Leading Sales Volkswagen Not Blowing Off Steam Yet

German carmaker Volkswagen has become the world's largest in vehicle sales. But Dieselgate's ongoing fallout is keeping the company from celebrating.
Despite dethroning Toyota as the world market leader, Volkswagen isn't feeling sweet.

It was the best news Volkswagen has gotten in a long time. On Monday, the German carmaker officially became the world’s largest, after Japanese rival Toyota released its latest numbers.

But at company headquarters in Wolfsburg, it seems as though no bottles of champagne were being popped. When Handelsblatt asked VW for a comment, it was referred instead to a statement issued in early January, announcing the company's sales of 10.3 million vehicles in 2016 – more than it's ever sold in a year before.

"We have managed to stabilize the operating business under difficult conditions," Chief Executive Matthias Müller said at the time. VW's new company culture is clearly one of restraint and modesty.

For Volkswagen, it is a big accomplishment. A year ago, shortly after the Dieselgate scandal broke and it was revealed that the company had been deceiving authorities and consumers, no one would have believed this could happen. Despite an onslaught of legal battles and declining sales in Germany and the U.S. of its core brand, VW still managed to come out on top. For the last four years, Toyota held the competition at arm's length but those days appear to be over.

Volkswagen can credit strong business in China for pulling ahead. Last year VW, together with subsidiary brands Audi, Porsche and Skoda, sold close to four million cars to Chinese customers.

Volkswagen can credit strong business in China for pulling ahead. Last year VW, together with subsidiary brands Audi, Porsche and Skoda, sold close to four million cars to Chinese customers, an increase of more than 12 percent from 2015. It has become Volkswagen's most important market, with the VW brand alone selling more than half of all its vehicles there.

Meanwhile, VW's Japanese competitor downplayed its loss of the number one spot. "We at Toyota are not focused on chasing volume," the company said in a statement, highlighting its aim to be at the forefront of technology development.

But Dieselgate is still a long way from being in VW's rearview mirror. Just last week, German prosecutors announced an expansion into their probe of the emissions scandal. Former Chief Executive Officer Martin Winterkorn is now suspected of fraud, in addition to possible violation of securities laws, and could face up to 10 years in prison.

If Mr. Winterkorn were convicted, it would spell trouble for the company. Long-suffering shareholders would stand a better chance of claiming damages against VW, if it is found that top managers were culpable. So far, potential European damage claims have not been factored into the company's earning analyses.

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But the biggest burden of  Dieselgate come from over the pond, where the VW Group faces fines and damage claims of more than €20 billion ($21.4 billion) in North America. VW is likely to announce the details of a settlement with 80,000 U.S. customers who bought SUVs with manipulated engines on Tuesday.

Arndt Ellinghorst, an automobile analyst with investment adviser Evercore ISI, expects a liability of about €1.5 billion. Wolfsburg officials hope that this will be the last major payment across the Atlantic, which would largely close the U.S. chapter of its emissions saga.

Management would then have more time to focus on operations than a sullied past. 2017 is shaping up to be a challenging year for VW. In China, tax rebates were partially responsible for 2016's strong figures, but the Chinese government wants to cut the tax rebate in half this year.

That alone could spell weaker business for the brand, but the company needs to especially regain U.S. customers it has lost. However the company is understandably worried about U.S. President Donald Trump's protectionist policy. More than a third of all VW's cars sold in the U.S. are assembled at a Mexican plant. If the administration imposes a tariff on cars produced in Mexico, VW's U.S. expansion in 2017 is unlikely to happen. And Toyota would stand a good chance of gaining back the title of the world's largest carmaker.

 

Stefan Menzel covers the auto industry and Volkswagen for Handelsblatt. To contact the authors: [email protected]