Volkswagen AG will take a surprise charge of about 2.5 billion euros ($3 billion) in the third quarter as plans to buy back or retrofit tainted U.S. diesel cars proves more complex than expected, bringing total damages from the two-year-old scandal to over 25 billion euros.
The charge will wipe out more than half of Volkswagen’s projected 4.45 billion euros in earnings for the period, according to three analyst estimates compiled by Bloomberg. The additional provisions will hit operating results in the quarterly report due Oct. 27, the Wolfsburg, Germany-based company said Friday in a statement.
A VW Golf TDI being tested.
The sizable increase to VW’s financial woes comes a full 15 months after the company reached a settlement with U.S. authorities to either buy back or retrofit around 500,000 tainted vehicles, including Golf, Jetta and Audi A3 models. Volkswagen on Friday said the plans were turning out to take significantly longer and were technically much tougher than anticipated. The complications, which the company didn’t specify in detail, amount to about 5,000 euros per car.
“The size of the provision is surprisingly large, considering the numbers of cars involved isn’t very large,” said Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler. “It shows VW remains some distance from coming through the scandal.”
Volkswagen shares, which haven’t rebounded from the crisis, fell as much as 4 percent to 132.85 euros and were down 1.6 percent at 11:41 a.m. in Frankfurt. That compares with a 0.6 percent drop in the Stoxx Europe 600 Automobiles & Parts Index.
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The charge marks the most concrete reminder that the crisis is far from over and undermines Volkswagen’s efforts to look forward with aggressive plans to roll out a lineup of affordable electric cars in the coming years. Munich prosecutors on Wednesday arrested former Volkswagen engineer Wolfgang Hatz, the second person detained in the widening probe into cheating at the automaker’s Audi division. In addition to criminal probes in Germany, the company still faces hundreds of investor lawsuits as well as consumer complaints.
The affected vehicles in North America are only a small part of the nearly 11 million rigged cars globally. While VW has worked to fix these cars, it’s rejected paying compensation to roughly 8 million European owners.
Porsche Automobil Holding SE, the investment vehicle that controls a majority stake in Volkswagen, said the company’s provision hike would negatively affect its third-quarter results. Still, the investment vehicle for the descendants of the VW Beetle’s creator stuck to a forecast for net income of at least 2.1 billion euros this year.
‘Rising Risk’
The continuing fallout from the diesel-cheating crisis compounds the pressures facing the automaker as it grapples with the spending demands to develop next-generation vehicles. The world’s largest automaker plans to invest about 20 billion euros by 2030 to develop a fleet of electric cars and another 50 billion to buy the batteries needed to power the vehicles.
At the Frankfurt motor show earlier this month, Volkswagen outlined plans to move away from combustion engines with electrified variants of all 300 models in the 12-brand group’s lineup. The company had net liquidity of 23.7 billion euros at the end June to help it finance the investments.
The move comes as the scandal set off a backlash that has led consumers to turn away from diesel technology amid concerns about pollution and driving bans. That creates problems for Volkswagen as it relies on diesel cars to boost profit and lower carbon-dioxide emissions to reach tightening European environmental targets.
“Volkswagen remains very liquid in terms of its financial position and the risk of a capital increase is low,” said Metzler’s Pieper. “However, given the uncertainty in Europe about diesel cars and the future investments that need to be made for electric cars, that risk is rising.”