Volkswagen can take $80 bln hit before crumpling

October 15, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Volkswagen is strong enough to withstand the financial fallout of disguising emissions of 11 million diesel engines sold globally. If Europe’s biggest carmaker can keep its operations stable, the cash it produces means it could allow it to absorb an impact of 70 billion euros ($79.7 billion) without having to sell brands or raise equity.

 Volkswagen calculator

VW’s financial power-train is its core business of selling motor vehicles. Even if sales of its Audis, Porsches and so on don’t grow in the coming years, the automotive unit should generate 5.5 billion euros a year in free cashflow. Just over a third of that would be doled out to investors in dividends, based on 2014’s numbers. But halve the payouts, and it would free up 1.2 billion euros. Over five years, the total available cash generated would be 22 billion euros.

Cutting the dividend further might be unpalatable to investors like the state of Lower Saxony. But there are always cost cuts. VW’s labour and materials costs as a share of revenue are significantly above Daimler’s and BMW’s, as analysts at Evercore ISI point out. A one-off reduction of the wage bill by 3 percent and of material costs by 0.5 percent, with the gains taxed at VW’s 27 percent rate, would boost cash reserves by 6.3 billion euros over five years.

Another lever is investment. VW invests a huge 25 billion euros a year in fixed assets and product development. It said on Oct. 13 it would cut the latter by 1 billion euros. But trim all investment by a bigger 10 percent, tax the savings, and there’s another 9.4 billion euros in accumulated firepower.

Add all of these savings to the 24 billion euros or so of net cash the carmaker currently has after planned asset sales – and assume 10 billion euros need to be kept on the side to maintain VW’s credit rating – and the carmaker has 51.2 billion euros to meet the cost of its misdeeds.

In reality it ought to be able to cover even more. Fines, legal fees and recall costs may be tax-deductible for VW. Factor in that tax perk, and it suggests VW can weather 70.1 billion euros of demands until 2020 without a capital increase or selling the family silver. Wolfsburg will be probably coughing up for years after fudging the results of its emissions tests, but it won’t choke.

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