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Volkswagen's $15 Billion Settlement is First Step for Car Company

Federal officials outlined a $14.7 billion deal with VW that will, among other things, remove as many as 475,000 diesel vehicles from U.S. roads.
File photo of a traffic light showing red next to the Volkswagen factory in Wolfsburg
A traffic light shows red next to the Volkswagen factory in Wolfsburg, Germany, in this November 20, 2015 file photo. REUTERS/Ina Fassbender/FilesREUTERS

Describing the settlement as “groundbreaking” and “unprecedented,” federal officials on Tuesday outlined a $14.7 billion, three-part deal with Volkswagen that will, among other things, remove as many as 475,000 diesel vehicles from U.S. roads.

But the agreement, which could yield significant compensation for those who own those vehicles, does not end the German automaker’s legal and financial problems. If anything, the automakers could wind up paying out billions of dollars in additional fines, fees and settlements. And the company and some of its current and senior executives could yet face serious criminal charges, a top Justice Dept. official warned.

“We take our commitment to make things right very seriously and believe these agreements are a significant step forward,” Matthias Müller, chief executive officer of Volkswagen AG, said in a prepared statement, adding that VW “still [has] a great deal of work to do to earn back the trust of the American people.”

Regaining that trust could prove especially challenging, industry analysts said, pointing to the double-digit drop in sales by the Volkswagen brand since it admitted cheating on diesel emissions tests last September.

Read More: CEO of Volkswagen U.S. Steps Down Amid Emissions Scandal

The German maker initially acknowledged using a so-called “defeat device” on 475,000 Volkswagen and Audi vehicles equipped with a 2.0-liter turbodiesel. The system was designed to detect when a vehicle was undergoing emissions tests and then maximize the effectiveness of the onboard pollution control system. Otherwise, noted Environmental Protection Agency chief Gina McCarthy during a Tuesday news conference, the production of particulates and smog-causing oxides of nitrogen ran up to 40 times the U.S. limit.

The new agreement between Volkswagen and federal prosecutors and regulators has three provisions:

  • A vehicle buyback and owner compensation provision that could cost VW as much as $10 billion;
  • A $2.7 billion environmental remediation provision that will help offset the higher emissions of the VW diesel vehicles by helping all 50 states and some Indian tribes replace older, dirtier diesel vehicles and equipment with newer, cleaner technology; and
  • VW also will spend $2 billion to encourage public adoption of zero-emissions vehicles.

Significantly, the agreement covers only VW’s 2.0-liter diesel engine. A separate settlement covering a more upscale, 3.0-liter diesel is still in the works and could come in several months. There are less than 50,000 of those vehicles, so the price tag is expected to be substantially lower than for the agreement announced Tuesday.

But VW could still be facing some substantial, additional costs. All told, about 11 million vehicles outfitted with the suspect software worldwide and repair costs may also wind up in the billions.

VW has so far declined to offer compensation to owners outside the U.S. but, over the weekend, a senior European Union official called on the maker to match the American compensation program in the EU.

"Volkswagen should voluntarily pay European car owners compensation that is comparable with that which they will pay US consumers,” European industry commissioner Elzbieta Bienkowska told the German newspaper Welt am Sonnstag.

Read More: Feds Announce $15 Billion Settlement With VW Over Emissions Rigging

Exactly how many vehicles that would cover is uncertain, though the numbers would run into the many millions and could drive the automaker’s costs for the scandal up towards $100 billion, said analyst Joe Phillippi, of AutoTrends Consulting, warning that the result would very likely be bankruptcy for what was last year the world’s second-largest automaker.

“The last thing Germany wants to deal with is a VW bankruptcy,” said Phillippi, adding that he would expect the Berlin government to try to derail such a plan.

The new settlement in the U.S. does not account for some VW diesel owners who have filed individual lawsuits against the maker, rather than joining some large class action cases overseen by a federal district court in San Francisco.

Meanwhile, the automaker is also being sued by dealers who have been hurt by the sharp drop in VW sales, as well as shareholders who have seen Volkswagen stock plunge since the scandal was triggered. The company saw a 52-week high of $216.25 at the beginning of July 2015, the stock plunging to $92.36 in the wake of the diesel revelations. Following Tuesday’s announcement, the stock settled back to just over $100.

During a joint government news conference, U.S. Assistant Attorney General Sally G. Yates stressed that the settlement “is by no means the final step.” Among other things, she said, “I can assure you our criminal investigation is active and ongoing.”

The U.S. Justice Department is working with its German counterpart on an investigation that has now targeted several current and former Volkswagen senior executives, including Martin Winterkorn, who was ousted last September as CEO.

Read More: U.S. Sues Volkswagen Over Diesels Designed to Cheat Emissions Test

Perhaps the biggest challenge, however, could be rebuilding the brand, according to David Sullivan, a senior automotive analyst with AutoPacific, Inc. “The real test will be down the road when we see how this affects customer loyalty.”

For May, year-over-year sales were down 17.2 percent, with the numbers off 13.1 percent for the first five months of 2016. And that’s despite a steady ramp-up of incentives designed to lure buyers back into VW showrooms.

Volkswagen will clearly make an effort to win back existing diesel owners who will need new vehicles when they accept the company’s buyback offer.

For now, the maker has no new diesels to offer them. It still has not come up with a solution to the emissions problem acceptable to U.S. and California regulators. And that’s a major problem considering that, before the scandal broke, diesels accounted for a quarter of Volkswagen of America’s sales.