VW’s Year on the Edge and How the Carmaker Is Clawing Back

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An employee stands on the top of a tower at the Volkswagen AG automobile factory in Wolfsburg, Germany, on April 22.

Photographer: Krisztian Bocsi/Bloomberg
  • A crisis can be a ‘turning point,’ CEO Mueller told staff
  • Profitability bounced back as Volkswagen outsold Toyota

A year ago, Volkswagen AG plunged into the worst crisis in its history after revelations it flouted environmental regulations by rigging millions of diesel cars to cheat on emissions tests.

The allegations cast the company as putting profit before public health, and the fallout was harsh and swift. After days of turmoil, including an awkward video apology, Chief Executive Officer Martin Winterkorn stepped down in disgrace. The value of Europe’s largest carmaker dropped by as much as 29 billion euros ($32.6 billion), as criminal and regulatory investigations were opened around the globe.

While the recovery efforts led by new CEO Matthias Mueller haven’t always been smooth, the German carmaker has shown surprising resilience. The stock price has climbed 40 percent since its low in October, consumers still buy VW cars, finances are intact, and the company is investing in the future even as it absorbs nearly 18 billion euros in fines and clean-up costs. 

While the scandal is far from over, here are four facts that show how Volkswagen is weathering the crisis:

1. No fire sales

After more than a decade dominated by empire-building, Volkswagen acquired a sprawling portfolio of assets ranging from Italian motorcycle maker Ducati to MAN Power Engineering, which manufactures motors and turbines for ships and power plants. While the 12-brand group is now reviewing its holdings, there has not been a single divestment stemming from the crisis.

Instead, the company has actually been a buyer. Earlier this month, it acquired a 16.6 percent stake in U.S. truckmaker Navistar International Corp. to add a bridgehead in the U.S. for its commercial-vehicle division, which includes Sweden’s Scania and Germany’s MAN. The investment throws troubled Navistar a lifeline and is seen a possible precursor to a full takeover. Volkswagen also bought a stake in ride-hailing app Gett, which will anchor a push into mobility services.

While there may still be sales down the road -- with candidates being Ducati and MAN Power Engineering and an initial public offering for the trucks division -- Volkswagen has shown it’s not going to raise cash in a panic.

2. Overtaking Toyota

Rather than suffering from customers turning their backs on the company, Volkswagen outsold Toyota Motor Corp. in the first six months of 2016, making it the world’s biggest automaker for the period. While the namesake VW brand bore the brunt of the backlash, the German manufacturer has benefited from gains by Audi, Porsche and Skoda as well as its strong position in China, where diesel is a non-issue.

The company is planning to go on the attack in the U.S. after initially toying with pulling out of the market. Chief Financial Officer Frank Witter said in an interview that Volkswagen plans to invest in four to five vehicles, including new SUVs, to better appeal to Americans as the company seeks to rebuild its tattered image.

“I can’t accept that we can’t make it in the U.S., and not just because I’m stubborn,” Witter said.

3. Earnings Recovery

Often run as a job-creation scheme for its home state of Lower Saxony, Volkswagen has never been the most profitable carmaker. The namesake VW brand especially struggles. The company’s saving grace is Audi and Porsche, which churn out some of the highest returns in the industry, and Skoda is an unsung hero in the mass-market segment.

So while scandal-related costs led to operating losses in the second half of last year, the group’s operating profit margin sprang back to pre-crisis levels in the first quarter. Profitability dipped in the second quarter on expenses from the landmark U.S. settlement, but excluding those costs, operating profit would have risen to 7.7 percent of sales from 6.5 percent the previous year.

Looking ahead to next year, operating margins are forecast to reach 6.1 percent of sales, roughly in line with the 6.3 percent posted in 2014, according to analyst estimates compiled by Bloomberg. The company, which has a mammoth workforce of more than 600,000 people, hasn’t resorted to layoffs and has said it won’t make anyone leave their jobs as part of cost-cutting efforts.

4. Low Risk

In the immediate aftermath of the scandal, Volkswagen’s viability was seriously in doubt, and the cost to insure its debt against default soared. But solid operations and a stable financial situation, thanks to 28.8 billion euros in net liquidity at the end of June, have brought those costs down to below rivals.

What’s Next?

Volkswagen is still not out of the woods. The company faces criminal probes and hundreds, if not thousands, of lawsuits. It also has yet to present the findings of an investigation conducted by law firm Jones Day into the origins of the scandal and how it was covered up for years. Skepticism abounds about the company’s explanation that only a few technicians were involved without the knowledge of senior management.

To recast its image, Volkswagen is embracing emission-free vehicles and has an ambitious target to sell as many as 3 million electric cars a year by 2025, roughly a quarter of annual deliveries. To afford the investment in new technologies, including self-driving features, Volkswagen needs to wring concessions from its powerful unions, which are demanding job guarantees in return. Success depends on Volkswagen striking a balance between cleaning up the past and investing in the future.

“A crisis can lead to the abyss, but it can also be a turning point,” CEO Mueller told about 20,000 employees gathered at the sprawling main factory in Wolfsburg this week. “At Volkswagen, the crisis opened doors for a real change of direction.”

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