When news broke about Volkswagen Group's (OTC:VWAGY) diesel emissions fraud, investors knew it was going to be a bumpy ride, but nobody was quite sure how sales would be affected by the scandal in the near-term. Most figured there would be pain, but General Motors' massive recall in 2014 didn't lead to an equally massive decline in sales, so there was hope for Volkswagen investors.
Now, with November U.S. auto sales in the books, we're getting a clearer picture, and it's not pretty for Volkswagen.
It has been an ugly couple of months for both Volkswagen's employees and its investors. Executives have been discarded, and consumers are unimpressed with Volkswagen's goodwill gestures. The German automaker is even halting production in Wolfsburg, Germany, for two weeks in late December to avoid bloated inventories, while at the same time, dealerships in the U.S. are complaining about tight inventories.
Despite all the negative attention Volkswagen has earned, the automaker's U.S. sales had remained roughly flat since the scandal broke in mid-September. That changed drastically in November when sales of Volkswagen-brand vehicles plunged 25% compared to a year earlier.
Put another way, last month's sales of Volkswagen-brand vehicles checked in at 23,882 units in the U.S., its second-worst monthly performance since February 2011, and the 25% monthly plunge in sales was its largest decline since September 2008.
Even worse, Volkswagen had been trying to prop up its U.S. vehicle sales with higher incentives. According to TrueCar estimates, incentives for Volkswagen Group -- which also includes Audi and Porsche -- rose a staggering 27%, to $3,850 per unit, compared to November 2014. That was much higher than the industry's average estimated increase of 6% to $3,100.
According to Volkswagen, though, the sales decline was mostly attributable to actions the company took.
In a press release, Volkswagen of America said, "The November sales results reflect the impact of the recent stop-sale for all 2.0L 4-cylinder TDI vehicles as well as for the 3.0L V6. The voluntary stop-sales were issued in light of notices received by the Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) regarding emissions compliance."
The road ahead
Right now, Volkswagen is basically engaging in damage control. Going forward, the automaker's top priority is going to be supporting the customers negatively affected by its diesel emissions fraud; already, Volkswagen has offered owners of its diesel vehicles in the U.S. $1,000 in compensation as a goodwill gesture. Volkswagen is also poised to begin fixing the affected vehicles and is closing in on approval for a low-cost fix to the 8.5 million rigged diesel vehicles in Europe.
Ultimately, Volkswagen Group has already taken a hefty 6.7 billion euro ($7.1 billion) provision to cover the costs of recalling diesel vehicles. The company still has a strong market share position in Europe and China, and will likely continue to compete for the title of world's best-selling automaker in the years ahead. However, investors considering scooping up shares of Volkswagen at a discount -- they're down roughly 22% since mid-September -- should only do so recognizing that the total cost of this scandal, both directly in terms of remediation costs and fines and indirectly via sales declines, could easily get worse before it gets better.