By Ira Silver CPA, CGMA, Principal, MBAF LLC
By now you are very familiar with the details of the VW emissions scandal. The company knowingly equipped 11 million VW and Audi diesels with software specifically designed to fudge on emission testing. The software could recognize when the car’s engines were being tested, and would emit less nitrogen oxide than they would during normal driving. The software not only cheated the machines, it deceived consumers with inaccurate gas mileage specs.
The scandal resulted in the resignation of embattled CEO, Martin Winterkorn, who still claims no knowledge of the intentional installation of the software. It has been several weeks since the scandal first broke, but it may take years to determine the full impact on VW, its dealers, and the auto buying public.
Trust Issues
This is certainly not the first scandal to rock the auto industry. In fact, in light of the recent GM ignition switch scandal, and Toyota’s problem with sudden acceleration, this could seem minor, as those two issues resulted in consumer deaths.
It’s true that auto manufacturers have recalls all of the time. Such recalls rarely affect consumer confidence in the brand. However, there is one major difference with the current VW debacle. Rather than a defective part, this was deliberate corporate deception perpetrated on regulators and consumers. That represents a breach of trust, whose impact is only just beginning to be felt by the company and its dealerships.
Consumers and dealers both feel cheated and lied to. Not only because of the specifics of the software cheat, but in the branding of VW’s “new breed” of diesels.
Picturing the dirty, noisy, clunky models of the 70s and 80s, American car buyers never really acquired a taste for diesel cars. Later, when so-called “clean diesels” were introduced, there was the perception that meant having to give up performance and/or fuel economy. VW specifically sold American car buyers a bill of goods that literally said, “This isn’t your father’s diesel.” VWs marketing said such tradeoffs were no longer necessary, and you could get a high-performance, fuel efficient diesel car that also met emission standards — all at a very attractive price. Dealers embraced the branding message, and innocently sold these cars to unwary consumers. The only problem was, that the whole concept was based on lies.
Decreased Value
That kind of a blow to consumer confidence in the brand could be hard to put a dollar amount on. Or is it? The company Brand Finance, which establishes values of given brands, has just released a report that says the scandal is having a ripple effect beyond VW, and has lowered the value of the entire “Made in Germany” brand. Its latest report shows that Germany has lost its top position as a “national brand.” Germany’s brand value, which is determined by the country’s strength as a brand and GDP data, dropped by nearly $200 billion as a result of the scandal. The publishers of the report said that, “the damage the Volkswagen scandal did to Germany’s brand is much more significant than the BP oil spill’s effect on the UK.”
Ultimately the scandal is going to cost the company billions of dollars in fixes, recalls, and inevitable consumer lawsuits.
On a smaller scale, VWs dealers nationwide are still struggling to deal with the scandal. It is predicted that when the sales numbers are all said and done for the months of September and October, the brand will likely see a drop from the same period last year.
The reactions of individual dealers run the gamut. Some say it’s not all gloom and doom, mainly because the diesel models do not make up more than 2–3% of their total sales volume. For other dealers, such as in California, where diesel sales are much more significant, the blowback has been more serious. For example, Chris Murphy, sales manager at Volkswagen of Oakland, told the Associated Press, “We can’t afford to buy all those cars back. We’re just one dealer. This is definitely going to impact our business. We’re trying to focus on positive, not negative, things because there’s nothing we can do.”
Speaking with some of the larger financial institutions, it’s “business as usual.” There does not appear to be any concern regarding financing buy-sells, real estate acquisitions, or floor plan upgrades of VW dealerships. In addition, the money VW has sent to dealerships to handle customer goodwill, combined with the additional repair and warranty work required to remedy the situation, could actually turn out to be beneficial to dealers.
The only current concern regarding the purchase of a VW or Audi dealership that may need to be addressed are affected vehicles that have been taken out of service. Will these be transferred to the buyer at the time of purchase, or will they remain with the seller until remedied by VW? If they can be transferred, at what price?
Anyone involved in a transaction where this may be an issue, is advised to consult with their attorney.
Is There an Upside?
Just as it may take years to assess the total damage created by the scandal, it may take years to see if it had any positive impacts on the industry. However, there are some potential upsides. Number one, it may ultimately have a positive impact on the environment as these “cheats,” are removed from the road, and increased scrutiny by the EPA looks for other such software tricksters. There have already been unconfirmed reports that Mercedes-Benz, Honda, Mazda, and Mitsubishi may also have installed similar software on some of their cars.
Also, now that the idea of “clean diesel” has proven to be an illusion, the scandal will likely boost sales of electrics and hybrids. Diesel engines, never all that popular in passenger cars in the US, will likely begin to fade away, in favor of hybrids and electrics for those interested in alternatives to gasoline vehicles.
And finally, in the business world, and particularly in the auto business, one brand’s loss is another brand’s gain. GM could benefit greatly from the scandal, particularly in China. China is actually the largest market for GM, and accounts for almost 50% of the company’s value. Yet, prior to the scandal VWs outsold GMs in China. Now, with the global blow to VWs reputation, there is an opportunity for GM to unseat VW as the best-selling foreign brand, which could lead to an increase in GMs value by as much as 10%.
As far as the trust factor, and how that will impact individual dealerships over time, I suspect they will all recover well. Americans have a notorious short term memory for corporate scandals, and will likely forget this one soon.
Smart dealers will have an opportunity to refocus on the established goodwill they have with existing clients and their local communities, and should be able to shake off the corporate taint in the long term.
Ira Silver, CPA, CGMA, is a principal in the Tax and Accounting Department at MBAF and is the principal-in-charge of the firm’s Orlando office. Ira has been in the public accounting profession since 1982. He can be reached at (407) 781-0150 or isilver@mbafcpa.com
