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VW Is in Too Much of a Hurry to Move On

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Volkswagen made every effort to leave its diesel emissions scandal behind this week. It planned to announce a $10 billion deal with U.S. car owners and a fix for their cars, hold a general shareholders' meeting on Wednesday and settle down to implement its new strategy, announced on June 16. VW's management and top shareholders haven't, however, done enough to turn the page, and that's coming back to haunt them.

German prosecutors have opened an investigation into former VW chief executive Martin Winterkorn's alleged failure to inform shareholders of the problem with the company's diesel engines as soon as he knew about it. Simultaneously, U.S. holders of VW bonds have sued, claiming its cover-up of emissions cheating inflated the price of the bonds. And the resolution of the problem with U.S. car owners has been delayed -- VW can afford payouts to customers and U.S. authorities, but lacks regulatory approval for its proposals to fix the cars that had been equipped with emissions-cheating software. Ironically, what would most benefit consumers and governments on both sides of the Atlantic is least likely to happen: letting the German carmaker get on with its makeover.

VW has ambitious plans to move beyond the emissions scandal. It wants to sell more than 2 million fully electric vehicles a year by 2025, based on its own battery technology. It is working on self-driving cars and hopes to deliver the first fully autonomous vehicles, equipped with VW proprietary software, by the beginning of the next decade. And it plans to build a whole new mobility business -- based in Berlin, far from VW's traditional power bases -- that will include robotaxis and car-sharing. All of this requires more than $10 billion of investment, most of it in cutting-edge engineering and production.

If the plan comes to pass, this will be a full transformation of a traditional German company into a hybrid tech and industrial company. The world needs more of these; consumers cannot rely on upstarts such as Tesla to get both sides right on a proper scale. 

VW's problems are self-inflicted and the company is not likely to get a break just because it has even bigger (and equally self-serving) plans. But further sanctions from governments or courts would imperil the planned investment, not just because payouts may be required beyond the current 16.2 billion euro ($18.3 billion) provision, but also because uncertainty about the potential costs makes it harder for VW to borrow. It does, however, force the company to be more serious than ever about cutting costs and a much-needed pruning of its 340 models and 12 vehicle architectures, but these may not produce the necessary savings even if conscientiously applied.

And yet it also makes sense that the company's troubles should continue. VW has not convinced investors and regulators that its remorse about the diesel scandal is sincere.

It has not explained how the decision to fit the diesel cars with test-cheating software came about. An investigation continues, but it's hard to understand what's taking so long -- or why VW appears intent on protecting Winterkorn and other top managers. The prosecutors' interest in the ex-chief executive is based, among other things, on information that he had received two memos on the diesel problem as far back as 2014 -- and either failed to read them or swept them under the rug. And yet the company has not attempted to claw back Winterkorn's performance-related pay for 2015, 5.9 million euros, though a strong case could be made for withholding the money: Winterkorn had presided over the company's worst performance since 1993, generating a 1.3 billion euro loss in 2015.

Other management board members only took 30 percent bonus cuts for last year's mess. That was overly generous of VW, too: Leaving the past behind and leaping into the future required a cleaner break with past practices. 

VW is also stubbornly fighting shareholder claims that they were told of the problem too late. Management and the board should take responsibility for keeping the software cheat under wraps for so long.

Shareholders will probably vent their discontent at Wednesday's meeting, but the Piech and Porsche families, which control the company, appear to be fine with not overdoing contrition, VW chief executive Matthias Mueller will proceed with his bold plans without quite burying the past.

That's riskier than making a clean break, clawing back all the bonuses and increasing the provision to deal with unhappy shareholders and bondholders. The risk may be worth taking based on the company's internal calculus, and the first-quarter profit of 2.4 billion euros gave investors some good news about a troubled company. But VW's situation would have been more predictable and its modernization efforts met with more enthusiasm if it had taken what accountants call a "big bath" this year. A full accounting for the past is the best way to ensure the brand's future.

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

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net