Fitch Ratings doesn’t expect Volkswagen to pay the highest possible fine — $18 billion — stemming from the U.S. Environmental Protection Agency and the California Air Resources Board revealing findings that allege five of the OEM’s diesel-powered vehicles include “defeat device” software that circumvents emissions standards for certain air pollutants.
However, the automaker is already experiencing a major impact in a variety of ways, and Black Book indicated that it’s keeping an eye on three elements in order to evaluate how this issue will impact vehicle values. Anil Goyal, vice president of automotive valuation and analytics for Black Book and one of the experts coming to Used Car Week gave Auto Remarketing the rundown on Monday, highlighting:
1. How will EPA force consumers to implement recall changes? Will the regulator stop such vehicles from passing emissions and thus not being able to update vehicle registration? If so, which vehicles will be impacted by EPA: new only, used trading hands, or existing vehicles as well?
2. How easy is it for the dealers to update the software? And, how does VW incentivize its customers to get an update? How do they manage “Clean Diesel” brand image?
3. What impact does the fix have? Will it worsen the car's fuel economy or will it introduce performance issues? Given the low gas and diesel prices, fuel economy impact to vehicle values will be minimal.
“Recalls are common in the auto industry,” Goyal said. “Looking at precious recalls, we don’t see a long lasting negative impact to values in general. What suffers the most are the brand and the sales of new vehicles.
“In the end, if the manufacturer can effectively manage damage control of the brand and the operations to implement recalled changes, the vehicle values are typically not impacted in the long term,” he continued.
“This recall situation could be different,” Goyal added. “Most recalls are safety related and could actually improve goodwill with the customer when the car is fixed. It is not clear what was the intent of this software meant to skirt emissions testing.”
And reportedly the U.S. Department of Justice is asking questions, too. Bloomberg reported on Monday afternoon, citing two officials familiar with the situation, that the Justice Department is conducting a criminal investigation of VW.
All of this uncertainty significantly impacted VW’s value with investors. Reuters reported that VW’s stock tumbled more than 20 percent on Monday, a day after the OEM’s chief executive officer said he was “deeply sorry” about the entire incident.
“The board of management at Volkswagen AG takes these findings very seriously,” VW’s Martin Winterkorn said. “I personally am deeply sorry that we have broken the trust of our customers and the public. We will cooperate fully with the responsible agencies, with transparency and urgency, to clearly, openly, and completely establish all of the facts of this case. Volkswagen has ordered an external investigation of this matter.
“We do not and will not tolerate violations of any kind of our internal rules or of the law,” Winterkorn continued.
“The trust of our customers and the public is and continues to be our most important asset,” he went on to say. “We at Volkswagen will do everything that must be done in order to re-establish the trust that so many people have placed in us, and we will do everything necessary in order to reverse the damage this has caused. This matter has first priority for me, personally, and for our entire board of management.”
Meanwhile, Fitch analysts based in London and Madrid assessed the potential penalty federal regulators could assess stemming from the vehicles associated in the investigation. “We believe the fine is unlikely to amount to the theoretical maximum amount,” they said about the calculation of a $37,500 penalty for each unit involved. Covering roughly 482,000 diesel passenger car sold by VW and Audi in the U.S. since 2008, the affected diesel models include the following:
• Jetta (Model Years 2009 – 2015)
• Beetle (Model Years 2009 – 2015)
• Audi A3 (Model Years 2009 – 2015)
• Golf (Model Years 2009 – 2015)
• Passat (Model Years 2014-2015)
“Owners of affected Volkswagen and Audi vehicles understandably have a lot of questions about what's next,” Edmunds.com director of industry analysis Jessica Caldwell said. “The good news for these owners is that there is no imminent safety threat in driving these vehicles.
“Of course, owners who bought these diesel vehicles in part because of any environmental benefits may have moral objections to driving them, and they may feel they have no other option but to keep their cars parked for the time being,” Caldwell said. “And then there are owners who just feel flat-out deceived and will want their money back.
“But until Volkswagen reveals a plan for how they will either buy back the cars or fix them so that they truly meet emissions standards, all affected owners will have to wait and see,” Caldwell went on to say. “It is in Volkswagen's best interest to publicly address steps to fix this mess as soon as possible before it loses its customer base for good."
Even if the OEM doesn’t have to wire $18 billion to federal regulators, Fitch, like Caldwell from Edmunds.com, emphasized the notice of violation of the Clean Air Act could “seriously undermine” the automaker’s brand image, particularly in the U.S., where Volkswagen is “already struggling to increase its market share.”
Fitch added, “The consequences of this crisis for the group’s brand image and reputation with regulators and consumers worldwide is difficult to assess. Potential class actions typical of such situations in the U.S. could also result and increase total cash outflows in the next two years.”
Those potential lawsuits already are beginning to form.
Block & Leviton — a national law firm based in Boston and San Francisco focused on complex litigation affecting investors, municipalities, and consumers — said on Monday it is investigating whether Volkswagen “misled its investors by failing to disclose its intent to avoid compliance with emission controls by installing ‘defeat devices’ in certain diesel models.”
Furthermore, Seattle-based Keller Rohrback filed a nationwide class action complaint against Volkswagen alleging that the automaker “deliberately deceived well-meaning, environmentally-conscious consumers and regulators.” Keller Rohrback indicated that it filed the complaint in federal court in the Central District of California on Sunday on behalf of seven named plaintiffs from three states: California, Washington and Connecticut.
“Volkswagen’s decision to prey on environmentally-conscious consumers who paid a premium of thousands of dollars for a supposedly cleaner-running car, and who received a polluting vehicle instead, is despicable,” Keller Rohrback managing partner Lynn Lincoln Sarko said. “Consumers nationwide are justifiably outraged, and Volkswagen will have to answer to them.”
Whether Winterkorn still is in position to answer those questions might be unclear as well. Christian Stadler, who is a professor of strategic management and researches the auto industry at Warwick Business School in Coventry, England, considered the possibility Winterkorn might be ousted from this post as Volkswagen’s CEO.
“No question that this is a big problem for Volkswagen and could lead to CEO Martin Winterkorn losing his job after all,” Stadler said.
“Five months ago, Ferdinand Piech, the former chairman, tried to oust him but in the end resigned himself,” Stadler continued. “This Friday, the board decides on whether to renew Mr. Winterkorn’s contract until 2018. After this a question mark now hangs over that decision. Maybe they will defer the decision to wait and see what happens.”