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Volkswagen's CEO: Scandal Will Force Big Spending Cuts

By John Rosevear – Oct 6, 2015 at 6:40PM

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As the likely costs of an emissions-cheating scandal continue to grow, VW's new CEO says any program that isn't "absolutely necessary" will be cut.

Volkswagen headquarters in Germany. VW's CEO told employees on Tuesday that big cuts in future-product spending are likely. Image source: Volkswagen

The German government has given Volkswagen (VWAGY -2.72%) until Wednesday to present a plan to fix millions of diesel-powered vehicles that don't meet emissions standards.

But a new report suggests the fix might turn out to be drastic -- and it might vary from country to country.

The worst case: $11,000 per car?
As of Tuesday, Volkswagen apparently hadn't yet decided how to fix the 11 million diesel-powered vehicles that it sold with software that turns on emissions controls only when it detects that a test is under way. In normal driving, the cars' exhaust is much dirtier than allowed by law.

Bloomberg reported that VW is considering a whole range of options, from a simple software update to buying back the affected vehicles. That's according to "people familiar with the plans," who told Bloomberg that the options range in cost from around 20 euros ($22) per car to as much as 10,000 euros, or about $11,200.

Per car.

It's likely that VW will use different solutions in different countries, doing whatever it has to do to appease regulators (and customers, probably) in each jurisdiction. The plan it presents on Wednesday will be specific to affected vehicles in Germany, but it should give investors an idea of how much VW may have to spend to fix all of its cheating diesels around the world.

It is likely to be a lot of money.

At least some of the cars will require more than a software update
The idea of a 20-euro software fix sounds like a bargain. But while we don't know VW's plan yet, the company's new CEO seems to think that won't be enough to fix all of the cars. 

VW CEO Matthias Mueller addressed employees at Volkswagen's headquarters in Wolfsburg, Germany, on Tuesday. "In many instances, a software update will be sufficient," he said. "Some vehicles, however, will also require hardware modifications."

Image source: Volkswagen

That could be costly. VW has already set aside 6.5 billion euros (about $7.3 billion) to repair the cars. But Mueller said that wasn't likely to be enough to cover the repairs as well as the fines and other costs that VW expects from the scandal. 

Mueller said that VW has initiated a "critical review" of its planned investments in an effort to conserve funds. "Anything that is not absolutely necessary will be cancelled or postponed," Mueller said.

VW spent $17.4 billion on research and development last year. That's more than any company in the world, according to an Evercore ISI analyst cited by Bloomberg.

Clearly, there's some room for cuts. But just as clearly, big cuts to VW's future-product and expansion plans will hurt the automaker for years to come.

VW's future as a leader is cloudy
In recent weeks, we've been looking at the prospects for the electric vehicles under development at VW's Audi and Porsche brands. These are the latest fruits of a massive effort by Volkswagen to emerge as a leader in battery-electric vehicle technology.

Audi has been planning a new electric SUV with Tesla-like range and performance. It showed this concept version last month. Will spending cuts kill the program? Source: Volkswagen

If the claims made last month for an upcoming new electric SUV from Audi were true, then the program is showing a great deal of promise. But right now, it's unclear what will happen to that program -- and to dozens of other new-product and production-expansion initiatives under way at VW around the world.

And that means VW's future as a leading automaker is still uncertain. Stay tuned.

John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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