News that German automaker Volkswagen AG (USOTC: VLKAY, XETRA: VOW) had purposely installed software in 11 million diesel cars designed to circumvent emissions testing rocked the business community and Volkswagen stock last week, according to reports from CNBC. The scandal caused shares to lose 29.3 percent of their value. Volkswagen lost $25.3 billion in market capitalization as stock sank to levels not seen since October 2010.
Volkswagen reports that they have set $7.3 billion aside to cover the associated costs — no trivial amount. Volkswagen CEO Martin Winterkorn resigned on Wednesday.
“Above all, I am stunned that misconduct on such a scale was possible in the Volkswagen Group,” Winterkorn was quoted.
The former CEO denied any knowledge of the deception but accepted responsibility as Volkswagen CEO. Cars identified as having the “defeat devices” installed were reported to have been manufactured between 2008 and 2015.
Matthias Mueller, the 62-year-old former head of Porsche, was named as the new Volkswagen CEO on Friday, as reported by CNBC.
In a statement, Mueller discussed instating strict compliance standards and regaining the trust Volkswagen has lost. It appears that Volkswagen does have the means to retrofit existing diesel cars and change manufacturing practices in order to comply with emissions standards, according the Truth About Cars. The total cost of the retrofits and upgrades combined with fines and class action lawsuits is estimated (by Volkswagen) to run near $7.3 billion.
Tesla Motors, Inc. (NASDAQ: TSLA) CEO Elon Musk has come under close scrutiny by the scientific and business community over recent weeks, as reported by the Inquisitr. Comments made by Musk to Stephen Colbert were estimated by one scientist to be off-mark by 10 million times. Tesla has also been slow on the delivery of Powerwall units to residential customers, originally promising that units would ship between July 30 and August 30. ARS Technica is reporting that Powerwall deliveries have finally begun for “pilot” customers, albeit more slowly than what Elon Musk originally projected when he announced the new product on April 30.
Elon Musk commented on the Volkswagen scandal while attending a seminar hosted by the German Ministry for Economic Affairs and Energy in Berlin on Thursday. With regard to the scandal itself, he was quoted as saying it was “obviously bad,” as reported by Bloomberg. He then quickly changed focus to what he perceives as a dire need for the world to reduce carbon dioxide emissions, which is probably true.
“It’s very important that we take action today to recognize that we are making a very significant change to the chemical constituency of the atmosphere and the oceans,” Musk was quoted, perhaps hinting at the urgency with which he feels consumers should make the switch to Tesla electric cars. “It’s very important that we do something.”
Volkswagen appears to have sufficient financial resources to weather the “defeat device” scandal. However, Wall Street consensus estimates for per U.S. share 2016 Volkswagen earnings have been hit hard by the news. Over the past 90-day period, 2016 EPS estimates have fallen from $5.36 to $2.40 or 56.7 percent — a massive hit to be sure.
Volkswagen sits atop an impressive $30.95 billion in cash and has $2.76 billion in debt maturing between now and 2018, as reported by Morningstar. Even if the $7.3 billion dollar costs associated with the scandal doubled, it would appear that Volkswagen would still have almost twice as much cash on hand as needed to deal with the scandal and maintain its debt obligations. A more dramatic slowdown (than what is already forecast) in sales and earnings figures could change this outlook quickly. Volkswagen carries a debt to equity ratio of 119.2 percent and a debt to revenue ratio of 54.0 percent.
Volkswagen reports that it produces about 10.2 million cars annually.
Tesla, by comparison, produced 17,300 cars in 2014, as reported by Seeking Alpha. Tesla is expected to run a per share loss of $0.83 in 2015 and a profit of $2.45 in 2016. While 2016 per VLKAY share estimates have come down 56.7 percent on news of a scandal, per TSLA share estimates have come down 28.3 percent over the same period, in the absence of any (publicly known) scandal, and while Elon Musk has been on Stephen Colbert talking about Mars missions and taking his sweet time in the delivery of Powerwalls. Further, Tesla carries a debt to equity ratio of 389.7 percent or more than triple Volkswagen’s. Tesla debt to revenue ratio is 75.4 percent.
The $7.3 billion in costs associated with the Volkswagen scandal equate to about $6,636 per car for 11 million cars. If Tesla was hit with a similar problem, with the same per car cost, on a total of cars roughly equal to its yearly production, like Volkswagen, the total cost would be about $114.8 million.
A rough estimate, pieced together with data from Bloomberg, shows that Tesla has $660 million in convertible debt coming due in 2018, $800 million in 2019, and $1.2 billion in 2021, bringing the total close to the $2.79 billion in total Tesla debt, reported by Yahoo Finance.
Volkswagen has a cash to debt ratio of 24.1 percent, while Tesla’s is slightly better at 41.2 percent. However, Volkswagen, even with the scandal, is expected to continue to turn a profit. Tesla, on the other hand, has failed to prove its profitability. Even with the scandal, Volkswagen is expected to bring in about $3.7 billion this year. Tesla is expected to see $107 million go out the window.
For two companies that are at drastically different stages in their growth cycles, Tesla’s financials bear a striking similarity to Volkswagen’s. And Volkswagen just announced $7.3 billion in unexpected costs. Debt levels and 2016 per share consensus EPS estimate reductions are comparable.
This may be why Elon Musk, according to reports, appeared to quickly turn talk away from Volkswagen at the seminar in Germany, lest an analyst make a comparison between the financials of the two companies, to talk of the dire need for consumers to make imminent changes and the effects on the atmosphere.
The scientific consensus appears to be that climate change is real. Whether or not Elon Musk and Tesla are the answer to this problem remains to be seen. It appears seemingly equally likely that climate change is a convenient agenda, which consumers are already worked up over, to exploit for profit. If Musk can successfully translate that fear into a profitable car company and quality cars, then he is truly worthy of the John Galt and Iron Man comparisons. If he is unsuccessful, however, more apt comparisons may be to Bernie Ebbers and Dennis Kozlowski.
Craig Prong was quoted by the Financial Times with regard to Tesla and Elon Musk.
“Elon Musk is a rent seeker masquerading as a visionary. If he is one-tenth the innovator and genius his fawning fans believe him to be he wouldn’t need any subsidies. We should give him the chance to prove it.”
“Elon Musk’s Tesla circus is a true ‘bonfire of the vanities’,” writes the Globe and Mail.
Imagine for a moment, Volkswagen CEO Matthias Mueller addressing the press on Monday morning and stating, “You know what guys? This scandal is going to cost us, big time. But guess what? We’re going to Venus!” to put recent statements made by Elon Musk into perspective.
[Volkswagen Photo by Justin Sullivan / Getty Images — Tesla Photo by Justin Sullivan / Getty Images — Stock Charts Courtesy Venngage — Elon Musk Photo by Kevork Djansezian / Getty Images — Matthias Mueller CEO Screenshot Courtesy Euronews / YouTube]