(REUTERS/Ina Fassbender)
Volkswagen CEO Matthias Müller.
This might be surprising, but car companies don't fear recalls. They know they'll face them, and they accept they're a cost of doing business.
A General Motors or Toyota isn't happy when a truly huge and deadly one happens — such as the GM ignition-switch recalls linked to more than 100 fatalities. But they also understand they need to be prepared to fix their cars after they sell them, if a flaw threatens safety.
Car companies are terrified of something else, though: buybacks.
Volkswagen is experiencing this terror right now. The embattled car maker and the US government announced that they've struck a deal to potentially buy back 500,000 of almost 600,000 vehicles implicated in the diesel emissions-cheating scandal that broke last year. That scandal has destroyed VW's US sales at a time when the market has been booming.
Buybacks almost never happen. And if VW does end up paying owners to return their cars, it will be the largest buyback in US automotive history. Fiat Chrysler Automobiles was compelled to buy back 200,000 vehicles last year, but prior to that, the last gigantic buyback affected Fiat in 1981, Bloomberg reports.
And this is only the beginning of the agony for VW. The 500,000 vehicles, all with 2.0-liter diesel engines, that would be bought back are a drop in the bucket compared with the diesels in Europe that the German automaker could be responsible for.
Recalls are better
Recalls are always preferable to buybacks because in many recalls, even if they're about safety features, owners never take their cars to the dealership to be repaired. A car maker will set aside recall funds and have to provide replacement parts, but it's rare for anything close to 100% of the recalled vehicles to be fixed.
Obviously, this rankles government regulators and consumer advocates, but dealers and car makers don't have the resources to go driveway-to-driveway to reclaim cars. A lot of recall fixes only happen when relatively new cars are traded in or come off lease. And for older cars, the fixes just don't get made.
Buybacks are a different story because owners are motivated to unload their lemons for something that doesn't have a fatal flaw. Money talks. Volkswagen has put aside over $10 billion to deal with dieselgate in the US, but if European regulators decide that a buyback is called for, VW could be looking at a hit far exceeding the $18 billion in total that's been reserved thus far.
Something like 8.5 million vehicles with cheat software were sold across several VW brands in Europe. Do the math: That's 17 times the number of affected vehicles in the US.