Dealers, States Pose Bigger Threat To Volkswagen Than EPA

Dealers, States Pose Bigger Threat To Volkswagen Than EPA.

“There will be a very, very long line of lawyers trying to sue Volkswagen for the next 20 years”

Estimates that Volkswagen could be liable for costs from aggrieved customers and government agency fines approaching a total of $90 billion have been dismissed as an exaggeration, but potential liabilities in theory could go well beyond that.

The estimates don’t include the potential for dealership law suits, and the scariest area of all; law suits from states for fraud.

“There will be a very, very long line of lawyers trying to sue Volkswagen for the next 20 years,” said Art Wheaton, senior lecturer at Cornell University’s ILP School.

That could be catastrophic news for VW because if these astronomical numbers came close to the truth, it would force this global giant into bankruptcy. So the good news is that government agencies like to frighten their targets with threats of massive penalties, but then take account of the damage this might do to the underlying business, and if the offender is suitably contrite, the fines become more of a slap on the wrist.

That would explain the grovelling position adopted by visiting VW executives to the U.S. CEO Matthias Mueller and VW brand chief Herbert Diess. It might not convince dealerships or States Attorney Generals to have mercy.

VW shareholders have been demoralized since news broke September 18 that the company cheated to defeat U.S. environmental rules which limited noxious emissions from diesel engines. This concerned around 500,000 diesel engines in the U.S. The scandal then moved on to the rest of the world with 11 million engines involved in cheating not only diesel emissions, but also fuel economy claims. This week the U.S. sued Volkswagen for up to $48 billion for allegedly violating environmental laws. Estimates of the final cost soared past the previous record for environmental penalties held by BP with $53.8 billion for the Deepwater Horizon oil spill.

More than money
And it’s not just the monetary cost to VW, says Steve Gefter, managing director at IDDS Group.

“In addition to monetary fees, it is important to consider how the company will have to rise above the tremendous criticisms and reputational damages they have accrued over the past couple of months. These repercussions will far outweigh the impact of monetary fines on VW as they will inevitably impact sales numbers /customer faith,” Gefter said in an email reply.

According to Wheaton, the threat from the Environmental Protection Agency (EPA) is not as bad as it sounds. EPA fines, which started out at $22.5 billion, could be doubled to $45 billion because VW wilfully violated the law. Wheaton said though that the EPA likes to start out with a big, scary number, then negotiate it down, so it’s possible $45 billion could become, say, $100 million.

“The EPA likes to make you sweat and worry first, but I don’t know of any case where they went for the full amount,” Wheaton said in a telephone interview from his office in Buffalo, N.Y.

The second category is VW dealerships, which have suffered by being unable to sell new diesels, or even used ones. The value of used diesels has dropped and dealers’ reputations have been damaged.

“The dealership lobby is extremely strong,” Wheaton said.

Action from 50 states
The third category should make VW most anxious because it is so difficult to predict, and that is the possibility of action from each of the 50 States.

“Each individual state in the U.S. can file law suits against VW for fraud. For advertising a fraudulent product – VW advertized clean diesel, as clean as hybrids – and sold cars knowing its claims were fraudulent. Everything you put in a mailing – that’s mail fraud, advertising on TV might bring in the Federal Communications Commission. There’s a federal crime too because VW did it in more than one state,” Wheaton said.

News Friday underlined this danger, when the attorney generals of New York and Connecticut, who are leading an investigation by more than 40 states into VW and “dieselgate”, issued a progress statement.

“Volkswagen’s cooperation with the states’ investigation has been spotty – and frankly, more of the kind one expects from a company in denial than one seeking to leave behind a culture of admitted deception,” the news agency AFP quoted New York Attorney General Eric Schneiderman as saying.

AFP described the statement as “sharply worded”.

The statement ended ominously.

“Our patience with Volkswagen is wearing thin,” he said.

Does Wheaton recommend any action which help VW mitigate some of these dangers?

Cheaper to buy them all back
“It would be much cheaper for VW to buy back all of the used vehicles and destroy them if the EPA and everyone signed off. That would be better than the potential fines,” Wheaton said.

IDDS’s Gefter doesn’t think it would be possible to buy back every car sold, but says that if he was VW CEO he would offer a lifetime warranty on every vehicle and create a powerful marketing campaign that radiated confidence in their autos, and showed a long-term commitment to its customers. VW should also provide incentives for buyers to trade in defective diesels for new ones to encourage long-term loyalty.

Would VW survive in the U.S.?

Gefter, citing the Ford, GM and Toyota’s brush with scandal, thinks it can.

“Eventually this VW scandal will become a thing of the past. The combination of money, actions taken on behalf of the consumer, a brilliant public relations plan and some new technology/models will help them endure the tough road ahead,” Gefter said.

Cornell’s Wheaton is optimistic too.

“Yes and I don’t think in five years time it will be much different from now. It’s not a very big player in the U.S. and never even came close to 10 per cent of the market,” he said.