The company’s resilient sales have created a platform for it to overcome the disgrace of manipulated emissions tests

VW is raising its profits forecast. Has it cleared the air over dieselgate already?

After a bruising two years, there are signs that Volkswagen is overcoming the damage to its reputation, and finances, wrought by revelations that it had cheated on emissions tests.

In November, the Wolfsburg-based manufacturer said it would post record vehicle deliveries this year and higher annual profits. VW, which also owns Porsche, Audi and Bentley among other brands, said it expected to sell more than 6 million Volkswagens this year, boosted by a strong performance in China, Europe and the US.

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It also said the operating profit margin at the brand could rise to between 4% and 5% by 2020 – still falling behind rivals such as PSA Group (formerly PSA Peugeot Citroën) and Toyota, but higher than forecast. This from the company that became an emblem of corporate scandal in 2015 when it emerged that it had used software to suppress emissions of nitrogen oxides during vehicle tests – a scam that affected 11 million vehicles.

Aftershocks from the scandal still linger, but the German car giant expects to overtake the €1.9bn (£1.7bn) of earnings it notched up in 2016. Rising sales of more profitable sport utility vehicles (SUVs), such as its Touareg model, are pushing earnings higher.

The more positive outlook has been seized on by analysts and investors. Arndt Ellinghorst, a senior managing director at financial advisory firm Evercore, said: “It is increasingly hard for investors to ignore the impressive turnaround of VW.”

Investors have responded to the positive news, chasing the share price up by 18% over the last three months.

This is despite the mounting financial toll of the scandal: it has so far cost VW more than €25bn and has been the main driver behind its strategic shift towards electric vehicles. The costs include settlements of government and customer lawsuits, repurchases, and retrofits to affected vehicles. It also includes a criminal plea deal in the US, which exacted $2.8bn (£2.1bn) in criminal fines and $1.5bn in civil penalties.

It has been a watershed couple of years for the car industry, as rivals scurry to jump on the electric-power bandwagon pioneered by Elon Musk’s Tesla. VW was late to the party, but the so-called “dieselgate” scandal has forced it to accept the new reality. Governments in France, the UK and the Netherlands have backed plans to ban the sale of diesel and petrol vehicles between 2025 and 2040 in a push to clean up polluted cities.

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Fears about the death of diesel also appear to have hit home with buyers. In November, sales of new diesel cars fell in the UK by more than 30% compared with the same period a year before, according to the Society of Motor Manufacturers and Traders (SMMT). The wider VW Group can see the writing is on the wall for the internal combustion engine.

The carmaker’s response has been decisive. It has earmarked €70bn to produce battery-powered versions of all models by 2030. Paul Nieuwenhuis, senior lecturer at Cardiff University’s Centre for Automotive Industry Research, says VW has come through the worst: “They are quite resilient … The problem now is really in the US – because of the litigation.”

The carmaker and two of its executives are still under investigation in Germany and it faces investor lawsuits in the US and at home. Oliver Schmidt, formerly VW US compliance executive, was sentenced to seven years in prison this month after pleading guilty to one count of conspiracy to defraud the US and another of violating the Clean Air Act. Schmidt admitted he was coached to lie about emissions by his bosses at Volkswagen.

He is the second employee sent to prison for participating in the emissions-cheating scheme: James Liang, a veteran VW engineer, was sentenced to 40 months in prison in August, having pleaded guilty to conspiracy and cooperated with prosecutors. He has appealed against his sentence.

But despite the huge legal challenges in America, sales of VW cars are up 8.3% year-on-year in the US.

“The thing is, they just make good cars,” Nieuwenhuis said. “It is such a strong brand, people will say ‘I’m buying a Golf because it’s good value for money’.”