While details are being kept under wraps, Volkswagen delivered a proposed settlement to a U.S. federal judge in San Francisco on Thursday that could help wrap up the legal challenges it faces over admittedly cheating on diesel emissions tests.
The plan, which observers expect to cost as much as $7 billion, would see the German maker buy back or repair as many as 500,000 diesel vehicles sold in the U.S., while also offering cash payments to owners. What remains to be seen is how much money VW may have to pay out in additional fines, as well as settlements for lawsuits filed by dealers and stockholders.
Volkswagen estimates it will cost it $18.2 billion in 2015 alone to put the crisis in the rearview mirror. And that could cause serious challenges for a company that, until the scandal broke last September, seemed destined to become the world’s largest automaker. The financial hit is only part of the challenge facing VW going forward. In the U.S., in particular, it must now rebuild a reputation in tatters and win back increasingly reluctant American buyers.
“What is still uncertain is whether this also resolves (other) issues Volkswagen has,” said Christian Stadler, a Professor of Strategic Management at the Warwick Business School.
Most immediate, Stadler said, is the lawsuit filed by the U.S. Justice Department. That could bring about penalties of as much as $46 billion for violating emissions laws by using a so-called “defeat device.” That software was able to detect when a VW diesel model was undergoing emissions testing and, if so, it would automatically adjust engine operations to comply with tough American standards.
In the early 1980s, Volkswagen sales went into freefall, dipping to a low of around 50,000 in 1992. The German automaker came close to abandoning the American market bit decided on a slow rebuilding process. It took nearly two decades and an expense product assault to approach the sales levels – topping 400,000 annually – it had scored in the 1960s and early 1970s.
Sales haven’t suffered nearly as a severe decline this time, and VW is already readying some critical product it needs for the U.S. market, notably a pair of new SUVs. But product alone won’t solve all of the maker’s problems. And, as it has already discovered, rebuilding one’s image – and sales – can be a long slog that could stretch out over a decade or longer.
It is widely expected VW won’t wind up paying the full $46 billion, but even a fraction of that sum will deliver a substantial hit on top of the settlement being worked out with owners. And there are additional lawsuits and criminal investigations overseas.
Some observers have warned that Volkswagen might have to sell off some of its corporate assets, perhaps even one of its 13 different vehicle brands, to handle the cost of the diesel scandal. At the very least, it already is cutting back its ambitious product and production plans.
That, in turn, could make it much more difficult for VW to overtake Japanese rival Toyota to become the world’s best-selling automaker, a goal it had set for itself by 2018. In fact, the German carmaker briefly surged into the lead during the first half of 2015, only to lose momentum as the scandal broke.
In recent months, Volkswagen has suffered double-digit sales declines in the U.S. despite offering hefty incentives on its non-diesel products. That’s a serious blow to the global leadership plan outlined by former CEO Martin Winterkorn – who was ousted after the diesel scandal broke. He had hoped to quadruple U.S. sales, in part by offering its “clean” diesels.
At another time, VW might have been able to suffer a U.S. slump but it is also facing problems in China, now its largest market, as that once-booming car market goes into a slide.
Rebuilding its American base won’t be easy. For one thing, it’s unclear if or when the diesels that once accounted for a quarter of VW’s sales will roll back into dealer showrooms. The bigger issue is whether U.S. consumers will forgive the maker.
Volkswagen isn’t the only automaker to be beset by crisis in recent years. Toyota had its unintended acceleration scandal, and General Motors hid an ignition switch defect for over a decade before it was linked to over 120 deaths. Both makers have largely polished up their tarnished reputations.
But VW’s diesel deceit is only one of the reasons why its image has been tarnished in recent years. Even before the scandal broke, the German maker was struggling to overcome a reputation for serious quality problems. It routinely lands in the lower tier of manufacturers, according to studies by J.D. Power, Consumer Reports and others.
And even if it can improve its quality score, that might not be enough. Perception is, for many potential customers, reality, stresses Joe Eberhardt, the CEO of Jaguar Land Rover North America. He should know. Despite fixing endemic problems and, in recent years, landing at the top of the J.D. Power quality charts, the Jaguar brand still has an image of poor quality the brand struggles to reverse.
“You can address perceptions or ignore them,” he said, but “the only way to change them is to improve the customer experience,” and that takes time.