In response to the looming diesel scandal that has rocked the world’s largest automaker, Volkswagen will be delaying — or ending entirely — all of its corporate investments that are deemed non-essential. The order came from new CEO Matthias Mueller, who took the reins of the company in the wake of Martin Winterkorn’s less-than-graceful exit.
“We will review all planned investments, and what isn’t absolutely vital will be canceled or delayed,” Mueller told about 20,000 employees at the German company’s headquarters this week, per Bloomberg. “And that’s why we will re-adjust our efficiency program. I will be completely clear: this won’t be painless.”
It’s easy to see why this was necessary — VW is charged with fixing 11 million TDI diesel-powered vehicles worldwide, and it has earmarked $7.3 billion to help. But it couldn’t have come at a worse time — in today’s cutthroat auto sales climate, automakers are shoveling money into the investment furnaces like crazy to maintain an edge against rivals. Volkswagen, which has a history of not being able to crack the U.S. sales code, should be spending as much as it can to get a toehold in America — especially now with its reputation being dragged through the mud.
That $7.3 billion is going to burn quick — between fines and legal action against the company (it’s being hit with numerous class action suits, with more undoubtedly to come), Mueller noted that it will not be enough. To account for the shortfall, VW will likely cut into its $17.4 billion research and development budget — the biggest of any company in the world last year.
Interestingly, this situation may come with a silver lining: Despite Germany’s penchant for efficiency and reputation for being methodical and productive, VW isn’t actually all that efficient as a company. The squeeze on the company’s finances might force it to streamline and cut out the dead flesh.
“Where’s the innovation? Obviously not in diesel engines,”Arndt Ellinghorst, a London-based analyst with Evercore ISI, told Bloomberg, referring to the immense R&D budget. “There’s a culture of spending and a lack of focus on efficiency in favor of striving to be bigger.”
Not only that, but that mindset is making its way up the proverbial ladder. “We’ll pay extra attention to bonus payments to members of the management board,” Bloomberg quoted Bernd Osterloh, a supervisory board member and head of the works council, as saying. Projects and investments will need to be examined, and “we’ll have to question everything that’s not economical,” he said.
No examples of investments were offered, but it means that VW’s ambitious push for market share in the U.S. might be delayed, perhaps significantly. This is especially painful considering that Volkswagen’s American lineup was already rather dated and suffering; a delay in new product for American shores could cost Volkswagen dearly in one of the world’s most voracious markets for automobiles. Time will tell. In the meantime, check out your local VW dealer — I bet they’ll be extra-willing to get you into the drivers’ seat of a new car. Provided, obviously, that it’s not a diesel.