Just a couple of days after VW admitted to falsifying diesel emissions tests in the US, Porsche Automobil Holding SE bought a 1.5% shareholding in VW from Suzuki.
This move was a leftover from 2009 when VW bought a near-20% stake in the Japanese automaker, famed for its ability to build low-cost, high quality small cars.
Moving in after the global credit crunch, VW was driven by its determination to expand on all fronts, on its way to becoming the world’s largest car maker.
One area where VW was lacking was the ability to build profitable small cars, especially for the booming Chinese and Indian markets.
According to Suzuki’s side of the story, VW wanted access to Suzuki’s engineering abilities but the Japanese claimed they were unlikely to get similar access to VW tech. VW and family-owned Suzuki fell out in 2011. Suzuki’s demand that it should be able to buy back VW’s 20% shareholding went to international arbitration.
Just days before ‘dieselgate’ Suzuki spent £2.4 billion buying VW’s shareholding back, after the judgement went the Japanese company’s way.
That reversal of VW’s global expansion was very minor compared with what happened over the following fortnight. The mighty German company is now completely on the back foot, and facing years of massively expensive fines and litigation.
In fact, so bad is VW’s potential situation, that one betting company is offering odds of 20 to 1 that VW Group will not be trading by the end of 2016.
While the situation is probably not quite that bad, the open-ended nature of VW’s potential liabilities means that its share price will be depressed for years, borrowing costs will rise, and the company’s huge research and development budget will have to be radically trimmed.
And that’s on top of the costs of the recall work and owner compensation. The manufacturing and fitting of around 11 million engine ECUs is the bare minimum needed. Hardware modifications would add another whole level of cost and complexity.
Officially, VW has set aside around £5bn for the ‘dieselgate' costs but analysts are betting on the final bill being around £18bn - a sum that could be enough to pay for the next 10 generations of the Golf.
In circumstances as dire as these, a company like VW would be at risk of being bought up by hostile bidders and then broken up. Luckily for VW Group, the vast majority of the company is owned by ‘close family’.
After buying 1.5% of VW from Suzuki, the founding Porsche and Piech clan - via its Porsche SE holding company - own just over 52% of VW. Another 20% is owned by the German state of Lower Saxony. Neither of these shareholders is going to sell up, so VW is safe from a hostile takeover.
What’s more likely is that VW Group might have to consider breaking itself up, partly to raise cash and partly to help bolster its share price.
Firstly, Porsche and Audi are by far the big profit engines in the group, so those brands are going nowhere. In 2014 Porsche made £2bn profit from 204,000 cars and Audi £3.75bn from 1.8m cars. In contrast, VW made around £2bn from its massive 6.1m sales.
The commercial truck division is the outlier for VW. Both Scania and Man make money (the former, £700m and the latter, £282m). Right now, they are good news for VW’s financial performance but, if the company’s financial situation deteriorates, these two brands could be put up for sale to help pay for the longer term costs of dieselgate.
Elsewhere, Skoda makes a good margin (£600m in 2014), but it is so integrated into the Group through the use of the MQB architecture, there’s zero chance of it being sold off.
SEAT looks vulnerable because it has struggled to turn a profit for some years and its volumes remain lowish at 394,000 in 2014. Its low-cost Spanish factories are useful to the group (SEAT already builds Audi Q3s) so a further slowdown in SEAT investment looks highly likely.
The Audi-Lamborghini-Ducati brand group could also see investment radically slowed in Lamborghini. The Italian maker builds three distinct models but sales last year were a modest 2650. Will the Urus be a high-profile victim of the cuts?
But the real cost saving will be at the oversized and bloated VW brand. VW sold 6.1m cars in 2014, but turned a margin of just 2.5%. The real cost cutting will have to come here, where margins should be around the same 7% Skoda achieved.
VW’s powerful unions won’t like it, but jobs will be cut and wilder investments - such as the next Phaeton - cut back because the company needs to plough on with its global investment in the all-new MQB factories. This is very costly, but necessary to ensure the economies of scale promised by the mega platform.
VW is in a mess, but not so much a mess that a fire sale is imminent. But the days of VW’s wild innovation are over for the next few years and new models will have to be solidly profitable.
But if VW ends up being hit financially very hard, as BP was in the wake of the oil spill in the Gulf of Mexico, selling some of the family sliver might be unavoidable.
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