VW CFO Explains How to Take a $20 Billion Hit and Fund E-Carsby
Witter’s challenge is spurring growth while paying for crisis
CFO says VW is using the scandal as a ‘catalyst for change’
Last October, Frank Witter got a late-night e-mail that sounded equally daunting and thrilling.
The mail invited Witter to a 9 a.m. meeting at Braunschweig airport, a half-hour’s drive from Volkswagen AG’s Wolfsburg headquarters. By the end of the day, Witter -- at the time the head of VW’s financial-services division -- had been named chief financial officer of the entire 12-brand group, taking on one of Germany’s toughest jobs.
At the time of his appointment, the company Witter had served for decades was staring into the abyss. VW’s admission that it had rigged millions of diesel engines to cheat on emissions tests had felled its CEO and was hammering the stock price, and speculation was swirling that VW, a cornerstone of Germany’s engineering pride, might unravel altogether.
As CFO, it falls to Witter to figure out how to fund the innovation needed to succeed in a rapidly changing auto market -- electric vehicles, driverless technology and ride-sharing services -- while digesting an unprecedented 18 billion-euro hit ($20 billion) from fines and other costs related to the scandal. That means enforcing much stricter financial discipline on an organization accustomed to unbridled spending and engineering excess.
“The mountain is moving,” Witter said in his first extended interview since taking the job. “Maybe not as fast as I’d wish as CFO, but it’s moving.”
The challenges are immense. VW has set aside 17.8 billion euros to cover costs related to the scandal, but Witter said the total damage remains difficult to predict, even if the company now has a better grasp on the risks. Sales, meanwhile, have plunged in the U.S., Brazil, and Russia. In China, VW’s largest market, competition is intensifying as demand for new cars ebbs after years of rapid growth.
Succeeding Hans Dieter Poetsch, who moved up to the chairman post, Witter took over as CFO two weeks after U.S. authorities revealed the company had manipulated emissions tests with a so-called defeat device, which was installed in as many as 11 million diesel cars globally. The scandal erupted just as VW was about to dethrone Toyota Motor Corp. as the world’s bestselling automaker after almost a decade of empire building through acquisitions and a strong focus on aggressive sales growth.
With the money for fines starting to fly out of the door in the fourth quarter, Witter is the financial gatekeeper for the company’s strategy. The 57-year-old also directly oversees projects including an effort to bundle together the sprawling components operations and evaluate the future structure of an equally complicated portfolio of assets. A year into the scandal, VW’s structure remains intact. While the new leadership has vowed to direct more power to regions and units, the company wasn’t forced into emergency disposals.
To reflect elevated financial risks, Witter doubled VW’s targeted average net liquidity to 20 billion euros to help ensure funding in volatile markets and protect credit ratings.
Witter is “challenging the status quo, trying to break down some of these thick walls in Wolfsburg,” said Arndt Ellinghorst, a London-based analyst at Evercore ISI, who has a buy rating on the stock. “Witter stands for focus and discipline which is what VW needs -- not just talk change but to actually get it done.”
Still, the fallout from the year-long crisis has left a visible mark on the manufacturer. VW’s stock price is down by 27 percent over the past 12 months, cutting its market value by some $17 billion. And after rating agencies downgraded VW amid mounting financial risks, Witter said the company -- previously among the busiest issuers of debt -- was effectively locked out of the corporate bond market. The shares were down 1.9 percent as of 10:44 a.m. in Frankfurt trading on Monday.
That added urgency to VW’s push to trim bloated costs. While Volkswagen’s development budget had surged in recent years, Witter said the company must now change course and use the crisis to spur change. A large part of that starts in the U.S., where the cheating was uncovered and where Volkswagen for years has tried unsuccessfully to build a profitable business.
Resetting VW’s operations in the U.S. is among the company’s toughest assignments, and Witter knows the challenges first hand after running operations there before switching to the group’s financial services arm. U.S. car sales of the namesake brand, already struggling even before the scandal broke, have dropped sharply, with its image tarnished and the diesel-powered cars that made up a fifth of the total pulled from showrooms.
Witter said VW even considered pulling out of the market altogether, but decided to stay put because a global carmaker can’t afford to be absent from the U.S. market, where it had already invested billions of dollars, including a factory in Tennessee and an extensive dealer network. Part of the decision to stay is also rooted in a view that American consumers are more forgiving and will give VW a second chance. Still, pursuing that opportunity will require investment in new vehicles more in tune with American tastes, such as SUVs.
“You need four to five model lines with high volume in the U.S. Otherwise you don’t get the scale to make an economically viable business case,” Witter said. “I can’t accept that we can’t make it in the U.S., and not just because I’m stubborn.”
The effort will also include VW’s first push into the U.S. heavy-truck market. VW’s Truck & Bus division, which owns the European-based MAN and Scania brands, agreed on Sept. 6 to spend $256 million on a 16.6 percent stake in struggling Navistar International Corp. Under the deal, VW will produce engines for Navistar, helping improve utilization of factories in Germany and establishing a bridgehead in the U.S. commercial-vehicle market.
“Creating a global champion in the truck and bus business without the U.S. is hard to imagine,” Witter said. “It’s important to have a stake, but the even more important part is the relationship from the supply agreement that comes with it.”
Back at home in Europe, VW faces increasing pressure from consumer groups and the European Union to offer compensation to the 8.5 million customers in the region who bought cars with the tainted engines. Witter rebuffed calls for payments similar to those it agreed to in its $15 billion settlement with the U.S. government, saying the fix in Europe is easier, and that customers in its home market don’t face the same drop in their cars’ value.
“There is no way we can paint all customers with the same brush,” he said. “The differences are truly there in terms of impact to the customers.”
Consumer grievances aside, much of VW’s recovery from the scandal will depend on the company’s different factions agreeing on the future direction. That’s a tough challenge for a corporation that’s often fought battles between the powerful workers, local politicians, management and not least the Porsche-Piech family, the dominant shareholder. While there are occasionally some pockets of resistance to change, the company as a whole has understood that it must transform the way it does business, Witter said.
“There’s nothing good about the diesel issue,” he said. “But if this crisis has had one positive side effect, it is that we are now using it as a catalyst for lasting change.”