Lawsuit to scare VW out of U.S.
The U.S. government’s lawsuit against Volkswagen threatens the German automaker with such heavy penalties that, in hindsight, it may not have been worth it for VW to be present in the U.S. market at all.
The lawsuit describes known facts. VW installed special software in approximately 580,000 cars sold in the United States that mitigated the level of nitrogen oxide (NOx) emission during tests but stopped doing so on the road, and it tried to hide the ploy from the authorities. The carmaker has admitted as much. The surprise is the amount of money the U.S. Department of Justice has demanded for the violations - a potential fine of up to $46 billion.
Even in the U.S. system, where courts commonly award enormous punitive damages, this is huge. A senior justice department official told Bloomberg that the court would be unlikely to award anywhere near the full amount the government has asked for. But given what the prosecutor is demanding here, one has to wonder whether the goal is to drive VW out of the U.S. market.
While punitive damages are clearly a big part of the punishment the government wants to mete out, there are two types of actual damages VW may have caused: damage to public health by the NOx emissions that apparently exceeded permissible levels by a factor of 40, and that to the owners of VW cars who were fooled into buying them as “green,” eco-friendly vehicles.
Noelle Eckley Selin, an associate professor at the Massachusetts Institute of Technology, recently estimated the health cost of Volkswagen’s misbehavior at $100 million - a “staggering number,” she wrote. She suggested that another method, used by the Environmental Protection Agency to account for people’s willingness to pay to avoid disease and suffering, would put the damage at $109.5 million.
As for the damage to car owners, it cannot logically be higher than the price they paid for the cars. Unless the car caused them illness or worse, they have benefited from ownership. Based on Volkswagen’s financial reporting, the weighted average price of a vehicle sold by the company in North America in 2009-2014, when the offending software was installed, reached $28,815. That would put the total cost of a buyback (using the government’s number of miss-sold vehicles) at $16.7 billion. So to completely erase the actual damage it has done with its cheating, VW would need to pay $16.8 billion. Even if the United States wants to make an example of the German company, multiplying the actual damage by three, as the lawsuit does, is unjustified.
Foreign companies, however, don’t get much pity when caught breaking U.S. laws and so it is with VW. According to Violationtracker.com, a service run by Good Jobs First, a Washington, D.C.-based group promoting government and corporate accountability, U.S. regulators have levied 11 fines of over $1 billion for health, safety and environmental violations. Seven of these cases involved non-U.S. companies, and the biggest violator of them all, London-based BP, has faced $25 billion in fines for the disastrous Deepwater Horizon oil spill, whose impact is still felt in the Gulf of Mexico almost six years after the accident.
Last year, the French bank BNP Paribas was hit with the biggest fine in history for violating U.S. sanctions against Sudan, Cuba and Iran - $8.9 billion, an amount that had French officials up in arms. “The penalty must be proportional and reasonable,” French Foreign Minister Laurent Fabius said at the time.
If VW’s fine exceeds that levied on BP, which caused far greater environmental and economic damage, it certainly won’t be proportional or reasonable. It would, however, clearly show to non-American multinationals that there could be high costs to operating in the world’s biggest economy, and that these costs could well outweigh the benefits.
For VW, growing North American sales was to some extent a vanity project: It strove to be the biggest automaker in the world and even briefly achieved the distinction last year. Leadership would be incomplete without an American presence. VW was never big in the U.S. and Canada, but in recent years, its sales on the continent sharply increased, thanks in large part to the emphasis on eco-diesels.
Applying VW’s firm-wide net profit margins to these sales yields a total of 4.3 billion euros ($4.6 billion) in profit in 2009-14, or 11.8 billion euros since 2000. Even if the eventual fine approaches the maximum actual damage of $16.8 billion, this suggests that from a profit perspective VW should have kept out of the U.S. market altogether. In Europe, regulators have let it off with cheap fixes to the NOx problem. In the United States, the authorities are in no hurry to accept the same recall program, and in any case the legal costs are going to make a solution much more expensive.
This is the cost of hubris, of course, and I have little sympathy for cheaters, but VW does make excellent, practical, reliable cars. It benefits U.S. consumers to have access to them. And, unlike Suzuki, Japan’s fourth-biggest carmaker which pulled out of the United States in 2012, VW doesn’t want to leave. The U.S. government chose to disregard this when it filed its lawsuit. It’s up to the courts now to be more reasonable.
*The author is a Berlin-based Bloomberg View columnist.
by Leonid Bershidsky