When all of Volkswagen's (OTC:VLKA.Y) settlement issues are said and done, the company is going to end up forking over more than $15 billion.
In this industrials segment from the Industry Focus podcast, analyst Sean O'Reilly and Fool contributor John Rosevear talk about how the automaker is going to come up with this large amount of money. Also, they look at how this already expensive situation could get a lot worse for the company in the coming months.
A transcript follows the video.
This podcast was recorded on June 30, 2016.
Sean O'Reilly: John, we just talked about how Volkswagen's going to be forking over, across tons of settlements and investing in infrastructure and all that good stuff, over $15 billion. Do they have that money lying around?
John Rosevear: In fact, they do. They took a charge, a reserve; they basically wiped out their 2015 earnings, to cover this. That charge is more than enough to cover that $15.3 billion. As of the end of the first quarter, they had about 26 billion euros, so something like $27 billion, in cash and credit lines available to them, so a reasonable reserve for an automaker. Yeah, they can cover this. They can pay for it. They've planned around it. They're good!
Here's the thing. The question that's being raised now is: What if other governments go back and say, "Whoa! Owners of these cars in the U.S. got these big settlements, they're buying back the vehicles. Owners in Europe got a recall when they installed this little bit of pipe and they say it's fine." Part of that is a function of the different environmental regulations. Our rules in the U.S. around oxides of nitrogen, the relevant emissions that cause smog, are a lot stricter than Europe's. Europe is --
O'Reilly: That's surprising to me, but yeah.
Rosevear: Europe is worried more about CO2. That's why they favor diesels. Diesels get better fuel economy than gasoline engines, so they burn less fuel and generate less CO2. That's the greenhouse gas. That's the global warming contribution. We're concerned about that too in the U.S., but we're also concerned about the pollutants that cause smog on the local level that make the cities gray.
O'Reilly: Got you. How many --
Rosevear: It's a different set of rules and a different set of priorities, and that's part of what's driving it here. It is possible that ... I mean, these cars were sold all over the world, and a lot of governments ... I know South Korea is taking a dim eye toward Volkswagen right now. There's some sort of criminal investigation going on there. India has sort of rattled their equivalent of the Department of Justice sabers a little bit. They're getting wound up. There are lots of other countries that are talking about this.
Fortunately for Volkswagen, they didn't sell very many of these in China. While China is concerned about this, there aren't tens of thousands of cars or hundreds of thousands of cars in China, so Volkswagen has that going for it. If some of these other governments go, "Hey, wait a minute, we want $5,000 for each of our owners," "Hey, wait a minute, we think you should buy back these defective cars," this is going to get real expensive in a hurry.