As crisis grows, VW dealers fear cash won't be enough

By Jamie LaReau, Crain News Service

DETROIT (Oct. 12, 2015) — Volkswagen A.G.'s U.S. dealerships are suddenly awash in cash. But they aren't sure it will be enough.

A package of special programs to help retailers cope with the diesel emissions scandal has infused large sums of money — in the form of incentives, sales bonuses and floorplan subsidies — into a dealership network that's struggling with sluggish sales, thin profits and, now, a stop-sale order on diesel vehicles, which have typically accounted for more than 20 percent of sales.

On Oct. 1, Volkswagen of America wired additional “discretionary funds” to dealers' accounts, to be used as they wish, VW said. Dealers declined to say how much they received, but Automotive News, a sister publication of Tire Business, has learned that the payments varied based on dealers' volumes and could have amounted to tens of thousands of dollars.

But as dealers look ahead to a mushrooming crisis engulfing the VW brand and the prospect of going months without being able to sell diesels, some worry whether the added funds will be enough to keep them in the black. To address those concerns, VW is preparing more programs to help dealers with cash flow, VW of America CEO Michael Horn told a panel of U.S. lawmakers on Thursday, Oct. 8.

Last week, Christopher Grundler, the U.S. Environmental Protection Agency's (EPA) top automotive regulator, told Automotive News that it will be months before VW is able to legally sell its 2016 models with 2.0-liter diesel engines. The EPA, he said, plans to subject the vehicles to a battery of tests to ensure they comply with U.S. emissions laws before certifying them for sale.

VW abruptly withdrew its application for EPA certification last week, just ahead of Mr. Horn's testimony in Congress. He said the vehicles contained a piece of emissions control software that wasn't properly disclosed in the application.

“One thing is very, very clear, and I'm damn sincere about this: The dealer profitability in this country is my first objective.” — VW of America CEO Michael Horn to members of a congressional oversight subcommittee

“We don't know if this is a defeat device” similar to the one VW has admitted using to foil emissions tests going back to 2009, Mr. Grundler said. “We have many questions.”

It's unclear when VW plans to submit a new application. A VW spokeswoman said no time frame was available. Whenever those vehicles come back for certification, Mr. Grundler said, “we will want to test them thoroughly and in different ways” before the agency has confidence that the vehicles comply.

That only fuels the uncertainty — and frustration — dealers feel as they consider how to allocate the discretionary funds from VW.

At Flemington Volkswagen in New Jersey, dealer Steve Kalafer said he will use VW's funds to help meet his store's operating expenses and bolster his marketing budget.

Mr. Kalafer called the infusion a “well-meaning” gesture, but said it isn't enough to cover his operating expenses amid what could be a protracted downturn. Mr. Kalafer owns one VW store in Flemington and his son owns another in Princeton. The group has 17 franchises that sell about 15,000 new and used vehicles per year.

October reckoning

He called the move “woefully inadequate and a poor response” in light of VW's violations, which he blasted as a fraud against customers and dealers.

“We have spent millions of dollars on this brand,” Mr. Kalafer said. “This is an intentional deception. I am concerned about our customers, our employees and our investment.”