Volkswagen gave some of the most comprehensive disclosures to date about the risks stemming from the Dieselgate scandal when presenting its third-quarter financial report, but observers are no the wiser about the final outcome of the crisis.
The legal risks portion of the report expanded to almost two full pages - typically it's a one-sentence blurb – and its core message could be boiled down to one simple statement: "It is currently impossible to assess the legal risks connected with the diesel issue."
While new finance chief Frank Witter said the cost of the scandal would be "enormous, but manageable,” VW explained there are too many variables to properly estimate its potential liabilities from lawsuits.
VW cited the early stage of investigations, the large number of questions that have yet to be clarified, and the complexity of the case, especially as some of the blame likely stems from decisions stretching a decade.
Under Germany’s old accounting principles, companies had a lot more leeway to take precautions in cases like these, but the International Financial Reporting Standards (IFRS) stipulate charges against future risks can only be booked when those are sufficiently concrete and quantifiable.
As a result VW has not made any provision for legal liabilities, leaving investors, suppliers, dealers and employees in the dark about the future cost.
A worst-case scenario estimate would improve transparency somewhat but it might do more harm than good. Any such figure would likely only paint an even bigger bulls-eye on VW, encouraging plaintiffs to max out their damage litigation claims to the detriment of all stakeholders.
The most interesting disclosure from Wednesday’s results then is that the company itself cannot say what effect its planned recall will have for customers, even though it has already presented a detailed plan to the German motor transport authority (KBA).
Specifically, VW warned that it remained “currently unclear” whether customers affected by the recall could expect either a decline in the value of their cars or “adverse changes” to the vehicle’s performance, both, or perhaps none of the above.
Depending on the outcome, this could also trigger recourse claims from non-group importers and dealers, according to Volkswagen. For example, a peculiarity of VW’s domestic market, in which the group has a 40 percent share, is that dealers – not the manufacturer – bear residual value risks from cars coming off lease.
Volkswagen, which recently surrendered its top spot in the industry to Toyota after only a few months, also could not rule out whether other EU countries may take more drastic action than the KBA. The German regulator has levied a mandatory recall to fix the cars’ software and in some cases the hardware to ensure all vehicles are compliant, but other countries may not feel this goes far enough.
“Discussions are currently underway with the authorities in the other EU member states with the aim of ensuring that no legal actions above and beyond this will be taken in this connection by public authorities in the other member states,” it cautioned in its report.
VW may be referring to whether countries may try to cancel the type approval for the affected models altogether, effectively banning their sale. This has been tried once before by France in 2013, when it stopped registering certain new Mercedes-Benz cars for roughly two months. Although they still had a valid approval in Germany, the models used an environmentally harmful refrigerant no longer permitted by the EU. The KBA eventually relented and retrospectively changed the car’s classification to comply with EU directives, but the episode seemingly revealed an institutional bias in favor of the agency’s domestic manufacturers.
Volkswagen also stuck to its story that it properly handled its communication of the scandal to capital markets, claiming it fulfilled its disclosure obligations even though it admitted the affair publicly two days after the Environmental Protection Agency’s Sept. 18 notice of violation and conceded its guilt behind closed doors already on Sept. 3.
VW said it has received so far three lawsuits from private investors claiming damages, but one capital markets lawyer I spoke to says expect more to come, especially from investors that bought shares after Sept. 3.
In its report, VW additionally warned that it could see damages from its program for American Depository Receipts (ADRs), a type of share proxy popular among foreign companies that don’t have a second listing on the New York Stock Exchange. VW has two programs trading over-the-counter and sponsored by custodial bank JP Morgan. Here VW believes investors could also potentially file claims for damages in the U.S. and Canada as well.
Other interesting tidbits that may result in more financial risks on the company’s income statement down the line:
- VW expects Canada to open an investigation into the affair.
- The Seat and Skoda brands are currently holding talks with vehicle certification agencies in Spain and the UK regarding the scandal.
- Because EU type approval is used outside of the bloc, VW is also in discussions with the relevant authorities in countries such as Switzerland, Turkey and Australia.
For investors this unfortunately means it could be well into next year before the true dimensions of this scandal and its impact on VW Group are at all remotely clear.
One thing VW’s management did say during an investor call: As a result of Dieselgate the company no longer feels it can fully stand behind its commitment to reach a 6 percent operating margin at its scandal-plagued VW brand by the end of 2017.