Sean Gallup, Getty Images
A slew of Volkswagen hood ornaments

Cash for Clunkers: VW Edition

Jan. 31, 2017
VW has repurchased or terminated the leases of about 96,000 vehicles, more than last year’s annual increase, and must buy back or fix as many as 562,000 diesel vehicles in the U.S. into 2019.

Scott Nichols was happy with his 2013 Jetta SportWagen TDI and planned to keep it for years. Then it surfaced that Volkswagen AG had been breaking emissions laws, souring him and his wife on the brand and thrusting them back into the market for a new Honda.

“We were really disappointed, because it was, in fact, too good to be true — this car with really good gas mileage and all the pep that it has,” said Nichols, who works at a private high school east of Los Angeles with his wife. “We researched this, we wanted something that was going to last a long time and now we have to go back and buy another car.”

VW must buy back or fix as many as 562,000 diesel vehicles in the U.S. into 2019. This will lead the German automaker to essentially mimic the U.S. government and its cash-for-clunkers program, which lured Americans into buying cars during the recession. Just as the feds doled out $3 billion to get Americans trading in gas guzzlers, VW could spend about $10 billion subsidizing new-vehicle purchases to replace diesels spewing excessive emissions.

The buybacks may extend a streak of U.S. auto sales gains that cash for clunkers started. Already, VW has repurchased or terminated the leases of about 96,000 vehicles, more than last year’s annual increase. The industry will use all the help it can get — in January, sales probably slowed to a seasonally adjusted annualized rate of about 17.3 million vehicles, down from 17.9 million a year earlier, according to the average of  11 analyst estimates.

“That is certainly one of the reasons we expect vehicle sales to continue to grow this year and next,” Jeff Schuster, LMC Automotive’s senior vice president of forecasting, said of the buybacks. Without the “VW Effect,” sales probably would start to slide a little, he said.

VW diesel owners who wouldn’t otherwise have been in the market may purchase about 210,000 additional new vehicles — 60,000 this year and 150,000 in 2018, LMC Automotive estimates. Automakers sold a record 17.55 million cars and light trucks in the U.S. last year.

Honda Motor Co., the automaker benefiting from the Nichols family’s decision to replace their Jetta, may join Volkswagen as the lone major automaker to boost sales in January from a year earlier. Analysts project gains of about 4% for Honda and 20% for combined sales of the VW and Audi brands.

Sales may fall about 2.4% at General Motors Co. and 2.8% for Ford Motor Co., while Fiat Chrysler Automobiles NV may see a 14% drop, according to analyst estimates.

The Nichols originally traded in a Honda Fit subcompact for the VW in 2013, when they had only one child. Ahead of an appointment to sell their Jetta in March, and with two kids now, they’ve already bought a new Odyssey minivan.

VW is managing to keep some diesel owners in the fold. About 20% of customers selling back their cars at Linden Volkswagen in New Jersey are sticking with the brand, said Mike DiFeo, who runs the outlet and heads VW’s national dealer council.

“I wouldn’t be surprised if that number starts to creep up,” he told reporters Saturday at the National Automobile Dealers Association convention in New Orleans. Angrier customers may be selling their VWs back first, and less-dissatisfied owners could be more inclined to cut the brand some slack.

VW’s settlements prohibit the company or its dealers from encouraging consumers to buy a new VW over any other brand. The automaker overcame its diesel scandal to dethrone Toyota Motor Corp. last year as the world’s best-selling automaker for the first time, propelled by surging demand in China.

Although Toyota isn’t targeting VW diesel owners, about 7% of Prius Prime buyers are coming out of diesel-powered Jettas, compared with almost none for Toyota’s previous plug-in hybrid, Jim Lentz, Toyota’s CEO for North America, said Sunday in New Orleans.

VW has hired about 1,300 contractors to process its diesel program-related paperwork and staff call centers, shortening the average hold time to less than 5 minutes, said Hinrich Woebcken, who became VW of America’s CEO last April. More than 1,000 cars have been fixed and returned to the used-car market, he said.

Alec Gutierrez, an analyst with Kelley Blue Book, has a 2013 Jetta SportWagen TDI, just like Nichols. Gutierrez bought his new for about $27,500, or $2,000 off the sticker price, and has driven it for about 40,000 miles. Rather than stick with his VW for another year or so, Gutierrez bought a Subaru Outback crossover for more space to haul around two kids. While the Jetta probably has a market value of $12,000 or less, he said he’s projected to get about $25,000 through the buyback program.

“It really doesn’t make sense not to take advantage of the offer,” he said.

By Jamie Butters, with assistance from Kartikay Mehrotra.

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Licensed content from Bloomberg, copyright 2016.

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