen diesels are unlikely to be introduced in the United States in the foreseeable future, if at all. Any new vehicles would have to have expensive exhaust aftertreatment systems, and the mileage difference between diesels and gasoline hybrids is smaller than it once was.

In Europe, where diesel-powered passenger cars are more common, the VW diesel scandal and reports of widespread flaunting of emissions rules by other automakers is likely to dramatically reduce the region’s appetite for diesels.

While most industry experts agree that Volkswagen will weather the storm, the company that emerges will be different. They have already announced a new corporate focus, with as many as 30 all-electric cars to enter their product portfolio by 2025, according to the BBC. The electric models are expected to represent between 20 and 25 percent of their sales, according to Volkswagen CEO Matthias Mueller.

One vehicle that the U.S. might see is a new small electric van, inspired by the Budd-e concept vehicle shown at 2016’s Consumer Electronics Show.

In order to meet the 2025 deadline, many current products are unlikely to be renewed due to tightening budgets and the bulk of research and development dollars being devoted to the new technologies. Under the terms of the U.S. settlement, the company will have to devote $2 billion to EV-related projects.

According to a survey of more than 400 current TDI owners by car shopping site CarGurus.com, 21 percent say they will not buy another Volkswagen, though a surprising 43 percent say that they would.

"The Volkswagen situation has introduced challenges on a new level for both VW and car owners who have been loyal to the brand," said Sarah Welch, SVP Consumer Marketing at CarGurus. "Our survey shows that owners are still processing the information they've received, and VW has a lot of work to do to remain in their good graces."

The Settlement

The settlement expected to be approved on October 25 provides owners of the approximately 475,000 2.0-liter Audi and Volkswagen TDIs in the U.S. the option to have their cars retrofitted with a yet-to-be-approved emissions fix or to have Volkswagen buy their car back at the car’s value just prior to the time that the scandal broke. Lease customers will have the right to terminate their lease with no penalty.

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Most owners or lessees will also receive cash payments of between $5,100 and approximately $10,000. Owners will have until May 2018 to decide which, if any, path to take. Volkswagen must either buy back or modify at least 85 percent of eligible vehicles by 2019 or face additional fines. Customers with outstanding loans can receive additional payments to help meet their loan obligations.

Any cars that the company buys back must be rendered inoperable if they cannot be modified to meet standards, or if is not cost effective to do so. They cannot be exported to countries with less stringent emissions standards unless they are first modified to meet U.S. standards.

Given that the value of the car is frozen at its value just prior to the scandal breaking, some have suggested keeping your car right up to the deadline, according to a story by Green Car Reports. While that may be the most economically advantageous strategy, it also maximizes the environmental damage causes by your car’s excessive emissions.

“There is resounding support for this consumer class settlement and the substantial benefits it provides. Nearly 340,000 class members have already registered online – a remarkable figure given that the settlement has not yet been approved – and far fewer than one percent have opted out,” says Elizabeth Cabraser, lead counsel for the consumer plaintiffs in the Volkswagen “Clean Diesel” Marketing, Sales Practices, and Products Liability Litigation.

Vehicles Affected by the VW Diesel Scandal (Source: EPA)

Model

(Click link for review)

Engine

Class

(Click link for rankings)

2010 - 2015 Volkswagen Golf

2.0-liter

Compact Cars

2015 Volkswagen Golf SportWagen

2.0-liter

Wagons

2009 - 2015 Volkswagen Jetta

2.0-liter

Compact Cars

2012 - 2014 Volkswagen Jetta SportWagen

2.0-liter

Wagons

2012 - 2015 Volkswagen Passat

2.0-liter

Midsize Cars

2012 - 2015 Volkswagen Beetle

2.0-liter

Subcompact Cars

2009 - 2016 Volkswagen Touareg

3.0-liter

Luxury Midsize SUVs

2010 - 2015 Audi A3

2.0-liter

Luxury Small Cars

2014 - 2016 Audi A6

3.0-liter

Luxury Midsize Cars

2014 - 2016 Audi A7

3.0-liter

Luxury Large Cars

2014 - 2016 Audi A8

3.0-liter

Super Luxury Cars

2014 - 2016 Audi Q5

3.0-liter

Luxury Compact SUVs

2009 - 2016 Audi Q7

3.0-liter

Luxury Midsize SUVs

2013 - 2016 Porsche Cayenne

3.0-liter

Luxury Midsize SUVs