VW's new CEO to workers: Cutbacks are coming
WOLFSBURG, Germany - Volkswagen's (VLKAY) new CEO has told more than 20,000 gathered workers that the company will have to review planned investments and contain costs as it works to overcome a scandal over vehicles that cheated on emissions tests.
Matthias Mueller vowed Tuesday that "we will overcome this crisis," but he said it "would not happen without pain."
He told the meeting at the company's sprawling home plant in Wolfsburg, Germany, that the company would have to put its future investments in plants, technology and vehicles "under scrutiny" to spend only what was needed to maintain a leading edge.
He told concerned workers that "we will do everything to ensure that Volkswagen will stand for good and secure jobs in the future as well."
Mueller said some of the cars -- more than 11 million worldwide -- could be fixed by adjusting the software, while others would need mechanical fixes. He didn't elaborate.
Volkswagen has until tomorrow to give German regulators a binding timetable that sets out when it will have a fix for the cars in the country and by when it can be implemented.
Volkswagen faces fines and lost sales after U.S. environmental regulators found it had installed software that disabled pollution controls when the vehicle was not on the testing stand. The company has set aside 6.5 billion euros ($7.3 billion) to cover costs but analysts say that likely is not enough.
Some experts estimate the bill could ultimately be five times as large. Beyond initial charges, the company is expected to suffer a drop in sales. And the damage to the brand's image could take years to heal.
"This is damaging stuff that goes way beyond negligence and incompetence," said Jeremy Robinson-Leon, principal and chief operating officer at New York-based PR firm Group Gordon. "The issue here is fraud and pretty brazen fraud at that."
The costs of fines, lawsuits and recalls are hard to estimate but have the potential to snowball. Marc-Rene Tonn, an analyst at Warburg Research, said they could ultimately exceed 35 billion euros ($39 billion).
Customers who feel cheated are already going after Volkswagen, with several class actions already filed in the U.S. and Europe. That could amount to billions more in damages.
And the cost of recalling and fixing the cars could run 2 billion euros ($2.2 billion) beyond what Volkswagen set aside, Tonn wrote in a research note to investors. As a result, analysts are predicting a serious hit to Volkswagen's profits.
Tonn halved his profit forecast for this year to 6.4 billion euros. For 2016, he reduced it to 11 billion euros from 15.7 billion euros.
Volkswagen has strong finances, starting with 20 billion euros in net industrial cash. However, it needs to keep at least 10 billion euros of that to maintain its credit rating.
And the impact on VW's vehicle sales will only add to the pain. Auto analyst Ferdinand Dudenhoeffer at the University of Duisburg-Essen estimated that Volkswagen could see sales fall by up to 10 percent globally next year.
Earnings could take a bigger hit because the company may have to hold down prices through purchasing incentives in order to maintain sales. To make matters worse, the scandal comes just as demand is slowing in China, where Volkswagen's brands are heavily exposed.
What about the company's strategic goal of maintaining its lead over Toyota ( TM) as the world's biggest automaker? Said Dudenhoeffer: "Forget about it."