Autos

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Ever since the diesel emissions scandal erupted more than seven months ago, Volkswagen's investors have asked themselves one question: when will it be safe to get back in?

By more than doubling its provisions for scandal on Friday to 16.2 billion euros ($18.2 billion) from 6.7 billion euros, VW has better clarified some of the risks.

Growing Risks
VW's provisions for the diesel scandal have ballooned since last year
Source: Company reports

But the company's 1.6 billion-euro net loss won't draw a line under the scandal. VW admitted it isn't yet able to reveal the results of an internal investigation into who was to blame for the emissions cheating.

Though ugly, Friday's provision is certainly within the realms most analysts thought acceptable, as well as within VW's ability to pay.

VW's car unit has more than 24 billion euros in net cash and other liquid assets. Previously, VW has said it needs a 10 billion-euro buffer to support its credit rating. Thanks to its Porsche and Audi brands cash flow has remained strong, and VW also secured a 20 billion-euro bridge loan last year. All that means VW won't run out of cash any time soon, and shouldn't have to raise equity.

Still, the provision probably won't cover all remaining legal risks, including VW's alleged failure to tell investors of the cheating in a timely manner. So investors will still have difficulty when trying to put a cost on the scandal.

Shares Tumble
VW is down almost 40% over the past 12 months
Source: Bloomberg

More troublingly, the company hasn't made sufficient effort to use the crisis as an opportunity to slash unnecessary capital expenditure, research and development costs, as well as labor expenses.

CEO Matthias Mueller said on Friday the company has no plans to cut jobs. It has more than 600,000 employees, almost twice as many as rival Toyota, which produces a similar number of cars. VW has a productivity problem that it's failing to address.

The web of interests that control Volkswagen -- the State of Lower Saxony, the trade unions as well as the Porsche and Piech families -- remains the same, even if Martin Winterkorn has departed as CEO.

This suggests that views of institutional investors will still count for little in Wolfsburg.

VW said it will pay a token dividend for 2015 -- 17 cents a share -- but investors shouldn't misconstrue this as a positive signal. It simply prevents them from getting voting rights at the company's annual general meeting, as Gadfly has explained.

Crucially, it remains far from clear what will be the long-term consequences for VW's image, pricing power and sales. VW's group vehicle sales fell 2 percent last year, which isn't too bad under the circumstances. In the first quarter, sales actually rose a fraction.  

The key test will come in coming weeks, when VW again tests the bond markets for the first time since the scandal broke.

VW may discover the cost of borrowing has climbed, something that would crimp its ability to offer cheap car financing to customers. As a proxy, the cost of insuring VW's debt against default remains more than 80 percent higher than what it was before the crisis.

The emissions scandal has hobbled the company and distracted management just as auto sales in key markets like the U.S. and China slow.

Carmaking remains a cyclical business, and when the next downturn arrives one thing is certain: VW will be a much diminished force.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net