What's going on?
German automaker Volkswagen (VW) announced on Wednesday that it is pleading guilty to criminal charges and will pay a $4.3 billion penalty for defrauding the US government on vehicle emissions tests. And yet, the company’s stock hit its highest price since “Dieselgate” first broke in September 2015!
What does this mean?
Nearly one year ago, the US government sued VW for falsifying results from diesel emissions tests. At the time, a fine from US authorities represented just one of the scandal’s many potential costs: since then, VW has also had to pay for the replacement of rigged vehicles and legal settlements directly with customers. But, its settlement with the US government is expected to be the company’s last major Dieselgate expense in the US, which is a big relief for anxious shareholders after a long year of uncertainty.
VW’s stock price was up more than 3% on Wednesday, suggesting that markets were relieved the US fine wasn’t a higher figure (and that the lawsuit was settled before the potentially more punitive Trump administration took office).
Why should I care?
For the stock: The scandal will cost VW a lot of money, but investors are beginning to look past it.
Wednesday’s announcement puts the total cost of the scandal for VW (so far) at just about €23 billion. This is well below some experts’ initial disaster scenario of more than €70 billion – a figure that would have likely required VW to raise new investment from shareholders and/or sell off some of its subsidiary brands (like Bugatti). As its costs start receding into the rear view mirror, VW’s investors will focus more on its future plans, including its emphasis on electric vehicles.
The bigger picture: Unlike previous corporate offenders, VW isn’t just paying a fine.
Auto companies like Toyota and GM (as well as banks and other big corporations) have been caught breaking the law before, but they have settled the charges with a fine and no admission of criminal intent. But VW is having to plead guilty to a criminal charge (clearly the government wasn’t offering a “no admission” option), and some of its executives are facing individual criminal charges. The question is, will this act as a stronger deterrent for companies that might break the law in the future?