Volkswagen AG is poised to weather the storm of recalls, lawsuits and regulatory costs, despite announcing a $3.8 billion quarterly loss for the first time in 15 years.
The emissions scandal uncovered by the Environmental Protection Agency harmed diesel and tainted Volkswagen’s reputation of elite German engineering. The scandal devastated VW shares, which initially lost half their value and the overall damage could cost the company $38 billion, reports Reuters.
The quarterly report released Wednesday morning is not a surprise as Volkswagen was expected to take losses. But VW’s shares did surprise the industry and rallied almost 4 percent at the opening. According to CNBC, Volkswagen will face heavy losses due to the costs of recalling 11 million vehicles, but is expected to maintain last year’s record sales numbers. Cost cutting in other areas will also boost the company’s balance sheet in the short term, positioning VW well to ride out the oncoming flood of fines.
Volkswagen sold a 19.9 percent stake in Suzuki, bringing net cash and liquid assets to roughly $30 billion. According to Reuters, VW is expected to boost cash reserves another $4 billion next quarter through its holding company, LeasePlan.
“We see it as a positive signal that VW has pretty much kept the provision for the scandal ($7.3 billion set aside) unchanged,” said Arndt Ellinghorst at Evercore ISI, a London-based firm. “Together with the very strong net liquidity, this should reassure both equity and fixed income investors.”
Volkswagen CEO Matthias Mueller, who replaced Martin Winterkorn following the revelation of “defeat devices,” said to reporters earlier in October he thinks VW can recover from the emissions scandal within two to three years. Reuters reports that excluding costs related to the scandal, Volkswagen’s operating margin will be around 6 percent, unchanged from 2014 numbers.
There may also be hope in Volkswagen’s planned line of electric vehicles. According to Bloomberg, German Chancellor Angela Merkel’s administration wants one million electric cars in Germany by 2020, though it doesn’t look like VW will get any government assistance in this endeavor.
Michael Fuchs, a senior lawmaker from the business caucus of Merkel’s Christian Democratic Union party said, “We’re against sales incentives in principle. No automaker gets sales help from the German government. So VW has to make it on its own, too.”
Volkswagen’s luxury brands Audi and Porsche are both developing electric vehicles set to hit the market in 2018 and 2020 respectively. Audi CEO Rupert Stadler said, “That’s our answer to the diesel issue,” as VW hopes the electric lines will help rebuild trust with environmentally conscious drivers, reports Bloomberg. Volkswagen will rely on these new technologies and strong liquidity as they continue to roll back investments to see them through the diesel emissions storm.
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