Volkswagen’s Potential Liabilities

What are Volkswagen’s potential liabilities in the diesel emissions scandal?

Chattanooga, TN, has been a very exciting place to live recently. We have won Outside Magazines “Best Town Ever” competition for the second time and hosted numerous large greatly positive events. However, the year has not been without its woes. Probably the biggest woe faced by this community was the shooting incident in which five service members were killed by an apparent lone wolf attack. The second largest it appears will be the Volkswagen diesel emissions scandal which has the potential to impact an estimated 10,000 employees (local suppliers and actual employees (including ones that would have been hired for the SUV line being added)).

I would like to provide an independent evaluation of the potential U.S. liabilities that the company faces and some ideas for the company to survive the scandal. I have read various estimates of the potential “worst-case scenario” costs to the company. These estimates range from $7 billion to $50 billion (internationally) and while they are indeed very large numbers I do not think the represent a realistic worst case scenario very accurately. I will begin with some basic figures regarding the financial position of the company then follow with potential costs looming over their company from the crisis. Finally, I will share my thoughts on the situation.

Volkswagen Company Assets

The company has a liquid cash fund of approximately $25 billion dollars. Earlier this year the company has a market valuation of approximately $125 billion (which has been reduced significantly, the 52 week high around $255 per share to a current $108 per share up from the low of $92 that occurred 10 days ago). I haven’t completely examined the financials thoroughly but the company puts their overall assets in the ballpark of $374.02 billion (http://www.marketwatch.com/investing/stock/vlkay/financials/balance-sheet/quarter). This seems reasonable and for this valuation it will be accepted at face value for this article. Their total liabilities stand at a $285.37 billion which leaves about $88.65 billion (as of June 30’Th this year) that is potentially available (without external help) to resolve this crisis. Finally the company’s net income for the four quarters is $10.83 billion

Volkswagen Emissions Crisis Cost in the U.S.

The simplest worst case cost to determine is the U.S. EPA maximum fine value. This number alone for the 500,000 (11,000,000 world wide) illegally operating vehicles it sold in the U.S. is approximately $18 billion. There is currently a large cohort of analysts who believe the actual fine will be much lower. The historical highest actual fined amount is only $1.2 billion paid by Toyota for the faulty ignition switches. General Motors paid $900 million for their ignition switch scandal which killed 124 people. Putting this in perspective the VW emissions scandal has probably (it is practically impossible to get an actual count) killed between 16-94 people inside the United States. As a result some analysts anticipate the actual fines being much lower than the $18 billion. However, I differ in my opinion that the VW crisis will end up being much larger than many people anticipate (I wouldn’t be surprised if the U.S. EPA seriously considers the maximum penalty). The big difference is that VW intentionally designed and implemented technology then sold it to consumers illegally and falsely advertised knowing that the emissions released would hurt people. This is much worse than previous recalls where damage was primarily cause by accident (or lack of proper review) instead of willfully and intentionally causing harm. In my mind this is the difference in a plane engine failing and the plane crashing due to the malfunction versus the pilot intentionally crashing the plane. One scenario is exponentially worse than the other though both are tragic. My gut tells me that many others, including the EPA, can also easily see this distinction and as a result I believe the end fine will be between $12-18 billion.

The more difficult to calculate expenses will result from litigation ranging from states to customers and dealers and potentially even suppliers adversely impacted by VW’s willful deception. I am not a lawyer or economist but I know that damages in court are often calculated at three times the calculated value. On the supplier and dealer side there are most certainly negative economic consequences that are/will directly result from this scandal. Will these damages be recoverable in a court of law? I’m not really sure. The state and local governments whose laws VW has violated will certainly have some recourse. These costs are unknown (perhaps even to those directly involved) but substantial.

The most significant loss is the loss to the consumer who purchased a “clean vehicle” at a premium of about $3,000 (the price over a gasoline engine) and received a vehicle that is the opposite of clean. The reputation on these vehicles is likely to take a long term hit and cause problems reselling the vehicles. The worst case scenario is that these vehicles will be valueless and the company will be requested to buy them back at the sale price which is much higher than $3,000. Due to lack of an average price point that accurately represents the 500,000 diesels sold in the U.S. I will low ball this value at $30,000 per vehicle.

Quickly the math:

$3,000 * 500,000 = $1.50 Billion

$30,000 * 500,000 = $15 Billion

Suppose the drivers of each of these vehicles decided to sue for 3x the value they paid (punitive/pain and suffering for being sold a vehicle under false pretense) this equates to $90,000 * 500,000 = $45 Billion in damages, not including legal fees paid by the corporation.

