Diesel Scandal Undercuts One of VW's Few Strengths in Showroom

Doctored Diesels Land VW a $100 Million Law Suit
  • Industrywide U.S. auto sales may have jumped 13% in September
  • Analysts split on whether Volkswagen sales rose or fell

Volkswagen’s admission this month that it was lying to customers about the benefits of diesel engines hit where it hurts: the showroom.

The German brand had been counting on fuel-efficient and fun-to-drive diesel-powered cars to turn around its slump amid a U.S. truck and SUV boom. Now, with its smaller diesels pulled from dealer lots while engineers work on a fix, analysts are split on whether VW will be the only major automaker to report a sales decline for September.

No one is more eager for a VW refit than Alan Brown, who runs the nation’s largest Volkswagen store. Even with 22 percent of his 237-vehicle inventory now quarantined, he said customers at Hendrick VW haven’t stopped asking about the cars. Last weekend, his team sold six new vehicles and handled questions from customers who like the diesels, wanted to know when they’d be available and wondered what kind of discounts they’d soon carry.

“People are smelling a little blood in the water,” said Brown, general manager of the store in Frisco, Texas, near Dallas. “The hope is the factory decides to give a little back to the community in the form of incentives. I think they will, and I think we come out of this stronger.”

America’s love of trucks and SUVs, fueled by available credit, affordable fuel and the latest technology, is helping push auto sales to the highest level in more than a decade. Industry researcher LMC Automotive is raising its 2015 total light-vehicle sales forecast to 17.2 million units from 17.1 million units.

Industrywide Sales

When automakers report September sales on Thursday, the industry may show a 13 percent jump in car and light-truck deliveries, for an annualized rate, adjusted for seasonal trends, of 17.7 million, the average of 12 analyst estimates in a Bloomberg survey. The projected gains include 19 percent at Ford Motor Co., 14 percent at Fiat Chrysler Automobiles NV and 9.3 percent at General Motors Co. At Toyota Motor Corp., sales may rise 16 percent, seven analysts estimate. (For a detailed breakdown of estimates, click here.)

Volkswagen, including Audi, is likely to be the odd one out: Four analysts are evenly split between those who predict a decline or a gain. Their average estimate, for a 0.8 percent increase, is the lowest of any major automaker. If sales do rise, analysts said it may be that VW, like other automakers, benefited from Labor Day weekend, a traditional car-shopping holiday which last year fell in August. It would also likely be because of Audi: The average of three estimates for just the VW brand is for a 6.7 percent decline.

Aging Lineup

VW’s U.S. sales have dropped for two straight years, hurt by an aging lineup that lacks a mid-size SUV. To try to more than double U.S. sales and meet a 800,000-vehicle sales goal by 2018, the automaker has relied on leasing to ensure a stream of repeat customers when their contracts end in 2017 -- about the same time the fruits of its product-line reformation would hit dealers.

Leases, some as cheap as $39 or $49 a month, have accounted for about 40 percent of the company’s deliveries -- more than Porsche and about double the rate of most mainstream brands.

Volkswagen has become the subject of numerous government investigations and lawsuits since the U.S. Environmental Protection Agency said Sept. 18 that the largest European automaker admitted using a so-called defeat device that turned off emissions controls when vehicles weren’t being put through official tests. The revelation undermined VW’s diesels, which were one of its few strengths, along with a critically acclaimed line of Golf cars. Martin Winterkorn stepped down from his role as chief executive officer of the automaker, but he remains CEO of its largest shareholder.

Engine Alternatives

Though Baum & Associates figures show Americans buy more than three times as many hybrids and electric models as diesels, hybrid sales have been slowing and actually slipped last year as gasoline prices fell. By contrast, sales of diesel vehicles have grown for eight straight years.

Shoppers predisposed toward diesels are more likely to delay a purchase, if possible, than to choose an electric vehicle or a hybrid instead, Jeff Schuster, senior vice president at LMC Automotive in Troy, Michigan, said in an interview.

“Those buyers share an interest in increased fuel economy, but that’s where it stops,” he said. “Those diesel buyers are going to be left hanging for a little bit.”

Brown, who heads VW’s national dealer council, said that while the scandal has slowed consumer demand for now, it hasn’t diminished the interest in diesels.

“The brand is working on incentives and how we’re going to face these headwinds in next few days,” Brown said. “VW has the funds to do it and do it right.”

Regulation Map
Regulation Map
Source: Bloomberg Brief

For more real-time updates on VW, read the Bloomberg Brief here.

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