VW struggling to keep dealers happy as scandal widens

Volkswagen AG’s goodwill offer of $1,000 to the owners of cars caught in the emissions scandal comes as the company wages a behind-the-scenes effort to soothe another powerful constituency: its U.S. dealers.

The German company is offering cash and no-interest loans to its roughly 650 dealerships that are stuck with cars that can’t be sold but are taking up precious space in their lots. It is also encouraging dealers to offer pre-scandal prices on trade-ins and promising to make up the difference in value.

The Indianapolis area has three official VW dealers: Tom Wood Volkswagen, Falcone Volkswagen and Dreyer & Reinbold.

“They have to keep those dealers on board, afloat and as happy as they can, because the dealers are going to be on the front line whenever there’s a fix for this problem,” said Michelle Krebs, an analyst with Autotrader.com, an online auto dealer marketplace. “Dealers are absolutely critical when these bad things happen.”

And plenty of bad things have happened to VW, starting with the acknowledgment in September that it sold nearly 500,000 cars in the U.S. marketed as "clean diesel" but in fact pumped up to 40 times the legal limit of nitrogen oxide into the atmosphere. Since then the number of cars under investigation worldwide has grown, prosecutors in Europe and the U.S. have opened probes and its stock has tumbled. Last week, U.S. regulators said that some newer models may be involved and VW itself admitted an additional problem with 800,000 cars, including some gasoline models.

Goodwill package

The automaker has responded with extra incentives for both dealers and consumers for the gasoline-powered 2016 models that are still on sale. The discounts have averaged $4,192 on VW cars—a 52 percent increase—and $2,248—or 70 percent higher—for Audi sport utility vehicles, according to AutoData Corp.

And it announced Monday an additional “goodwill package” to owners of diesel-powered cars with 2.0-liter engines under investigation by EPA $500 on a prepaid Visa card, $500 in dealership credits and three years of free roadside assistance.

“They’re a very nimble team, and they are fast to react to the changing climate,”  Alan Brown, chairman of Volkswagen’s U.S. dealer network and the general manager of Hendrick Volkswagen in Lewisville, Texas, said of the VW corporate reaction.

VW’s U.S. president, Michael Horn, told a Congressional hearing in October that VW wired dealers funds to offset costs stemming from the scandal. He wouldn’t say how much, but said it was “a significant amount of money” that could be used for “the most urgent customer cases” or wherever they see fit.

Repair lag

“One thing is very, very clear—and I’m damned sincere about this—the dealer profitability in this country is my first objective,” Horn said.

But one thing Volkswagen hasn’t done is roll out a fix for the affected diesels. If it takes more than a year to recall the bulk of the affected 482,000 cars—as Horn suggested in the hearing—Maryland dealer Jack Fitzgerald said it would “complicate my business a lot.”

The company has agreed not to sell the cars under investigation, which it admits were equipped with software that fooled government emissions tests, until it comes up with a way to fix them that regulators approve.

Fitzgerald, who owns VW dealerships in Frederick and Annapolis, is worried VW isn’t moving quickly enough to engineer the repair. He pointed out that Consumer Reports has already been able to figure out a way to keep VW diesels in “cheat mode,” engaging pollution-control equipment in real-world driving. It resulted in negligible drops in acceleration and acceptable reduction in fuel economy, Fitzgerald said.

Quicker repairs

“Consumer Reports did it, why can’t Volkswagen?” Fitzgerald said.

Horn, the VW America president, said Monday in an e-mail “We are working tirelessly to develop an approved remedy for affected vehicles.”

One of the biggest concerns dealers had was the cost of housing 2015 diesels that could no longer be sold, Brown, the Texas dealer, said. Dealers usually have to pay finance charges on vehicles between the time they’re delivered by VW to the dealer, and the time the cars are sold to customers.

On the diesels that are part of the EPA investigation, VW is helping retailers cover the finance charges. The difficulty is that a lot of dealers don’t have enough storage capacity, so the models under the stop-sale order are taking up space.

“The cars are taking up valuable parking spaces,” Brown said.

Sizable payments

The funds Horn told Congress about are being apportioned according to a formula based on size, capacity and throughput, Brown said. They’ve already announced the payments will continue in November and December. Without specifying the exact dollar amounts, Brown said they’re “sizable.”

VW is also supporting dealers on trade-ins. Hendrick VW is giving customers with an affected diesel model the book value prior to the scandal. It helps convey "transparency and fairness," and it soothes customers who are concerned. VW has encouraged dealers to do this.

“The Volkswagen customer is a very forgiving customer,” Brown said.

Volkswagen sales rose 0.2 percent in October, the first full month since the emissions-cheating scandal broke. Industrywide sales rose 14 percent, according to Autodata.

New revelations

There are signs that the market for Volkswagen cars is getting worse, especially for used models that have been targeted in the U.S. Environmental Protection Agency’s diesel investigation.

Models affected by the scandal are taking 123 days to sell, about 44 percent longer than a control group of similar non- Volkswagen cars, according to Autolist, a San Francisco-based website that aggregates sale listings. List prices are about 5 percent below what the company’s algorithms suggest they should be, and they’re dropping rapidly.

That suggests VW owners are going to be dealing with accelerating depreciation, said Alex Klein, Autolist’s vice president of data science. Thousands of non-franchised dealers who have Volkswagen models on their lots are going to be stuck with cars they have to repair, or the challenge of selling what is essentially a broken vehicle, he said.

“There’s turbulence surrounding the Volkswagen brand as a whole, and there’s a negative perception of diesels,” Klein said. “It’s extremely apparent in the data. Based on our analysis and the trends we’re seeing, we expect the worst is still to come.”

Krebs said the story is still unfolding, so it’s hard to say how it will turn out for dealers. GM is getting over the ignition-switch scandal from last year. Toyota rebounded from the sudden-acceleration investigation in 2010 and Ford survived the Firestone tire recall 15 years ago.

“This is such unprecedented territory,” Krebs said. “This is such a different situation because this was an intentional defeat. Our surveys show that is what matters to consumers the most.”