Summary of potential U.S. Expenses

High Estimate:

U.S. EPA Fine – $18 Billion

Customer Law Suits – $45 Billion

State, County Municipality Fines: Unknown (We’ll say it matches the EPA fine $18 Billion)

Legal Fees – Unknown (We’ll use 10% of the total settlement $77 Billion * .10 = $7.7 Billion)

Law Suits from Suppliers – Unknown (Unable to find an estimate)

Law Suits from Dealers – Unknown (Unable to find an estimate)

Recall Costs – $7 Billion

Cost to return the air quality to what it had been if they hadn’t cheated – Unknown

Total High Estimate: $18 Billion + $18 Billion + $45 Billion + $7.7 Billion + $7 Billion = $95.7 Billion

Midrange Estimate:

U.S. EPA Fine – $12 Billion

Customer Law Suits – $15 Billion

State, County Municipality Fines: Unknown (We’ll say it matches the EPA fine $12 Billion)

Legal Fees – Unknown (We’ll use 6.5% of the total settlement $39 Billion * .065 = $2.535 Billion)

Law Suits from Suppliers – Unknown (Unable to find an estimate)

Law Suits from Dealers – Unknown (Unable to find an estimate)

Recall Costs – $4.2 Billion

Cost to return the air quality to what it had been if they hadn’t cheated – Unknown

Total High Estimate: $12 Billion + $12 Billion + $25 Billion + $2.535 Billion + $4.2 Billion = $55.735 Billion

Low Estimate

U.S. EPA Fine – $1.2 Billion

Customer Law Suits – $1.5 Billion

State, County Municipality Fines: Unknown (We’ll say it matches the EPA fine $1.2 Billion)

Legal Fees – Unknown (We’ll use 3% of the total settlement $3.9 Billion * .03 = $0.117 Billion)

Law Suits from Suppliers – Unknown (Unable to find an estimate)

Law Suits from Dealers – Unknown (Unable to find an estimate)

Recall Costs – $1.2 Billion

Cost to return the air quality to what it had been if they hadn’t cheated – Unknown

Total High Estimate: $1.2 Billion + $1.2 Billion + $1.5 Billion + $0.117 Billion + $1.2 Billion = $5.217 Billion

The three estimates above range again are: $5.217 Billion, $55.735 Billion and $95.7 Billion. Recall that VW only has a total positive value of $88.65 Billion. This means that the U.S. alone could potentially (in a worst case scenario) bankrupt the company single handedly. This doesn’t even add in other responsibilities internationally just for fun (and to put the entire crisis into perspective) I have calculated their international liabilities under three different scenarios: The world on average fines them 100% of what the U.S. does on a per car basis, 50% and 10% are the additional two values. I think the U.S. has some of the more strict regulations worldwide but some other countries may have more strict regulations than the U.S.

The cost per car to Volkswagen based on my estimates at the three price points is:

High Estimate: $191,400

Midrange Estimate: $111,470

Low Estimate: $10,434

Please remember the EPA alone can fine VW up to $37,500 per vehicle so the low estimate really is extremely low. Here is a table showing various combinations of international cost at the different estimates and international penalty points:

International Costs
Low Estimate Midrange Estimate High Estimate
100% $109,557,000,000.00 $1,170,435,000,000.00 $2,009,700,000,000.00
50% 54,778,500,000 585,217,500,000 1,004,850,000,000
10% 10,955,700,000 117,043,500,000 200,970,000,000
International Costs + U.S. Costs
Low Estimate Midrange Estimate High Estimate
100% $114,774,000,000.00 $1,226,170,000,000.00 $2,105,400,000,000.00
50% $59,995,500,000.00 $640,952,500,000.00 $1,100,550,000,000.00
10% $16,172,700,000.00 $172,778,500,000.00 $296,670,000,000.00

 

The potential liabilities range from $16 Billion (best case scenario) to $2.1 Trillion (worst case scenario). In fact only the low estimates (on the table) where the international community only puts 50% or 10% the severity of the penalty that the U.S. does will result in VW still maintaining a positive value. If they survive this disaster as a company there is still the hit to their reputation, their suppliers and the broader effects on the European manufacturing reputation that could cause further monetary issues on economies worldwide. Remember these estimates do not include any penalties associated with repairing the harm done to the environment, VW’s dealers and VW’s suppliers.

My thoughts As a Chattanoogan on the VW Emissions Scandal

As promised I would include a portion on my thoughts. Chattanooga is at an epicenter of this controversy we have about 10,000 jobs resulting from the Volkswagen manufacturing plant located in our city. Optimistically, I hope that in 2 to 5 years all these people still have healthy jobs and careers. Looking at the scandal I believe that based on the current information Volkswagen will likely end up being responsible for $60 to $200 billion in total damages. They can certainly withstand $88 billion without outside assets. Additionally they can probably sell stock to raise funds and cut costs to increase profit margins. Perhaps they will even receive a bailout from the German government, the Tennessee Government and China since these economies have many jobs that the company provides. I would put them at a 50% chance of bankruptcy depending on on going investigation and litigation.

Honestly, I’m not sure that I want Volkswagen to survive after purposefully harming so many people just for the sake of profits and growth. Perhaps the best outcome would be a buyout from another major auto player and drastic changes within the management of the company. What would excite me the most on a local scale is if Tesla Motors purchased the Volkswagen plant and Chattanooga became the new hub for electric vehicles in the United States.