Emissions Scandal To Cost Volkswagen Over $7 Billion
The crisis enveloping Volkswagen AG, the world’s top-selling carmaker, escalated Tuesday as the company issued a profit warning following a stunning admission that some 11 million of its diesel vehicles worldwide were fitted with software at the center of a U.S. emissions scandal.
In a statement, the German company said it was setting aside around 6.5 billion euros ($7.3 billion) to cover the fallout from the scandal that is tarnishing VW’s reputation for probity, raised questions over the future of its CEO Martin Winterkorn and seriously undermining its share price.
In the wake of its statement and emissions scandal, VW’s share price was down another 18.7 percent at 108.75 euros and near a four-year low. The fall comes on top of Monday’s hefty 17 percent decline and means the company has lost an eye-watering 25 billion euros or so in just two days of frenzied trading.
The trigger to the company’s market woes was last Friday’s revelation from the U.S.’s Environmental Protection Agency that VW rigged nearly half a million cars to defeat U.S. smog tests.
The company then admitted that it intentionally installed software programmed to switch engines to a cleaner mode during official emissions testing, and apologized for it. The software then switches off again, enabling cars to drive more powerfully on the road while emitting as much as 40 times the legal pollution limit.
In its statement Tuesday, Volkswagen gave more details, admitting that “discrepancies” related to vehicles with Type EA 189 engines and involved some 11 million vehicles worldwide.
“A noticeable deviation between bench test results and actual road use was established solely for this type of engine,” it said. “Volkswagen is working intensely to eliminate these deviations through technical measures.”
To cover the necessary service measures and what it says are “other efforts to win back the trust of our customers,” VW said is setting aside some 6.5 billion euros in the current quarter. There was no mention of any fines or penalties. The EPA has indicated that it could, in theory, fine VW up to $18 billion.
The costs, VW conceded, may be subject to revaluation in the light of ongoing investigations. As a result, it said 2015 earnings targets will be adjusted but it didn’t specify by how much.
The company added that the software is also installed in other vehicles with diesel engines but that that for the “majority of these engines the software does not have any effect.”
Volkswagen said that new vehicles with EU 6 diesel engines currently on sale in the European Union comply with legal requirements and environmental standards.
The company’s statement was clearly a shock in the markets, not least the number of vehicles involved, which is more than VW’s 2014 sales of around 10 million vehicles.
Christian Stadler, professor of strategic management at Warwick Business School, said he was surprised at the scale of the VW’s potential infringement but noted that companies which transgressed U.S. regulations rarely pay the full fine that local authorities say could be imposed.
“I don’t think this is a life-threatening event but it’s clear it’s going to be very expensive,” he said.
VW’s troubles appear to be escalating around the world.
South Korea said Tuesday it would investigate emission levels of Volkswagen diesel vehicles in the wake of the rigging scandal in the U.S. that has heaped pressure on Winterkorn. The German government is to also conduct new emissions tests in VW’s diesel cars, while France called for a wider Europe-wide investigation into Volkswagen’s practices – and into those of French carmakers.
Even before Tuesday’s statement, a member of Volkswagen’s supervisory board suggested that heads will roll in the wake of the scandal, though he said it was too soon to start assigning blame.
Speaking on Germany’s Deutschlandfunk radio, Olaf Lies cautioned against “over-hasty calls for resignations.”
Lies, who is also the economy minister of the German state of Lower Saxony, which holds a 20 percent stake in Volkswagen, said he was sure there would be “personal consequences” once the investigation is complete.
The shockwaves from the scandal enveloping Volkswagen were being felt far and wide across the sector as traders wondered who else may get embroiled. Germany’s Daimler AG, the maker of Mercedes-Benz cars, was down 6 percent, while BMW AG fell 5.3 percent. France’s Renault SA was 5.5 percent lower.
“It’s an auto sector shaking incident,” said Connor Campbell, a financial analyst at Spreadex.
Questions about the scandal
German automaker Volkswagen AG admits that it rigged U.S. emissions tests so it would appear that its diesel-powered cars were emitting fewer nitrogen oxides, which can contribute to ozone buildup and respiratory illness. Here are some questions and answers about the ongoing crisis.
Q. Which vehicles does this affect?
A. Volkswagen installed software in roughly 482,000 diesel passenger cars sold in the U.S. since 2008, according to the U.S. Environmental Protection Agency. The software turned on the cars’ full emissions control systems when the cars were being tested by the government, and then turned off those systems during normal driving. The Jetta, Beetle, Audi A3 and Golf from the 2009-2015 model years are affected, as well as the Passat from the 2014-2015 model years. Volkswagen has halted the sale of 2015 models and is prohibited from selling 2016 models until they are fixed.
Q. What does Volkswagen say?
A. The EPA Volkswagen Group CEO Martin Winterkorn issued a statement Sunday saying that the company will fully cooperate with government investigations and has ordered an internal probe. Winterkorn said, “I personally am deeply sorry that we have broken the trust of our customers and the public.”
Q. Why would Volkswagen do this?
A. Experts think Volkswagen may have wanted to avoid the cost of additional hardware to meet tough U.S. emissions standards, so it came up with a cheaper software fix. The software also would have helped the cars’ fuel economy numbers, since they get better gas mileage when the emissions control system is turned off.
Q. What should customers do?
A. Volkswagen will fix the cars for free as soon as it develops a remedy. Owners will be notified when there’s a fix. In the meantime, the cars are safe to drive. Car buying site Edmunds.com cautions owners against selling the cars right now if they don’t have to, since they can expect a lower trade-in value.
Q. Does this affect other diesel vehicles in the U.S.?
A. Not so far. Thirteen brands currently offer diesels in the U.S., including Ram, Chevrolet, Mercedes-Benz and BMW. West Virginia University, which conducted the tests that led to the discovery of Volkswagen’s software, said the BMW it tested passed.
Q. What’s next?
A. The U.S. government could fine Volkswagen $37,500 per vehicle for the violations, a total of more than $18 billion. The U.S. Justice Department, the California Air Resources Board and German authorities are also investigating. Winterkorn could also face scrutiny from Volkswagen’s board, which meets Friday, and investors, who watched the company’s shares plunge 17.1 percent Monday to a three-year low.