Volkswagen posted its first quarterly loss in at least 15 years on Wednesday and said the 6.7 billion euros ($7.4 billion) set aside to cover the costs of its rigging of diesel emissions tests was likely just a start.
The news came as the carmaker's new CEO was about to fly out to China with German Chancellor Angela Merkel and other business leaders to promote trade in a major export market and try to limit the damage of a scandal that has rocked the auto industry.
Almost six weeks after it admitted using illegal software to cheat U.S. diesel emissions tests, Europe's biggest carmaker is under pressure to identify those responsible, fix up to 11 million affected vehicles and convince regulators, investors and customers that it won't make the same mistakes again.
The biggest business crisis in its 78-year history has wiped more than a quarter off VW's stock market value, forced out its long-time CEO and tarnished a business held up for generations as a model of German engineering prowess.
New CEO Matthias Mueller said on Wednesday the cost of the scandal would be "enormous, but manageable," without giving details. He said VW had hired consultants Deloitte to support an investigation by U.S. law firm Jones Day, and that those responsible would face tough consequences, without elaborating.
Mueller also said VW would focus more on profitability than sales volumes in future. His predecessor, Martin Winterkorn, set VW the goal of becoming the world's biggest carmaker by sales volumes, and critics have said this may have inadvertently led to the use of software that allowed VW to disguise the level of real toxic emissions in its diesel engines.
Though Mueller has promised far reaching change, some analysts and investors have questioned whether the company veteran is the right man to lead the overhaul, which they say needs greater openness from the family, local government and trade union interests that control the carmaker.
"That Volkswagen now finds itself in this current situation is something that some might say is not so surprising," said Yngve Slyngstad, the CEO of Norway's wealth fund which owns a stake in VW and has been a critic of its corporate governance.
He added it was too early to say whether the steps taken by VW's new leadership were enough, as his fund posted a quarterly loss on its investments in part due to the plunge in VW shares.
BAD NEWS TO COME
VW reported a third-quarter operating loss of 3.48 billion euros, in line with the 3.47 billion loss forecast in a Reuters poll of analysts.
It set aside 6.7 billion euros in the July-September period to cover costs related to the scandal, up from the 6.5 billion announced a week after the cheating became public on Sept. 18.
As a result, the German group said it now expected its operating profit to drop "significantly below" last year's record 12.7 billion euros, even though its auto sales are seen matching last year's record 10.14 million deliveries.
The costs of the scandal so far are largely related to the refitting of affected vehicles, and CEO Mueller has said they are likely to rise due to regulatory fines and lawsuits.
"It is currently impossible to assess the legal risks connected with the diesel issue due to the early stage of the comprehensive and exhaustive investigations," VW said in its quarterly report. "As a consequence, corresponding provisions have not been recognized in the interim financial statements."
Analysts took comfort in VW's robust balance sheet, however, suggesting it should be able to cope with the final bill for the scandal which some have said could reach 35 billion euros.
VW's net cash and liquid assets jumped 29 percent in the quarter to 27.8 billion euros after it sold a 19.9 percent stake in Suzuki Motor Corp (7269.T).
Reserves may keep growing in the fourth quarter when proceeds from a transaction involving VW's holding in financing company LeasePlan, valued at 3.7 billion euros, are expected to be booked, analysts said.
"We see it as a positive signal that VW has pretty much kept the provision (of 6.7 billion euros) for the scandal unchanged," London-based analyst Arndt Ellinghorst at Evercore ISI said.
"Together with the very strong net liquidity, this should reassure both equity and fixed income investors."
VW shares were trading up 1.1 percent at 106.3 euros at 1322 GMT.
VW has said it will speed up development of electric and hybrid vehicles in the wake of the crisis, and the head of its namesake brand told reporters at the Tokyo motor show the company's next flagship model would be an all-electric vehicle.
However, Herbert Diess added the carmaker remained committed to diesel engines, amid warnings from some analysts that the technology - which tends to produce less carbon dioxide than gasoline engines and accounts for about half of vehicle sales in Europe - could be irreparably damaged by the VW scandal.
"We still believe in the future of diesel engines because they are in the trade-off of emissions and CO2, they are a very good option for many vehicles," he said.
Excluding costs of the scandal, VW said it still expected the group operating margin to come in between 5.5 and 6.5 percent this year, after 6.3 percent in 2014.
Group deliveries, which also include premium brands Audi and Porsche, slid 1.5 percent in September to 885,300 vehicles and fell 3.4 percent in the third quarter to 2.39 million, causing VW to drop behind Toyota in nine-month global auto sales charts after briefly overtaking its Japanese rival to become world No.1 three months earlier.
(Additional reporting by Camilla Knudsen in Oslo and Naomi Tajitsu in Tokyo; Writing by Mark Potter; editing by Susan Thomas)